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
- 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]
[Name of Person] [Name of Person]
- 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.