Demystifying Termsheets for Startups

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Demystifying Term Sheets for Startups

Demystifying Term Sheets for Startups

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  • 1. Your Legal Team Demystifying Investment Termsheets Takeaways: * Understanding Termsheet components * What to negotiate * Interdependency of the terms NovoJuris Startup Focus. Private Equity Expertise. Technology Spotlight. For more information, please get in touch with us 1
  • 2. Your Legal Team About Us  NovoJuris fast outpaces most well-known legal counselors and ranks among India’s 6th in Private Equity Venture Intelligence Reports.  Legal consulting company specializing in corporate, technology, capital markets, fund formation, private equity.  Over the last five years we have worked with over 500 businesses on the continuum from ideation, funding to exits and beyond.  Started by a team with experience in business strategy, law and technology.  Specific services and solutions for companies at various growth stages. For more information, please get in touch with us 2
  • 3. Your Legal Team Our Engagements  Fund Formation. Fund Investment. Worked on either side-Entrepreneur/Fund.  Outsourced legal department for start-ups and SMEs  Corporate governance and company secretarial compliances  Corporate structuring, Merger, amalgamation, take-over, hiving off, acquisition of companies / businesses. The team has prior experience of handling an IPO.  Ideation, business plans  Protection of intellectual property  Legal compliance and due-diligence  Customized legal solutions for commercial transactions  Agreements, MoU’s and legal reviews  Top management legal orientation For more information, please get in touch with us 3
  • 4. Your Legal Team Focus and Process For more information, please get in touch with us 4
  • 5. Patience…takes between 4-12 weeks Intro & Pitch Your Legal Team • Referrals, entrepreneur osmosis, independent attorney • Pitch to exhibit scalability, marketing hustle, tech muscle • Betting on the jockey versus horse • Accelerate other investors for negotiation strength • Informal discussion on termsheet components. Truly informal? Negotiation & • For transparency, a non-binding TS with commercials and shareholder rights • No-shop begins TS DD & SHA • DD on business, tech, founders’ background, legal, financial, compliance. • Definitive agreements: SA, SHA. • Transaction docs: Employment Agreement, Reps and Warranties, ESOP, Restated AOA For more information, please get in touch with us 5
  • 6. Your Legal Team • Scene changing!! Growth Stage guys are cherry picking • Don’t forget customer revenue • Angel networks • Super Angels • VC • Banks too! • Debt funding For more information, please get in touch with us Private Equity • Friends • Family • Angels Seed/Growth Stage Early Stage Focus • Financial engineering • Science vs. Art • PIPE 6
  • 7. Your Legal Team TermSheets in a page Commercials Controls Valuation : Dilution Board composition: decision making Liquidation Preference Pre-emptive right, Tag, Drag, Default Drag, ROFR. ROFO ESOP Pool – Unused? Exits: IPO. Strategic sale. Company buyback. Promoter buyback. IRR Founders’ vesting of shares For more information, please get in touch with us Reserved Matters. Reporting, Process, Budgets, Key employee agreements, 7
  • 8. Your Legal Team Founder Reverse Vesting  Upfront Vesting.  Accelerated Vesting at Exits. Death/Disability. Vested Unvested Good reason: Exiting Founder retains Founders / then Investors / Company buyback at FMV Good reason or Cause: Exiting Founder transfers back to Continuing Founders / Investors / Company buyback at FV Cause: Forced transfer to Founders / Investors at FV - For more information, please get in touch with us 8
  • 9. Your Legal Team Liquidation Preference  1.5x and participatory. What was the shareholding %?  Preference for payment over other shareholders – LIFO – Typically Preference Shares – Cumulative. Compulsorily Convertible. Participatory  A thought on the coupon rate For more information, please get in touch with us 9
  • 10. Your Legal Team Other things  Co-investment.  Next round of funding  Other shareholders exiting  Instrument  Tranches. Definitive language for next tranches.  ESOP pool. Top-ups. Treatment of unused options.  Dilutive Issuance. Full ratchet. Broad / narrow based For more information, please get in touch with us 10
  • 11. Your Legal Team Beyond Valuation  Smart Money  Free CXO – Strategy  Next round of funding  Referrals and huge network  PR  To think an exit at seed stage funding? For more information, please get in touch with us 11
  • 12. Final Term Sheet Your Legal Team Company & Business Investment Amount $ 0.5 million (Use of funds as per plan presented). Valuation $ 2 million post money (26% to new investors). Instrument Instrument is 1% CCCPS (Cumulative Compulsorily Convertible Preference Shares). 1:1 Conversion. Funding Milestones Single Tranche. Board Composition 2 founders representatives, 1 investor representative, 1 independent director. 1 board observer (non-voting for angel investor). Anti Dilution Rights Full Ratchet protection upon a dilutive issuance. Liquidation Preference 1x + Participatory Right. Founder Vesting 33% vesting upfront. Remaining over 3 years monthly vesting. 50% accelerated vesting for death / disability. Full accelerated vesting for Liquidation Event (defined in Definitive Agreements). ESOP 10% set aside. Founders excluded. Unissued revert pro-rata to founders and investors. For more information, please get in touch with us 12
  • 13. Your Legal Team Contact us: Questions? @shardabalaji For more information, please get in touch with us 13