Equity
Indicative Term Sheet (SAMPLE)
Subject to review & final negotiation with investors
Please note this is a sample term sheet only and should not be used without professional advice. No representation is made as to its completeness or suitability for any specific financing. The User accepts sole responsibility for use of this draft term sheet.
Draft: [DATE]
Items in square brackets should be filled in by you, with assistance from professional advisors. Please note that every negotiation is unique and it may be necessary to vary the suggested terms accordingly.
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Item / Suggested terms / Notes /Company / [Company name], a company incorporated in [country] with company number [#] whose address is at [registered address] (the “Company”). / Add the Company information.
Parties / (1) [--] (the “Founders”);
(2) [--] (the “Investors”); and
(3) [--] (the “Continuing Shareholders”),
each a “Party” and together the “Parties”. / Add the Party names.
Summary Capital Structure / The share capital of the Company shall be split as follows:
[--] ordinary shares of [£/$/€] (“Ordinary Shares”); and
[--] preference shares of [£/$/€] (“Preference Shares”),
(the Ordinary Shares and Preference Shares together the “Shares”).
The persons who hold more than [50]% of the Ordinary Shares for the time being in issue are referred to as the “Shareholder Majority”.
The Investors shall subscribe in cash for [Ordinary Shares][Preference Shares]. / The Parties should decide whether the Founders and/or the Continuing Shareholders will continue to control the Company, or whether they will cede control to the Investors.
The applicable percentage threshold for the Shareholder Majority determines the control of the Company for matters such as shareholder consents.
Investors may subscribe for either Ordinary Shares or Preference Shares in the Company.
Share Rights /
Voting
On a show of hands, each holder of Ordinary Shares who is present in person or by proxy shall have one vote. On a poll each holder of Ordinary Shares shall have one vote for each Ordinary Share held. No voting rights shall attach to the Preference Shares.Return of capital
On a return of capital, the surplus assets of the Company following satisfaction of its assets shall be applied:(a) first in paying to the holders of the Preference Shares, the issue price of such Preference Shares; and
(b) second any surplus shall be paid to the holders of the Ordinary Shares pro rata to the amount of the Ordinary Shares held by them.
Dividends
Subject to the board of the Company recommending the same and the consent of the Shareholder Majority, any profits which the Company shall determine to distribute to the holders of Ordinary Shares and Preference Shares shall be so distributed pari passu amongst the holders of Ordinary Shares and Preference Shares as if all of the Ordinary Shares and Preference Shares constituted one class. / Preference Shares are suitable for Investors who will not be involved in the running of the Company, as only Ordinary Shares have voting rights, whereas Preference Shares do not. However, Preference Shares rank ahead of Ordinary Shares on a return of capital of the Company.
This term sheet assumes that Preference and Ordinary Shares will have equal entitlements to dividends. However, Investors may want a minimum return on their investment above the capital invested, such as through priority dividends or a multiple return on capital invested. Please speak to your professional advisor for advice on this.
Warranties / The Founders will give customary warranties (the “Founder Warranties”) which will cover:
(a) due diligence reports;
(b) business plan and forecasts; and
(c) managers’ declarations/questionnaires.
The Founder Warranties will be given jointly and severally and based on the knowledge of each Founder (as the case may be), such Founder being deemed to have made enquiry of each of the other Founders and any other key employees or third parties. Warranties given in respect of managers’ declarations shall be given severally and by the Founder concerned. The total liability of each Founder in respect of the Founder Warranties shall be limited to [#] times his total annual remuneration package.
The Continuing Shareholders and/or the Founders will also give customary warranties in relation to the business of the Company (the “Company Warranties”), including but not limited to:
(a) constitution of the Company;
(b) compliance with law;
(c) accounts;
(d) financial matters;
(e) contracts and trading;
(f) disputes;
(g) environmental matters;
(h) assets (including property and intellectual property);
(i) insurance;
(j) employees;
(k) pensions and benefits; and
(l) insolvency. / Founders will typically give the Investors a limited set of Founder Warranties capped for each Founder at 1–2 times that Founder’s total annual remuneration.
The Continuing Shareholders and/or the Founders will also give a broader set of Company Warranties regarding the business of the Company. The Parties who will give the Company Warranties, which will depend on which Parties are actively involved in the operation of the Company. Some examples are included, although not all of these may be applicable and others may be required.
Time Period for Investors’ Claims / The Founders shall not be liable for any claim brought by the Investors unless written notice of the claim is received by them on or before the date falling [24] months after completion in respect of claims under the Investment Agreement.
The Continuing Shareholders shall not be liable for any claim unless written notice of the claim is received by them on or before:
(a) the date falling [24] months after completion in respect of non-tax claims; and
(b) the date falling [7] years after completion in respect of tax claims. / The time limit for the Investors’ bringing non-tax claims typically ranges from 12–36 months.
The time limit for the Investors’ bringing tax claims typically ranges from 3–7 years.
Restrictive Covenants / Each Founder shall be subject to the following non-compete restrictions:
(a) not to carry on, be engaged or concerned or interested in any business which competes with any business which is carried on by the Company at termination;
(b) not to solicit or to endeavour to entice away from the Company the business of any customer, supplier, licensee, licensor, client or agent of the Company who had dealings with the Company in the [12] month period before such termination; and
(c) not to solicit, employ or entice away or endeavour to employ or entice away any employee of the Company who is at termination employed in a skilled or managerial capacity and with whom such Founder had dealings in the normal course of their employment duties,
for the period of [24] months immediately following his ceasing to be an employee and/or director of the Company. / Restrictive covenants are heavily negotiated and their time period and scope is dependent on the particular circumstances of the Company and the Founders. The time period typically ranges from 1–3 years. (Note that time periods which are considered by courts to be excessive will be unenforceable – please speak to your professional advisor for advice on this.)
Permitted Transfers by Founders / Each Founder shall be permitted, with the consent of the Shareholder Majority, to transfer or procure the transfer of (either as a single or multiple transfers) up to [30]% his Ordinary Shares to:
(a) his/her spouse, children and grandchildren (including step and adopted children and their issue) and step or adopted children of their children (in each case who is not a minor); and
(b) a family trust,
(each a “Related Person”).
Each Related Person may transfer Ordinary Shares to another Related Person of the original transferee.
In the event of any such transfer, the transferee shall undertake to the Parties to observe and procure, on behalf of the Founders, all obligations of the Founders. / Founders are typically permitted to transfer a percentage of Ordinary Shares to Related Persons for tax planning purposes, provided the Related Persons comply with the Founders’ obligations under the agreement.
Investors may also want the right to transfer their Shares to permitted transferees, such as affiliates, co-investors or a syndicate. Please speak to your professional advisor for advice on this.
Tag Along / If the Parties together propose to sell more than 50% of the Ordinary Shares to a third party (the “Third Party Purchaser”), such sale shall not be permitted unless such Third Party Purchaser also makes an offer in writing to buy all of the Ordinary Shares held by the [Founders][Investors],
(each a “Tag Offer”).
The consideration payable under any Tag Offer shall be:
(a) the same for each Ordinary Share;
(b) in the same form (excluding any alternative and/or additional offer or right to subscribe for equity or debt securities of the Third Party Purchaser (or its group)); and
(c) subject to the same payment terms,
as offered for the [Founders’][Investors’] Ordinary Shares which are the subject of the sale.
Each tagging shareholder shall pay his/its pro rata share of the costs incurred in connection with the proposed sale and shall give the same warranties with respect to its title to, and ownership of, the relevant tagged shares, as those given by each [Founder][Investor]. / Tag Along provisions provide protection for minority shareholders by requiring a Third Party Purchaser who is purchasing control of the Company to make the same offer per Ordinary Share to the minority shareholder as offered to the majority shareholder(s).
Depending on the Company’s agreed shareholdings, the minority shareholders may be either the Founders or the Investors.
Drag Along / If any Party proposes to sell more than 50% of the total Ordinary Shares to a third party, the Third Party Purchaser may require each other holder of Ordinary Shares to transfer all of their Ordinary Shares (the “Dragged Shares”).
The consideration payable for each Dragged Share shall be:
(a) the same for each Ordinary Share;
(b) in the same form (excluding any alternative and/or additional offer or right to subscribe for equity or debt securities of the Third Party Purchaser (or its group)); and
(c) subject to the same payment terms,
as offered for each [Founder’s][Investor’s] Ordinary Share.
Each dragged shareholder shall pay its pro rata share of the costs incurred in connection with the proposed sale. / Drag Along provisions provide protection for majority shareholders by giving a Third Party Purchaser who is purchasing control of the Company the option to require the minority shareholders to sell their Ordinary Shares to the Third Party Purchaser with the same offer per Ordinary Share to the minority shareholder as offered to the majority shareholder(s).
Depending on the Company’s agreed shareholdings, the minority shareholders may be either the Founders or the Investors.
Leaver arrangements – definitions / In relation to each Founder:
“Leaver” means any Founder who ceases to be an employee and/or director of the Company;
“Bad Leaver” means the cessation/termination of a Founder’s employment or office in circumstances other than those constituting him a Good Leaver; and
“Good Leaver” means the cessation/termination of a Founder’s employment or office as a result of that Founder’s:
(a) death; or
(b) permanent incapacity (other than as a result of alcohol or recreational drug abuse),
or if the Investors determine that a Leaver should be a Good Leaver. / Leaver provisions are heavily negotiated and the definitions of Good Leaver and Bad Leaver are dependent on the particular circumstances of the Company and the Leavers.
This term sheet includes a narrow definition of Good Leaver. However, the Leaver provisions may be drafted the other way around so that all Leavers are Good Leavers unless they fall within a limited narrow definition of Bad Leavers.
There are further intermediate Leaver options, such as performance or time based vesting of Shares. Please speak to your professional advisor for advice on this.
Good Leaver and Bad Leaver Price / Upon becoming a Leaver, such Leaver shall be deemed to have served a transfer notice in respect of his relevant Shares (”Leaver Shares“) and shall not be entitled to exercise any voting rights at or to attend general meetings of the Company, in respect of his Leaver Shares.
The Investor must decide within [6 months] of a Founder becoming a Leaver whether it requires the Leaver to transfer his Leaver Shares. The Leaver Shares shall be offered as the Investors see fit.
The price at which a Founder shall sell his Ordinary Shares shall be as follows:
(a) if the Founder is a Bad Leaver – the lower of the original subscription price and the Fair Market Value; or
(b) if the Founder is a Good Leaver – the higher of the original subscription price and the Fair Market Value (being the fair market value as agreed mutually or determined by an independent expert). / The prices at which the Leaver Shares are purchased from Good Leavers and Bad Leavers are heavily negotiated.
Shareholder Consents / The consent of the Shareholder Majority shall be required for all material matters including (but not limited to):