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.
2. Introduction to Term Sheet
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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
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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
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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
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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
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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
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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
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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