How to evaluate your term sheet?
Key takeaways from the roundtable session with Rangam Sharma and Sera Arora, regarding the elements of a term sheet.
0:00 - Intros of all the people
12:08 - Essence of a term sheet
Regardless of the differences in the nuances of term sheets, it validates the fact that you and your company are worth financial backing. The form and structure of the term sheet depend on the intent behind the investment, which is typically of 3 kinds: Financial Investors, Strategic investors and Impact investors.
18:05 - Breaking down the parts of a term sheet
To put it very simply, a term sheet is a business document between the promoters of the business and the investors interested in investing in the business, that chalks out the conditions subject to which the investment will take place, if and when it does occur. Apart from the basics of the names of people involved, their shareholding pattern and the amount of money to be invested, it consists of other specific terms and conditions to ensure the protection of the interests of the promoters and the investors. However, one thing to note is that a term sheet is not a legally binding document, it functions as a letter of intent between the investor and the promoters.
23:46 - Long-stop date and minority protections
A long-stop date is essentially a definitive time period in which any particular action is to be executed, most often being used for completing the fund-raise procedure and signing the share-holding agreement.
Minority protections are clauses added in by the promoters of the business to ensure the protection of the interests of those shareholders who have a very small stake in the company but yet were early-backers, like advisors or family members.
31:38 - Indian regulations have their constraints
SAFE notes (Simple Agreement for Future Equity) are a US accepted investment structure. SEBI regulations do not legally allow investment into SAFE notes by Indian investors. However, the Indian Indian investors use CCD / convertible notes for unpriced transactions in India.
39:52 - Information rights
Founders agree to share periodic information about the workings of the business, on a regular frequency. They generally consist of key business updates, cash flows, financial metrics (MIS), financial statements.
46:34 - Anti-dilution rights
Anti-dilution ensures the safety of the shareholding of the investors. The most common method is the broad-based weighted average method however, a more investor-friendly method is the full-ratchet method.
53:21 - Right to sell
Founders don't want their investors to exit the company too fast, while investors don't want to be held hostage to their investments, and this creates a very crucial conversation around the timeline after which the investor can share his/her stake.
59:45 - Drag-along rights
A drag-along right allows the investor to “drag” the promoters, after the exit period (typically 5 years) to accept an offer from a third party to purchase the whole company. They exist to protect the capital of the investors and enable them to perform their fiduciary duty towards their partners.
1:09:17 - ESOPs and team contracts
Keep things clean from day one, and be open about everything. Regardless of what you think, make sure your books are in order, and all unforeseen situations are under relevant contracts.
1:14:38 -Confidentiality clause
