Overview of Term sheets and SHA

Following are the key features of a term sheet:

• Parties involved: Clearly identify the parties participating in the agreement, including the names and contact information of the involved individuals or entities.
• Definitions: Provide clear definitions of key terms and phrases used throughout the term sheet to avoid any confusion or ambiguity.
• Transaction overview: Summarise the nature of the transaction, including the type of investment, acquisition or partnership being considered.
• Investment details: Specify the amount of investment or funding being proposed, including any agreed-upon milestones or tranches.
• Valuation: State the pre-money and post-money valuation of the company, if applicable and the agreed-upon percentage of ownership or equity to be acquired by the investor.
• Capitalisation table: Include a capitalisation table outlining the existing ownership structure, including the names of existing shareholders and their respective ownership percentages.
• Use of funds: Outline the specific purposes for which the invested funds will be used, such as product development, marketing or expansion plans.
• Due diligence: Specify the timeframe and process for conducting due diligence on the company, including any required financial, legal or operational documentation.
• Conditions precedent: Identify any conditions that must be met before the transaction can proceed, such as regulatory approvals, third-party consents or satisfactory completion of due diligence.
• Investor rights: Detail the rights and protections granted to the investor, including board representation, veto rights or protective provisions.
• Anti-dilution provisions: Describe any anti-dilution mechanisms that protect the investor in the event of future equity issuances or down rounds.
• Liquidation preference: Explain the order of priority for distributing proceeds in the event of a liquidation or sale of the company, including any preferred return or participation rights for the investor.
• Exit strategy: Address the options and mechanisms available for the investor to exit their investment, such as IPOs, acquisitions or buybacks and any associated timelines or restrictions.
• Confidentiality and exclusivity: Establish the obligations of both parties to maintain the confidentiality of the term sheet and their commitment to negotiating exclusively with each other for a defined period.
• Governing law and jurisdiction: Specify the governing law and jurisdiction that will apply to any disputes arising from the agreement.
• Termination and remedies: Outline the circumstances under which the term sheet can be terminated and the available remedies for breach of the agreement.
• Confidential information: Include a provision on the handling and protection of confidential information shared during the negotiation process.
• Binding and non-binding provisions: Clearly identify which provisions of the term sheet are binding and enforceable and which are non-binding and intended for discussion purposes only.
• Signatures: Provide space for the authorised representatives of both parties to sign and date the term sheet, indicating their agreement and intention to proceed with the transaction.

Following are the additional key elements of a Shareholder’s agreement:

• Shareholding details: Specify the number of shares owned by each shareholder, their respective percentage ownership and any restrictions on transferring or selling shares.
• Board representation: Outline the rights and responsibilities of shareholders regarding board representation, including the number of board seats allocated to each shareholder or group of shareholders.
• Voting rights: Define the voting rights of shareholders, including any special or veto rights granted to certain shareholders on specific matters.
• Decision-making process: Describe the process for making major decisions, such as amendments to the company's articles of incorporation, approval of annual budgets or appointment of key executives.
• Dividends and distributions: Address the distribution of profits, including the payment of dividends to shareholders and any restrictions or conditions on such distributions.
• Shareholder obligations: Specify the obligations of shareholders, such as non-competition agreements, non-disclosure agreements or restrictions on engaging in activities that may be in conflict with the company's interests.
• Transfers and restrictions: Define the procedures and restrictions for transferring shares, including rights of first refusal, tag-along rights, drag-along rights and any restrictions on transferring shares to third parties.
• Exit provisions: Address the mechanisms and procedures for shareholders to exit their investments, such as buyback options, drag-along rights or provisions for initial public offerings or acquisitions.
• Dispute resolution: Establish the process for resolving disputes among shareholders, including mediation, arbitration or litigation and the applicable jurisdiction for legal proceedings.
• Intellectual property rights: Address the ownership and protection of intellectual property developed by the company and the rights of shareholders in relation to such intellectual property.
• Termination and remedies: Outline the circumstances under which the shareholders agreement can be terminated and the available remedies for breach of the agreement.
• Amendment and waiver: Detail the process for amending or waiving provisions of the shareholders agreement and the required majority or unanimous consent of shareholders.

Term sheets and SHAs are drafted and finalised with the below mentioned purpose in mind:

• Protection of Shareholder Interests: Safeguards the rights and interests of shareholders, providing clarity on their roles, responsibilities and decision-making authority.
• Governance and Control: Defines the structure of corporate governance, including board representation, voting rights and decision-making processes.
• Dispute Resolution: Establishes mechanisms for resolving disputes among shareholders, minimising the risk of conflicts and providing a structured process for resolution.
• Share Transfer Restrictions: Sets out restrictions on the transfer of shares to maintain stability and control within the company, protecting shareholder investments.
• Exit Strategies: Outlines options and procedures for shareholders to exit their investments, ensuring clarity and fairness in the event of an exit.
• Confidentiality and Non-Compete: Protects the confidentiality of proprietary information and restricts shareholders from engaging in competing activities.
• Succession Planning: Addresses matters related to succession, including share transfer upon death or disability of a shareholder.
• Investor Confidence: Boosts investor confidence by establishing a framework that protects their rights and ensures a fair and transparent business environment.
• Compliance and Legal Framework: Ensures compliance with applicable laws and regulations, providing a legal framework for shareholder relations.
• Alignment of Interests: Promotes alignment among shareholders, fostering a shared vision and goals for the company's success.

What are the Conditions to be considered while Drafting a Term sheet and an SHA?

The below mentioned conditions are necessary to be considered in a Term sheet:

• Non-binding nature: Clearly state that the term sheet is non-binding, meaning that both the start-up entrepreneur and the potential investors are not legally obligated to adhere to its terms.

• Company valuation: Define the valuation of the start-up, including the investment amount and the percentage of ownership that the investors will acquire.

• Voting rights: Address the allocation of voting rights, ensuring a fair balance between the entrepreneur and the investors in decision-making processes.

• Liquidation preference: Specify how the proceeds from a potential sale or liquidation will be distributed, outlining any preferences or priorities for the entrepreneur and the investors.

• Investor commitment: Outline the expected duration of the investor's commitment and the vesting period, providing clarity on the investor's long-term involvement.

• Exclusions and additional items: Highlight any specific exclusions or additional items that either party considers important and that should be taken into account during the negotiation process.

Conditions to consider in an SHA are:

• Binding nature: Emphasise that the shareholders agreement is a legally binding document, establishing the rights and obligations of the shareholders involved.

• Shareholding details: Clearly define the number of shares held by each shareholder, their respective ownership percentages and any restrictions on share transfers.

• Voting rights: Specify the allocation of voting rights among the shareholders, outlining any special or veto rights granted to certain shareholders on specific matters.

• Dividends and distributions: Address the distribution of profits, including the payment of dividends to shareholders and any conditions or restrictions on such distributions.

• Share transfer restrictions: Outline the procedures and restrictions for transferring shares, including rights of first refusal, tag-along rights, drag-along rights and limitations on transferring shares to third parties.

• Dispute resolution: Establish a mechanism for resolving disputes among shareholders, such as through mediation, arbitration or litigation and specify the applicable jurisdiction for legal proceedings.

• Termination: Define the circumstances under which the shareholders agreement can be terminated and outline the available remedies for breaches of the agreement.

The following procedure needs to be followed in successfully drafting a term sheet and SHA:

Identify key terms and provisions:

• Determine the fundamental terms and provisions that need to be included in the term sheet and shareholders' agreement.
• These may include ownership percentages, voting rights, decision-making processes, capital contributions and dispute resolution mechanisms.

Conduct negotiations and discussions:

• Engage in discussions with relevant stakeholders, such as co-founders, investors and legal advisors, to align on the terms and conditions.
• Address any conflicting interests or concerns and work towards reaching a consensus on important matters.

Outline the term sheet:

• Prepare a term sheet as a non-binding document outlining the key terms and conditions agreed upon during negotiations.
• Include sections on the business purpose, ownership structure, capitalisation, voting rights, vesting schedules and any specific rights or privileges of shareholders.

Seek professional help:

• Engage professionals experienced in corporate law to review and provide guidance on the term sheet and shareholders' agreement.
• Ensure that the drafted documents comply with relevant laws and regulations and accurately reflect the agreed-upon terms.

Draft the shareholders' agreement:

• Develop a comprehensive shareholders' agreement based on the terms outlined in the term sheet.
• Include provisions on share transfer restrictions, rights and obligations of shareholders, dispute resolution mechanisms, confidentiality and non-compete clauses.

Review and finalise:

• Carefully review the drafted term sheet and shareholders' agreement, ensuring accuracy and consistency throughout.
• Seek input and feedback from all involved parties and make necessary revisions until all parties are satisfied.

Execution and signatures:

• Once the term sheet and shareholders' agreement are finalised, circulate the documents to all relevant parties for review and signature.
• Ensure that all signatories understand the terms and implications of the agreement before signing.

Record and retain copies:

• Maintain a copy of the executed term sheet and shareholders' agreement in a secure location.
• Distribute copies to all parties involved and retain copies for future reference and potential legal requirements.

A Term Sheet sets forth the fundamental terms of the agreement between the founders and investors to serve the purpose of eliminating any potential misunderstandings in the future.

On the other hand, a shareholders agreement is a legally binding document that oversees business dealings and also the relationship between shareholders and a company's directors.

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