India has in the past one decade
seen more start-ups than it did in the two-three decades prior to that, owing
to the more liberal stance taken by the authorities, encouraging Govt policies,
availability of funds, people’s willingness to invest in new ventures, but most
importantly the passion held up by the youth to create something on their own
instead of settling down in conventional job-posts. While it is great to be
driven by dreams and propelled by hard work, a difficult task faced by all
start-ups is obtaining sufficient funds to kick-start the venture and then get
the boat to sail smooth. There are various funding sources through which
start-up ventures could source investments, and the compliance requirement for
each is different. In this post we discuss about Term Sheets that are required
to be drafted and presented before the prospective investors to get them to
trust your venture with their money. It must put forth a clear outline of the
investment sought, the stake offered and the investment rights that may be made
available to the angel investors.
The Term Sheet is an agreement that reflects the interests of
both the parties (investor and the investee) in respect of the business and the
concerns that either party has; it represents the basic relationship between
the investor and the company. While framing the term Sheet, conditions and
terms preferred by either party is to be negotiated and the two will have to
settle at a point where the benefits and liabilities are mutually agreeable to
both. Some typical items to be included in term Sheet are listed below:
·
Company
Information: About the company, its promoters, business, etc. Vital
information in relation to the company must be furnished to the investors to
help them make an informed decision.
·
Valuation
of Company: The Company may be valued pre-money or post-money, and this
plays a major role in calculating the investor’s stake in the equity of the
company.
·
Conditions
placed on the Business: The investor may impose certain conditions on the
business to be able to receive the funding, and the promoters must attempt to
negotiate it to demarcate some terms as conditions subsequent to the infusion
of funds into their business.
·
Types of
Shares Offered: The investor might prefer to know the kind of shares that
he will be receiving in return for the investment that he is making, such as
whether he will have voting rights in respect of the same.
·
Investors’
Rights: The investor may seek to
exercise some reasonable control on the company’s functioning, owing to the
fact that they have put their valuable money into it. Some rights and modes of
control that companies seek to possess over their investee are Participation
Rights, Registration Rights, Board Representation, Information Rights, Voting
Rights, etc.
·
Anti-Dilution Protection and Affirmative Rights:
Anti-Dilution protection would mean that the business cannot offer its
securities to any new investor at a rate lower than the price paid by the
previous set of investors. An Affirmative Right is where it is agreed that decisions
pertaining to matters affecting investors’ rights as shareholders or varying
the valuation of shares would require prior written consent of the investors.
·
Governing
Laws and Dispute Resolution Clauses (Indian Kanoon): The
law that is purported to regulate the dispute resolution process or set out the
arbitration agreement between the parties, decide on the clauses to be
incorporated therein, and the applicable laws.
·
Time-Limitation
and Exclusivity: The parties may agree upon a time period for which the
agreement is valid, and the same may be subject to extension if both parties
think fit to do so. Also, an Exclusivity provision prohibits the business from
approaching any other investor during the time of subsistence of the Term
Sheet.
In India, Start-Ups receiving funds from angel investors are
mandated to abide by the Rules and regulations put in place by the Authorities such
as SEBI (Alternative Investment Fund) Regulations. To receive angel investment,
the Start-Up must be within 3years of incorporation, not listed on any Stock
Exchange, and with a turnover less than 250 Million.
Sample
Term Sheet
Presumptions:
·
Company: Start-Up
·
Requirement: Series A Financing
·
From: Angel Investor
Note:
This is only a sample meant as informative content, and must not be used as
a template to create a legally binding document. To draft a Term Sheet for your
Company, get in touch with us at our Website Legal Resolved, where experienced
and efficient corporate lawyers will assist you to draft a formal and
fool-proof Term Sheet.
Sample
Term Sheet
The following document intends to lay down the
principal terms with respect to the proposed Series A Investment by __________
[Corp.] in the business venture by the name of _________ [Inc.], and does not
constitute a legally binding contract to invest. This document is only a
written proposal of investment spelling out the basic requirements of the
financing that the former may provide to the latter, if it deems fit to do so,
and does not amount to a legally binding undertaking to make the investment. In
case the investment shall take place after due negotiations and correspondence
between the parties, the terms and conditions hereinafter expressly stated as
‘binding’ shall come into effect from that point on.
Company: [ABC]
[Corp], incorporated under the laws of [country, law under which incorporated, etc.]
Type of Security: [Equity,
other security, etc.; specify amount of shares; minimum to close the deal]
Closing Date: [xx-xx-xxxx]
Price per Share: [Specify
Pre-Money and/or Post-Money Valuation; price per share as per the valuation
adopted]
Investors: [List
the names of the investors targeted, and their necessary details]
TERMS OF INVESTMENT
Incentives to Investors: [Specify
any incentives that will be provided to the investors, such as discounts,
warrants and stock options]
Liquidation Preference: [The
Series A Preferred shall receive an amount equal to one times (1x) the Purchase
Price, in addition to any unpaid dividends; in priority over payment of any
sums to any other equity security holders in the event of (i) a liquidation,
dissolution, or winding up of the Company; or (ii) Change in Control]
Voting Rights: [Whether
to vote together with Common stock Investors or as a Separate Class]
Information Rights: [The
right to receive financial information
and Standard information with respect to the business; audited annual financial
statements, unaudited quarterly financial statements, etc.]
Participation Rights: [The
investor’s right to participate in the business, on pro-rata basis or
otherwise]
Conversion: [Power
to convert the securities into Common Shares at the option of the investor
holding the same, and terms thereof, if any]
Automatic Conversion: [Whether
or not, and if yes then how, the shares of investor will automatically convert
into common shares, at the then applicable conversion rate upon either the
closely of an underwritten IPO of Common Shares, or with the consent of the
majority of holders of the outstanding Investor Shares]
Protective Provisions: [Like
requiring the consent of the majority of holders of the outstanding Investor
Shares in order to alter the Articles of Association of the Company that may
adversely affect the rights of the Investor, etc.]
Pre-emptive Rights: [Major
Investors may have a right to purchase the pro
rata share of any offering of new securities by the Corporation, subject to
certain exceptions; the right may terminate immediately prior to the Company’s
first IPO].
Exclusivity: [Specify
a certain date or incident like
closing of the investment deal/formal termination of negotiation/consummation
of financing between the parties, before which the Business is forbidden from
approaching any other potential investor for finances].
Confidentiality: [Until
the negotiation terminates or the finance is obtained, or based on any other
eventuality, bind the parties to maintain confidentiality in respect of the
transaction and negotiations.]
Statements or Clarifications: [Such
as the conditions that are binding, and the extent to which it I so; disclaimer
that the Term Sheet is not a description of financing; or that it is not a
contract between the parties].
Expiration date: [Preferably
fix a suitable date when the Term Sheet would expire, so that the business
could absolve itself of the Exclusivity clause]
SIGNATURES AND DETAILS
On behalf of the Company On
behalf of the Investors
[Name of Company] [Name
of Investor Group]
[Signature] [Signature]
[Name of Person] [Name
of Person]
[Phone] [Phone]
[E-Mail] [E-Mail]
Glossary:
·
Series A Financing: The first round of financing
given to a new business by external investors when they are given company
ownership for the first time. This is sought subsequent to the setting up of
Seed Capital.
·
Angel Investors: Who invest in small Start-Ups
and new ventures; they give a one-time investment to kick-start the business or
may give money at intermittent intervals to help in difficult situations.
·
Seed Capital: The initial capital used to start
up a business, often from the personal assets of founders.
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