Viral Rathod, Everstone Capital Advirsors explains the various clauses in the term sheet, the exit strategies and other terms from both - an investor and entrepreneurs perspective. He highlights the key areas that an entrepreneur needs to focus on while entering into a investment deal and signing the term sheet.

1. Introduction to Term Sheets
TiE Mumbai
Feb 20, 2015
1

2. Introduction to Term Sheet
2
 A Term Sheet is a non-binding agreement between an Investor, the Company and the existing
shareholders setting forth the basic terms and conditions under which an investment will be made
 A term sheet serves as a template which the lawyers will use to draft the final legal documents, hence
though non-binding, a term sheet is a very important document
 Most investors typically invest significant time and money in evaluating a deal, only after a Term Sheet
is signed. Detailed legal, Financial and Business diligence starts after the Term Sheet is executed
 A term sheet can be broken down into 3 major sections:
 Information about the Target & Investor
 Key Investment Terms
 Investor Rights, including Exit rights
 Each investor has his own format of a Term Sheet but the content is broadly similar

3. Factual Information about the Target & Investor
3
 Captures factual information on the Company, existing shareholders and the investor
 The target entity also discloses the following information:
 Details of any subsidiaries or JVs through which target entity conducts its business with an
undertaking that
 Defines management shareholders
 Detailed shareholding pattern of the company pre-investment including the details of # of shares
held and type of instrument

4. Details of Investment
4
 Outlines the key terms of the Investment by the Investor:
 Instrument for investment – equity shares / compulsorily convertible debentures / compulsorily
convertible preference shares
 Investment amount
 Valuation at which the Investment will be made resulting in the stake the investor will get
 Broad assumptions based on which the Investment is being made and valuation of the Company is
being agreed (often linked to certain financial/operational parameters)

5. Investor Rights
5
 Multiple sub-sections in a term sheet specify the various Investor Rights
 Exclusivity
 Non-Compete
 Transfer restrictions
 Pre-emptive rights
 Anti-dilution rights
 Exit Rights: These are discussed in detail in the next slide
 Board Representation
 Information Rights
 Reps & Warranties/Indemnities
 Investor Affirmative Rights/Reserved Matters
 Material Adverse Change

6. Investor Exit Rights
6
 The Exit options are typically the following (not necessarily in this order):
 IPO / Offer for Sale
 Stake sale to 3rd party (competitor/non-competitor)
 Sale of Company to the 3rd party (incl. competitor)
 Put Option on the Company
 Put Option on Management Shareholders
 Other exit related rights
 Tag along Right
 Drag Along
 Right-of-First-Offer

7. Some important and easy to understand terms you’ll come across
7
Lets take the hypothetical case of a new age company – FlipDeal
 Type of Company – Proprietorship / Partnership / Private Limited /Public Limited / LLC
 Instrument of investment – Equity Shares / Compulsorily Convertible Debentures /
Compulsorily Convertible Preference Shares
 Type of investment – Venture / Growth / Buyout or control
 Investor type – Indian / Foreign (FDI restrictions apply)
 Investment type – Primary / Secondary
 Pre-Money Valuation (A) - $100 million
 Investment Amount (B) - $ 10 million
 Post-Money Valuation (C = A+B) - $ 110 million
 Investor Stake (D = B/C) – 9.1%
 Liquidation Preference – Min 2x return for the Investor

8. Some important and easy to understand terms you’ll come across
8
Types of Diligence
 Financial Diligence – To assess the ‘real’ financial health of the Company and key drivers of historic
performance. Usually done by auditing firms
 Legal Diligence – To assess legal issues in the Company
 Business Diligence – To assess market potential. Competitive landscaping and check
reasonableness of assumption. Usually done in-house or through an external consultant
 Forensic diligence – Background check on promoters, key shareholders. Done clandestinely
through an external agency
Some other important terms
 Deal Signing – Execution of definitive agreements
 Deal Closure – Remittance of investment
 Condition Precedent (CPs) – Conditions that need to be fulfilled between Deal Signing and Deal
Closure. Some of the CPs will emerge out of finding of Diligences
 Condition Subsequent (CS) – Non- critical conditions that need to be fulfilled post Deal Closure

9. Introduction to Term Sheets
TiE Mumbai
Feb 20, 2015
9