Transcript of "Investment term sheets-An Overview"
Investment Term SheetsAn overview
• A non-binding agreement setting forth the basic terms and conditionsunder which an investment will be made.• A term sheet serves as a template to develop more detailed legaldocuments.• Once the parties involved reach an agreement on the details laid out inthe term sheet, a binding agreement or contract that conforms to the termsheet details is then drawn up.E.g. A term sheet from a venture capital company that is investing in anearly-stage company may contain such details as the amount ofinvestment, the percentage stake sought, anti-dilutive provisions andvaluation.The Term Sheet Chronicles
Term Sheet Strikes a Balance Between Complimentaryand Conflicting interests of:Entrepreneur/Inventor/DeveloperVs.InvestorTerm Sheets answer the glaring questions.• How will my Investment/Idea grow?• Is this Consistent?• Are we leaving innovation on the table?• Lets talk long term ?• Is this the right Market/Strategy ?• Where will my IP rights vest ?• Money Vs. Dream ?• My Role ?• What if I don’t want to do it anymore ?
What Investors Do• Invest money - picking winners• Provide contacts - knowing the rightpeople• Consult– technical and strategic advice– push to make difficult decisions– encouragementWhat Entrepreneurs Do• Amalgamate the Resources and Idea together• Provide expertise and technical Know how• Build strategy• Make the structure work
• Opportunity Analysis• Fit Analysis• Preliminary due diligence• Risk assessment• Development Planning Analysis• Valuation• Structure• Entrepreneurs Needs• Opportunities Needs• Firm’s Needs• Identification and evaluationof Assumptions• Verification of Facts• Interviews• Customers• Competitors• ExpertsAgreement• Documentation• Reps and Warranties• Expediting• Overcoming ProblemsTerm SheetLines up incentives of entrepreneur and investor to provide compulsion to grow rapidly.
Investor Vantage Point•Binding vs. non-binding or selectively binding•Anti-dilution, Pre-emptive Rights•Voting Rights (Affirmative vs. veto)•Board representation (director and observer)•Dividends (Assured Return)•Conversion•Exit (IPO & Buy Back Provision, Drag along)•Time commitment•Protective Provisions
• Information Rights•Transfer Restrictions•Right of First Refusal, Right of first Offer•Co–Sale/Tag Along•Investor Support• Business Plan and use of proceeds•Exclusivity/No Shop•Rights, Preferences, Privileges, and Restrictions of Equity Stock
• Due diligence and Closing Conditions•Drag-along and tag-along rights• IP Rights• Future Role, further finance (pledge/guarantee)• Strategic imperatives and Financial return imperatives•Exit of investor / extinguishment of rights•Costs and taxes
Legal Considerations1. House Keeping (to reduce CP’s)2. Types of securities/shares3. Restriction on transfer, ROFR, ROFO, Tag, options4. Dividend payment, assured return and waterfall provisions5. Valuation on investment and exit6. FDI Policy and related structuring7. Board representation, meetings, decision making, deadlock8. Exit provisions (IPO, Buy Back, Drag along, valuation)9. Tax implications on issue of securities and on exit10. Stamp duty and registration11. IP protection12. Indemnities and warranties13. Termination (tag/drag), extinguishment of rights andsurvival14. Dispute resolution15. Cost and taxes