Term Sheet consists of key aspects and terms in a summarized manner which matter to both the parties with respect to the startup fundraising. It is the first most document that an entrepreneur receives from its investor expressing the intent to invest in startup. The key aspects and the terms and conditions mentioned in the Term Sheet arefurther elaborated in the SHA.
The Shareholders Agreement (SHA) defines the legal terms of the investment and contains definition, the closing date, pre-emptive rights, anti-dilution, liquidation preferences, terms of CCPS etc. Share Subscription Agreement (SSA) is an agreement which further talks about the subscription or investment made by the investor so it therefore includes the clauses like closing date, conditions precedent to investment, conditions subsequent to investments etc.
| S No. | Clauses | Content |
|---|---|---|
| 1 | Definitions | Includes the definition of Act, Affiliate, Board of Directors, Business Day, Cause, Closing Date, Competitors, Control, Down Round, Employment Agreement, ESOP Scheme, Exit, InvestorSecurities. |
| 2 | Closing Date | The date by which the investor needs to transfer the money and the company needs to issue the securities. |
| 3 | Pre-emptive right | Gives the rights to the investors to maintain the percentage holding at the time of future funding. |
| 4 | Anti Dilution | It gives right to the investors to subscribe new shares at the nominal rate at the time of downround in the future. |
| 5 | Liquidation Preferences | It allows the investors to withdraw their share of money before distributing it to other shareholders. |
| 6 | Reverse Vesting | In case of Termination with cause, the vested shares of the founders will get reversed if so mentioned in SHA. |
| 7 | ROFO/ROFR | Right of First Offer or the Right of First Refusal is the contractual right which allows the holder to get the first right to purchase the shares in case other party wants to sell the same in future. |
| 8 | Tag Along Right | Tag Along Right gives the contractual right to its holder to sell their shares at the same terms or proportion being sold by the other party. |
| 9 | Drag Along Right | This right gives the right to investor to drag the founders to sell their shares at the price which is being agreed by investor to sell his shares. |
| 10 | Reserved Matters | Matters which require the prior approval of the investor such as any changes made in MOA/AOA, any future investments, any KMP hiring or any expenses which are beyond the percentage of the approved business plan, merger-acquisition etc. |
| 11 | Board Seat | SHA defines whether the Board Seat will be given to the investor or not. |
| 12 | Shareholders meeting | It includes the clauses with respect to the quorum, notices etc. like whether or not video conferences will be allowed for meetings. |
| 13 | ESOP | It includes the clauses regarding the criteria of ESOP pool and the vesting schedule. |
| 14 | Exit | It defines that how the exit shall be provided to the investors. |
| Do’s | Don’t’s |
|---|---|
| Companies should always take the shareholders’ permission via a special resolution before initiating the Shareholders Agreement exercise. | Remember to execute the Term Sheet. Some founders tend to carry out the approval process on emails which is not advisable. |
| Companies must also alter the Articles of Association (AOA) and add to the clauses mentioned in the SHA. | Remember to execute the SHA and SSA even if company is raising investment from friends or family. |
| Companies must align its existing founders’ agreement with the SHA. | Companies should preferably avoid giving drag along rights to its investors in the Seed round of investments. |
| Term Sheet | SHA |
|---|---|
| Term Sheet is the initial document issued by the investor so as to express his intent to invest in the startup. | SHA is the last step in the fundraising process. It provides a detailed version of the terms agreed in Term Sheet. |
| It is not the binding document as this may be subject to many conditions like positive due diligence etc. | It is the binding document which mentions all the provisions in a detailed manner. |
| It is issued before the due diligence | It is issued only after satisfactory due Diligence |
ROFR is better for the founders. As per ROFR, if the investor wishes to sell his shares in the future then the investors will quote the price as well which they are getting from the buyer.
Standard Vesting Schedule for founders are four years with the cliff of one year.
Termination with Cause triggers the reverse vesting in case of founders so it is utmost important to remove the subjectivity. Points like “not doing the business properly” or “incapable of doing business” etc. needs to be removed from definition.
Yes, make sure to prepare both SHA and SSA separately.
The amount to be paid depends from state to state according to the law of state stamp law.
Founders salary post investment is one of the key discussions at the time of fundraise. Therefore, investors prepare the employment agreement for founders at the time of investments.
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