This document summarizes key terms related to venture capital term sheets. It discusses the purpose of a term sheet, common instruments used in financings like preferred shares and convertible notes, liquidation preferences, rights that investors obtain like affirmative rights and board seats, founder vesting schedules, and other terms like anti-dilution, valuation methods for convertible notes, and more. The document provides examples to illustrate concepts like liquidation preferences and anti-dilution calculations.

1. Term Sheet Fundamentals May 2020
Backing Ventures in Deep Tech creating 10x differentiated businesses
Samik Rakshit
Head of Fund Operations, pi Ventures Twitter: @samik_rakshit

2. The Funding Process
Pitch to Investors Convinced? Term Sheet
Negotiation
concluded?
Due Diligence
- Financial DD
- Legal DD
SHA/ SSA
Ok?
Detailed
Terms
concluded?
Can
Issues be
fixed?
ClosureDrop
Yes
No
No
Re-negotiate
No
No Yes
Yes
No
Yes
Parallel process
Yes

3. What is Term Sheet?
Written document having the key terms and conditions of a potential deal
Deal between Founders & Investor/s
Dividing the upside and risk between the parties
Non- binding agreement. Binding to the extent of Non-shop &
Confidentiality
Gives road map for lawyers to draft Definitive agreements

4. Instruments
Promoters own
Equity/ Common shares
Investors own
Preferred shares (most common way of investment)
Convertible/ Optionally Convertible (Redeemable)
Participating/ Non-participating
Cumulative / Non-cumulative
Compulsory Convertible Notes/ Debts (CCN/D)
Preference shares

5. Liquidation Waterfall
Equity
shares
Preference
shares
Remaining
debts
Govt. dues
Unsecured
Creditors
(CCD/N)
Wages &
Unpaid
dues
Secured
Creditor
Liquidation
cost

6. Eg.
₹10cr Ser A investment at ₹30cr pre-money. Company ends up selling for ₹100cr.
Particulars Principal return
Additional
Participation
Total Remarks (if any)
1X Non-
participating
Greater of
₹10cr or ₹25cr
(25% X ₹100cr)
- ₹25cr
Greater of pro-rata
return or principal
return
1X Participating
with 3X Cap
₹10cr
₹20cr
(25% of remaining
proceeds of ₹90cr upto
3X of total investment)
₹30cr
Limiting returns to 3X of
Investment
2X Participating ₹20cr
₹20cr
(25% of ₹80cr)
₹40cr
25% of the remaining
proceeds (₹100cr -
₹20cr)
Liquidation Preference Variants
Non -
Participating
(1X Non- Participating)
Capped
Participating
(1X Participating with 3X
Cap)
Uncapped
Participating
(2X Participating)

7. Eg.
₹10cr Ser A investment at ₹30cr pre-money. Company ends up selling for ₹100cr.
Particulars Principal return
Additional
Participation
Total Remarks (if any)
1X Non-
participating
Greater of
₹10cr or ₹25cr
(25% X ₹100cr)
- ₹25cr
Greater of pro-rata
return or principal
return
1X Participating
with 3X Cap
₹10cr
₹20cr
(25% of remaining
proceeds of ₹90cr upto
3X of total investment)
₹30cr
Limiting returns to 3X of
Investment
2X Participating ₹20cr
₹20cr
(25% of ₹80cr)
₹40cr
25% of the remaining
proceeds (₹100cr -
₹20cr)
Liquidation Preference Variants
Non -
Participating
(1X Non- Participating)
Capped
Participating
(1X Participating with 3X
Cap)
Uncapped
Participating
(2X Participating)

8. Affirmative Rights/ Board Rights
What?
Economic Rights
Operational Rights
How?
Hard negotiations
Protective provisions
Thresholds

9. Affirmative Rights/ Board Rights
What?
Economic Rights
Operational Rights
How?
Hard negotiations
Protective provisions
Thresholds
Change VC
terms
Creation of
more stock
Amendment
of AoA/ MoA
Issue senior
rights stock
Change in BoD
composition
M&A
Business pivot
Economic Rights (examples) Operational Rights (examples)
Appoint/
remove auditors
Incur Opex
beyond threshold
Related
party
transactions
Approve
annual budgets Change in
business
projectionsIncur Capex
beyond
threshold

10. Affirmative Rights/ Board Rights
What?
Economic Rights
Operational Rights
How?
Hard negotiations
Protective provisions
Thresholds
Change VC
terms
Creation of
more stock
Amendment
of AoA/ MoA
Issue senior
rights stock
Change in BoD
composition
M&A
Business pivot
Economic Rights (examples) Operational Rights (examples)
Appoint/
remove auditors
Incur Opex
beyond threshold
Related
party
transactions
Approve
annual budgets Change in
business
projectionsIncur Capex
beyond
threshold
Voting & Conversion
Preference shares on a “as if converted basis” have voting rights.

11. Other Rights
Drag Rights
Investors can force the sale of the company under certain conditions
Pre-emptive/ pro rata rights
Gives the existing investors the right to participate in subsequent rounds
ROFR/ ROFO
Preferred Stock holders get the first right to participate
Tag along/ co-sale rights
Management agrees not to sell their shares without giving investors a right
for pro-rata participation in sale
Note: Drag-along and tag-along rights typically end at an IPO, as they get replaced by security laws for public markets.

12. Founder Vesting
Typical Founder vesting curve
4 years vesting with 1 year cliff.
Post the cliff the shares are vested in periodic intervals
Pre-vesting of Founder Vesting at certain times
6.25%

13. Founder Vesting
Typical Founder vesting curve
4 years vesting with 1 year cliff.
Post the cliff the shares are vested in periodic intervals
Pre-vesting of Founder Vesting at certain times
6.25%
Cliff
Y1 Y2 Y3 Y4
Closing
date
25% vesting 50% vesting 75% vesting 100% vesting
31.25% 37.5% 43.75% 50%
56.25% 62.5% 68.75%
81.25% 87.5% 93.75% 100%
75%
Say a Founder had 40% shares as at Closing date. So after 18 months the founder will vest 15% shares (37.5% of 40% shares)

14. Founders Agreement
Equity Vesting
Founder Lock-in
Non - compete
IP assignment
Exit Terms
Scenario Vested Shares Unvested Shares
Resignation Remains with Founder Lapse
Retirement Remains with Founder Lapse
Death/ Incapacitation Remains with Founder Accelerated Vesting
Leave for Cause Lapse Lapse
M&A
Gets bought by the
company/ Acquirer
Depends on
Acquisition terms
Exit (typical) Terms

15. Founders Agreement
Equity Vesting
Founder Lock-in
Non - compete
IP assignment
Exit Terms
Scenario Vested Shares Unvested Shares
Resignation Remains with Founder Lapse
Retirement Remains with Founder Lapse
Death/ Incapacitation Remains with Founder Accelerated Vesting
Leave for Cause Lapse Lapse
M&A
Gets bought by the
company/ Acquirer
Depends on
Acquisition terms
Vesting during M&A - depends on acquisition terms
Exit (typical) Terms
Options
No accelerated vesting
Accelerated vesting
Single Trigger
Double Trigger
Merger of company
Acquiring company fires
the concerned person

16. Anti-Dilution
Protect Investors in down round investment
Broad based
- Fully diluted
- Current Outstanding +
Convertibles
Weighted AverageFull Ratchet
Narrow based
- Current outstanding
shares (equity + pref)
Anti-dilution
Weighted Average formula
NCP = OCP X ((CSO + CSP)/ (CSO + CSAP))
NCP = New Conversion Price
OCP = Old Conversion Price
CSO = Shares outstanding immediately prior to the new issue
CSP = Shares purchased if the round was not a down round (previous round pricing)
CSAP = Shares actually purchased because the round is down

17. Anti-Dilution - Example
Chronology of events
1. Outstanding shares with company is 600,000
2. Seed round - Investor 1 puts in $400k for 40%
3. Series A round - Investor 2 like to put in $500k for 50%
Solution:
Price for Seed Round per share = $1
Price for Series A round per share = $0.50
Full Ratchet:-
Particulars # shares %age Total value
Founders 6,00,000 60% $6,00,000
Investor 1 4,00,000 40% $4,00,000
Total 10,00,000 100% $10,00,000
CAP table post Seed Round
Weighted Average:-
Particulars # shares %age Total value
Founders 6,00,000 60% $6,00,000
Investor 1 4,00,000 40% $4,00,000
Total 10,00,000 100% $10,00,000
CAP table post Seed Round
Full Ratchet
Weighted Average
Particulars # shares %age Total value
Founders 6,00,000 10.00% $1,00,000
Investor 1 4,00,000
Anti-dilution (Full Ratchet) 20,00,010
sub-total Investor 1 24,00,010 40.00% $4,00,000 $0.17
Investor 2 30,00,012 50.00% $5,00,000
Total 60,00,022 100% $10,00,000
CAP table post Series A Round (after multiple iterations)
Particulars # shares %age Total value
Founders 6,00,000 25.38% $1,00,000
Investor 1 4,00,000
Anti-dilution (Weighted Avg) 1,81,818
sub-total Investor 1 5,81,818 24.62% $4,00,000 $0.69
Investor 2 11,81,818 50.00% $5,00,000
Total 23,63,636 100% $10,00,000
CAP table post Series A Round (after multiple iterations)

18. Convertible Note
Defer the valuation till next round of financing
Key Parameters
Max Valuation Cap
Discount
Lower Cap
3 Methods of Conversion:
Conversion Method Calculation Impact on Founders
Impact on CCD
Investors
Impact on VC
Pre-Money
Pre-money valuation of
company is fixed
Best Worst Worst
Percentage-Ownership
%age ownership of VC
is fixed
Worst Best Best
Dollars-invested
Post-money includes
nominal value of CCD
Middle Middle Middle

19. Few More Terms
Valuation
Post money valuation = pre-money valuation + Investment in the round
Tranching
Staggering the same round of investment. Usually milestone based investment.
ESOP
Part of the capital structure allocated for employees
Clawback
Chance to reclaim money or stock options already given to a founder or
employee
Legal & Due Diligence fees
Mostly all investors put the burden of legal fees on the entrepreneur. Can
negotiate some overall caps

20. For more information, write to
samik@piventures.in
*Thanks to Prof Shivaram from IIT Mumbai for the phrase
J AI HIND*