Essentially, an Ordinary Shares Investment Term Sheet is a simple, non-legally binding document. It records the major terms of negotiation between a company and investors for the issue of ordinary shares.
Typically, it is customary to begin the negotiation of an investment deal with the circulation of a term sheet. This is a summary of the terms that both the company and the investors will accept. The term sheet is similar to a letter of intent. It’s a non-binding outline of the principal points which the share investment agreement and other agreements will cover in detail.
Creating an Ordinary Shares Investment Term Sheet helps facilitate discussion between the company and its investors in the negotiation stage.
Given the non-legally binding nature of a term sheet, it is necessary for the parties to execute an Ordinary Shares Investment Agreement to record the binding terms in full.
What is an Ordinary Shares Investment Term Sheet?
As above, an Ordinary Shares Investment Term Sheet is a record of discussions between the founders of a business and an investor. It refers to a potential investment in a company through ordinary shares.
Usually, in the early stages of capital raising or fundraising, the founders of start-ups talk to a lot of potential investors to get investment in their business. When an investor is interested and the discussions start to form a shape, a term sheet is signed. This will outline the major aspects of the potential deal.
Importantly, it is crucial that the parties have a good idea of the rights or any restrictions that apply to the ordinary shares of the company at an early stage of the discussion.
Why is a term sheet used in an investment deal?
A “term sheet” is used to record the significant aspects of a deal. This is an overview without the details of every minor possibility that are in a binding contract. The term sheet generally ensures that the parties in a business transaction agree on most major aspects. Additionally, it reduces the likelihood of a misunderstanding or unnecessary dispute. Also, it ensures that neither party will incur premature expensive legal charges for drawing up a binding agreement or contract. In cases of an investment deal, you can use an ordinary shares investment term sheet to do all the things above in relation to the investment in the company by the investors.
Is a term sheet legally binding?
A term sheet is not legally binding. Except for confidentiality and exclusivity obligations (if applicable). This is why a definitive agreement in the form of “Ordinary Shares Investment Agreement” comes into play, later on, to agree on the binding terms.
However, it is usually binding in honour. This makes it difficult for either side to renegotiate other than in exceptional circumstances. For example, if the investor’s due diligence uncovers something which changes the basis upon which the investor is willing to invest in the company. This is the reason why you should have a lawyer review a term sheet. Then they can advise on its implications before signatures.
What should be included in an Ordinary Shares Investment Term Sheet?
- Basic information about the company;
- Identity of the founders;
- Proposed investment amount and investors commitment
- Pre-money valuation of the company
- Details of new shares to be issued to investors (number and classes of shares, type of shares like equity or preference, percentage stake, voting rights, dilutive/non-dilutive, etc.)
- Subscription price for new shares;
- Estimated completion date;
- Pre-money and post-money capitalisation tables
- Investors’ rights;
- Obligations on the founders;
- Whether or not the company will set up a share option pool for its employees (employee share option plan);
- Board representatives – whether investors can nominate directors on the board (investors directors)
- Reserved matters that require approval of the board;
- Reserved matters that require majority consent of the shareholders;
- Important matters that the shareholders agreement will contain such as drag along and tag along rights, founders share vesting, right to buy back, etc.;
- Confidentiality of the terms discussed; and
- Whether or not the discussion will be exclusive, and if so how long is the exclusivity period.
What to do next after signing a term sheet?
Generally, after a term sheet is signed, the negotiations regarding the investment deal follow. Usually, the investors conduct due diligence on the company. Then, depending on the outcomes, both parties come to terms. Typically, this is between the company founders and the investors. Also, this includes their respective rights and obligations under the deal. Also, they agree on the binding terms in an Ordinary Shares Investment Agreement. Following that, a shareholders agreement is signed. This will finalise the issue of new shares, shareholder rights, and other relevant materials in detail.
Who prepares a Term Sheet?
A term sheet is prepared by an investor, where they state the investment they are willing to make. It is prepared before a final presentation.
In summary, a term sheet is a kick-off document for any investor or a company/its founders. Essentially, it negotiates the terms of an investment when raising capital. Also, it outlines the preliminary roadmap of the deal on the basis of which a definitive agreement is entered later on. In essence, both bounders and investors find this document useful for understanding and recording their proposed deal.
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