- Sample of Term Sheet:
- Term Sheet – Basic summary of terms and conditions of investments before due diligence by investor and signing of SHA/SSA(Final Agreements.)
- SHA/SSA – Share Holders Agreement – For understanding between shareholders /Share Subscription Agreement.agreement to subscribe to the capital. Also called as definitive agreements.
- Cap Table – Effective Capital holding Structure including ESOP, Convertible Instruments etc.
- Pre-Money valuation: Valuation before investment amount.
- Post-Money/Pre-money valuation example: Investment of Rs. 1000 for 25% shareholding:
PostmoneyValue= 1000/25% = 4000.
Premoney = 4000-1000 = 3000
- Option Pool– Options are rights to buy shares of common stock in the future at a set price. Granted to employees, consultants, advisors, board members. The “pool” is the number of shares of common stock that you have reserved for options outstanding and options to be granted in the future.
- “Up round” where subsequent round is at a pre-money valuation that is higher than post-money valuation of the prior round.
- Liquidation Preference – When distributing liquidation proceeds, investor stock has right to get a certain amount of money back before the common stock gets anything (the “preference.”)
- Antidilution Protection: Protects investors in a future “down round” when new money is invested at a pre-money valuation (or price per share) that is lower than the previous round’s post- money valuation
- Control – Board Seats: Usually preferred stock investors require one or more board seats –Various Combinations are worked out. Sometimes a “board observer” rather than board seat.
- Veto rights– Essentially a list of things the company can’t do without investors’ consent. Consent at either the Board or Stockholder level is must.
- Tag Along Tights: Ability to sell along side founders/management (and sometimes also other investors).
- Drag along rights –Ability to force all stockholders to go along with a sale that meets certain conditions.
- Right of first refusal (ROFR) –Ability to purchase shares for sale by founders/management (and sometimes also other investors)
- Pre-emptive rights – Right to participate in future financings . Usually in proportion.
- Pay to Play –Ability for investors to force each other to invest in future rounds.
- Information rights – Right to get periodical information.
Various Equity like Instruments:
- Convertible Notes
- Convertible Debentures
- Convertible Preference Shares • Optionally Convertibles Debentures/preference shares
Usual Model of Convertible Note:
The CN shall convert into Equity Shares based on a price per share (“Conversion Price”) arrived as per the formula below:
Discount Price = (Price per Security issued in the Qualified Equity Financing)*Discount Rate
“Discount Rate” = (100 – X)%, expressed as a percentage.
X = [!]% up to a period of 12 months from the Closing Date
X = [!]% as increased by [!]% for every completed month from the 13th month from the Closing Date OR X = [!]% where Qualified
Financing Round is between 13 – 18 months of Convertible Note: