Introduction to Term Sheets

TiE Mumbai

Feb 20, 2015

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Introduction to Term Sheet

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A Term Sheet is a non-binding agreement between an Investor, the Company and the existing

shareholders setting forth the basic terms and conditions under which an investment will be made

A term sheet serves as a template which the lawyers will use to draft the final legal documents, hence

though non-binding, a term sheet is a very important document

Most investors typically invest significant time and money in evaluating a deal, only after a Term Sheet

is signed. Detailed legal, Financial and Business diligence starts after the Term Sheet is executed

A term sheet can be broken down into 3 major sections:

Information about the Target & Investor

Key Investment Terms

Investor Rights, including Exit rights

Each investor has his own format of a Term Sheet but the content is broadly similar

Factual Information about the Target & Investor

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Captures factual information on the Company, existing shareholders and the investor

The target entity also discloses the following information:

Details of any subsidiaries or JVs through which target entity conducts its business with an

undertaking that

Defines management shareholders

Detailed shareholding pattern of the company pre-investment including the details of # of shares

held and type of instrument

Details of Investment

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Outlines the key terms of the Investment by the Investor:

Instrument for investment – equity shares / compulsorily convertible debentures / compulsorily

convertible preference shares

Investment amount

Valuation at which the Investment will be made resulting in the stake the investor will get

Broad assumptions based on which the Investment is being made and valuation of the Company is

being agreed (often linked to certain financial/operational parameters)

Investor Rights

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Multiple sub-sections in a term sheet specify the various Investor Rights

Exclusivity

Non-Compete

Transfer restrictions

Pre-emptive rights

Anti-dilution rights

Exit Rights: These are discussed in detail in the next slide

Board Representation

Information Rights

Reps & Warranties/Indemnities

Investor Affirmative Rights/Reserved Matters

Material Adverse Change

Investor Exit Rights

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The Exit options are typically the following (not necessarily in this order):

IPO / Offer for Sale

Stake sale to 3rd party (competitor/non-competitor)

Sale of Company to the 3rd party (incl. competitor)

Put Option on the Company

Put Option on Management Shareholders

Other exit related rights

Tag along Right

Drag Along

Right-of-First-Offer

Some important and easy to understand terms you’ll come across

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Lets take the hypothetical case of a new age company – FlipDeal

Type of Company – Proprietorship / Partnership / Private Limited /Public Limited / LLC

Instrument of investment – Equity Shares / Compulsorily Convertible Debentures /

Compulsorily Convertible Preference Shares

Type of investment – Venture / Growth / Buyout or control

Investor type – Indian / Foreign (FDI restrictions apply)

Investment type – Primary / Secondary

Pre-Money Valuation (A) - $100 million

Investment Amount (B) - $ 10 million

Post-Money Valuation (C = A+B) - $ 110 million

Investor Stake (D = B/C) – 9.1%

Liquidation Preference – Min 2x return for the Investor

Some important and easy to understand terms you’ll come across

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Types of Diligence

Financial Diligence – To assess the ‘real’ financial health of the Company and key drivers of historic

performance. Usually done by auditing firms

Legal Diligence – To assess legal issues in the Company

Business Diligence – To assess market potential. Competitive landscaping and check

reasonableness of assumption. Usually done in-house or through an external consultant

Forensic diligence – Background check on promoters, key shareholders. Done clandestinely

through an external agency

Some other important terms

Deal Signing – Execution of definitive agreements

Deal Closure – Remittance of investment

Condition Precedent (CPs) – Conditions that need to be fulfilled between Deal Signing and Deal

Closure. Some of the CPs will emerge out of finding of Diligences

Condition Subsequent (CS) – Non- critical conditions that need to be fulfilled post Deal Closure

Introduction to Term Sheets

TiE Mumbai

Feb 20, 2015

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