Term Sheet (Ordinary Shares)

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What is it?

A Term Sheet is set out as an offer from an investor to a company to purchase ordinary shares in the company.

A Term Sheet is a document used to set out the key financial and other terms of a proposed investment. Investors and shareholders of the company use a Term Sheet to achieve preliminary and conditional agreement to those key terms.

Provisions of a Term Sheet are not usually intended to be legally defining, except for some clauses such as confidentiality. Their investment proposed by their Term Sheet will be subject to the parties agreeing on the further documents (for example, the Seed Investment Agreement and Shareholders' Agreement), and the Term Sheet may contain conditions that need to be met before the investment is completed (known as "conditions precedent").

Why do you need it?

A Term Sheet is shorter and more direct than the final legal documentation needed to complete the investment. You can reach agreement on the basic terms more quickly. The Term Sheet is therefore used more as the basis to negotiation before drafting a more detailed legal document.

Any conditions precedent in the Term Sheet will show the shareholders of the company exactly what actions need to be taken before the completion date, which can reduce the risk of the investment being delayed.

Key clauses to watch for:

When drafting a Term Sheet, it is important to focus on a number of key clauses, in particular:

  • Type of share - the voting and financial rights the investor's shares have;
  • Power for the investor to appoint a director to the board;
  • Valuation of the company - the "pre-money valuation" will usually determine the price per share that the new investor will pay and the "post-money valuation" is the valuation of the company after the investment has been completed;
  • The fully-diluted number of shares in the company. This will usually include shares that have been issued, shares allocated to an option pool, and any other shares which the company could be required to issue through options, warrants, convertible debt, or other commitments;
  • Option pool of shares - whether there are shares set aside for employees or other investors;
  • Full investment on completion date versus the investment being made in stages over a period of time (tranches), and any technical and/or commercial conditions (milestones) to be met for each tranche;
  • Anti-dilution provisions to protect the value of the investor's stake in the company;
  • "Tag-along" and "drag-along" rights;
  • Liquidation preference - if the company is liquidated, whether the investor receives an amount from the proceeds before other shareholders;
  • Restrictions on how shareholders can deal with their shares if they leave the company within a certain time, and non-competition restrictions on founders; and
  • Who pays the investor's costs.

Term Sheet (Ordinary Shares) Document

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