Overview of an Ordinary Shares Investment Term Sheet
What is an Ordinary Shares Investment Term Sheet?
An Ordinary Shares Investment Term Sheet is a simple, non-legally binding document that records the major terms of negotiation between a company and investors for the issue of new ordinary shares.
An Ordinary Shares Investment Term Sheet is a record of discussions between the founders of a business and an investor for potential investment by ordinary shares.
Creating an Ordinary Shares Investment Term Sheet helps facilitate discussion between the company and its investors in the negotiation stage.
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. Finally, 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.
What should be included in an Ordinary Shares Investment Term Sheet?
These are the basic things included in a Term Sheet (Ordinary Shares). ie;
- Basic information about the company;
- Identity of the founders;
- Proposed investment amount and investors commitment
- The 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.)
- The subscription price for new shares;
- Estimated completion date;
- Pre-money and post-money capitalization 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 shareholder’s 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?
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 honor. 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.
An Ordinary Shares Investment 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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