Series A Term Sheet - Exposure Therapy
Publishing our standard term sheet
A common way to get over phobias and anxieties is via exposure therapy. This type of treatment gradually exposes people to their fears so they can deal with them. So, we like to think of publishing our series A term sheet template as a way to do just that for the fundraising entrepreneur.
Jokes aside, we have been toying with the idea of publishing our series A term sheet template for a while now. Other VCs like Cherry Ventures and earlier Point Nine have done so before, and we think it helps founders to compare typical terms. When more firms open up, it gradually sets a standard in the market. So, we root for others to do the same!
Our term sheet for a series A is not a one-pager. Rather it does spell out a few things in more detail. We totally get that this isn't 'hip, but the benefit is that you can better expect what's coming when we go into long-form documentation. Again, exposure therapy.
The other comment to make is that this is our starting point and merely presents an array of particular deal terms. Every term sheet is custom-made and tailored to meet specific requirements and other deal specifics. The terms of the round will normally be negotiated with the founders. We realize that this is not the most fun part of the process, but it is important that we agree on these principles for successful collaboration in the future and we hope to start working with you soon after.
Below you will find our Term Sheet template. We annotated it with the help of VC specialist lawfirm Ingen Housz. Legalese is always a bit tough to read, but we've tried to make it comprehensible.
TERM SHEET
SECTION A.
I. GENERAL
Company
[Company Legal Name], a [Country] [private company with limited liability] (the Company)
Founder
[ * ]
Non-binding
Section A of this Term Sheet is non-binding and intended solely as a basis for further discussion. Section B of this Term Sheet sets out the binding provisions.
II. KEY TERMS OF THE INVESTMENT
Investment Amount
The total investment in the Series [*] by Keen, the existing shareholders, and co-investors (Further Investors)
amounts to €[*] million, of which Keen will invest €[*] million. The Further Investors are investors suitable to the Founder and Keen.
amounts to €[*] million, of which Keen will invest €[*] million. The Further Investors are investors suitable to the Founder and Keen.
Valuation
Pre-money valuation of €[*] million on a fully-diluted basis.
Consequently, a €[*] million post-money valuation (includingthe: (i) shares issuable upon conversion of all outstanding exercisableor convertible instruments (including but not limited to options,convertible debt and Safes); and (ii) ungranted shares allocated to anemployee stock option plan (“ESOP”) equal to [*]% of the post-moneyfully diluted capitalization (such percentage to exclude granted orpromised options)), with Keen holding no less than [*]%of the fully diluted capitalization of the Company post-money and following the ESOP expansion.
Consequently, a €[*] million post-money valuation (includingthe: (i) shares issuable upon conversion of all outstanding exercisableor convertible instruments (including but not limited to options,convertible debt and Safes); and (ii) ungranted shares allocated to anemployee stock option plan (“ESOP”) equal to [*]% of the post-moneyfully diluted capitalization (such percentage to exclude granted orpromised options)), with Keen holding no less than [*]%of the fully diluted capitalization of the Company post-money and following the ESOP expansion.
Representations and Warranties
The Company will give customary representations and warranties under the investment and shareholders' agreement.
Liquidation Preference
1x non-participating liquidation preference for the Series [*] Shares, ranking senior to all existing shares [OR ranking pari passu to Series [*] Shares].
Anti-Dilution
Standard broad-based weighted average anti-dilution protection.
Pre-emption
All shareholders shall have a pro-rata subscription right for any futureequity or similar (e.g., convertible loans) financing rounds.Non-exercised subscription rights shall be allocated pro rata to theexercising shareholders.
III. TRANSFER OF SHARES
ROFR
All shareholders shall have a right of first refusal for any shares proposed to be sold by a shareholder in the Company, except in the case of a shareholder transferring to a permitted transferee.
Tag Along
Any shareholder intending to sell shares in the Company will give the other shareholders the opportunity to participate in such sale with an equivalent proportion.
Drag Along
If an unaffiliated third party makes an offer for all of the shares in the Company, with a [50]% shareholders’ majority and the consent of the Investor Majority, the remaining shareholders shall sell their shares on the same terms and conditions.
Investor Majority shall mean the consent of more than [##]% of the holders of [Series [*] Shares] / Preferred shares].
Investor Majority shall mean the consent of more than [##]% of the holders of [Series [*] Shares] / Preferred shares].
IV. FOUNDER AND EMPLOYEE-RELATED MATTERS
Founder Reverse Vesting
Existing Vesting shall – with respect to unvested shares as of closing – re-start with signing of the definitive agreements for [##] months. Vesting terms shall be based on a customary good/bad leaver concept and are subject to due diligence review.
Lock-up
The Founder may not (directly or indirectly) transfer their shares in the Company prior to the expiry of the vesting period, without the prior written consent of Keen.
Non-Compete,
Non-Solicitation
Non-Solicitation
All current and future key employees will enter into confidentiality, IP assignment, non-competition, and non-solicitation agreements satisfactory to Keen. The Company will identify each key employee.
V. INVESTOR'S RIGHTS
Board of Directors
Keen may appoint one [non-executive Board Director or Supervisory Board Director] and one non-voting Board Observer. Full Board composition to be discussed. Board meetings will take place at least 4 times per year. The Company shall take out insurance (premiums to be borne by the Company) against director’s liability for each member of the Board.
Protective Provisions
Approval of the Investor Majority shall be required for customary list of reserved matters of the Board of Directors and the General Meeting.
Information Rights
The Company will grant customary information rights in a format reasonably acceptable to Keen.
ESG
Within 12 months after closing of the funding round the Company will:
-adopt a climate policy including measuring its direct operational carbon footprint, setting clear action steps to reduce it, and offsetting what is not reduced, and
-evaluate and implement best business practices with respect to ESG, including efforts to promote diversity in the employee base
-adopt a climate policy including measuring its direct operational carbon footprint, setting clear action steps to reduce it, and offsetting what is not reduced, and
-evaluate and implement best business practices with respect to ESG, including efforts to promote diversity in the employee base
Put Option
Keen can oblige the Founders or the Company to (re)purchase its shares for an aggregate amount of €1, to the discretion of Keen.
VI. OTHER
Costs
The Company will pay the legal and due diligence fees and expenses of Keen, not to exceed €[ * ].
SECTION B.
I. BINDING OBLIGATIONS
Exclusivity
The Company agrees not to discuss any potential investment in the Company or to continue or initiate any such discussions with any other potential investors unless consented to by Keen. This right shall expire 45 days after the signing of the Term Sheet.
Governing Law and Venue
The laws of the Netherlands will govern this summary of terms, without regards to principles of conflicts of law.
Expiry
This Term Sheet expires on [DATE] at 12:00 noon (CET) unless accepted by the Company.
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This term-sheet (as most term-sheets) is non-binding, except for the clauses in section B. (confidentiality, exclusivity, governing law, and expiry). This means that both parties are not obliged to complete the transaction until they have signed long-form documentation which is generally completed at the end of DD.
However, the term sheet means that Keen intends to invest in your company and serves as the blueprint for the long-form documentation. Keen performs ‘confirmatory DD’, which means that unless a closet with skeletons turns up during DD, the investment will happen.
However, the term sheet means that Keen intends to invest in your company and serves as the blueprint for the long-form documentation. Keen performs ‘confirmatory DD’, which means that unless a closet with skeletons turns up during DD, the investment will happen.
Fully-diluted means all shares of the company outstanding, including the shares issuable upon conversion of all outstanding exercisable or convertible instruments (including but not limited to options, warrants, convertible debt and Safes) and shares reserved for the employee stock option plan. The point of this is to have a mutually understood, 100% transparent valuation were all parties know how much equity they will own after the round.
A point of negotiation is whether the ESOP pool should be expanded before or after the investment happens. In the end this is a valuation discussion: if the ESOP pool is increased after investment, that effectively means a higher valuation (as the new investor will dilute after ESOP increase and thus get less equity for their money).
The liquidation preference impacts how the proceeds are divided between shareholders in a liquidity event (usually an exit).
In principle, 1x non-participating liquidation preference is market standard and merely a downside protection of investors in suboptimal exits. In this situation, the investors can choose either (i) to get 100% of their investment back before anyone else in the company receives any proceeds from the sale of the company or (ii) to receive their pro-rata share based on a fully diluted basis.
Example: let's assume the investor invested €5M at a €30M pre-money valuation (i.e., post-money = €35M, 14% of the shares for the investor).
Assume the company has an offer to be acquired for €25M. In this case, the investor will likely choose to receive its initial €5M investment rather than its pro-rata share (14% of €25M = €3.5M).
Now assume the company has an offer to be acquired for €50M. In this case, the investor can either choose to (i) be paid its 1x €5M investment, or (ii) be paid as if he converted into common shares, i.e. 14% of €50M = €7M. So in this scenario, the investor will likely choose option (ii) and receives €7M, and the other shareholders €43M.
In principle, 1x non-participating liquidation preference is market standard and merely a downside protection of investors in suboptimal exits. In this situation, the investors can choose either (i) to get 100% of their investment back before anyone else in the company receives any proceeds from the sale of the company or (ii) to receive their pro-rata share based on a fully diluted basis.
Example: let's assume the investor invested €5M at a €30M pre-money valuation (i.e., post-money = €35M, 14% of the shares for the investor).
Assume the company has an offer to be acquired for €25M. In this case, the investor will likely choose to receive its initial €5M investment rather than its pro-rata share (14% of €25M = €3.5M).
Now assume the company has an offer to be acquired for €50M. In this case, the investor can either choose to (i) be paid its 1x €5M investment, or (ii) be paid as if he converted into common shares, i.e. 14% of €50M = €7M. So in this scenario, the investor will likely choose option (ii) and receives €7M, and the other shareholders €43M.
Anti-dilution protection provisions are used to protect investors in down rounds (when the company issues equity at a lower valuation than previous financings rounds). There are two varieties: broad-based weighted average anti-dilution and ratched-based anti-dilution.
A broad-based weighted average accounts for all equity previously issued and the shares issues in the down round, including all convertible securities. With the broad-based weighted average formula, investors will receive a number of shares issued at a reduced price that will be calculated on the price per share of the previous rounds.
Ratched-based anti-dilution means that if the company sold one share to someone for a price lower than the previous round, all of the previous round shares to which the anti-dilution protection is applicable would be repriced to the new issuance price.
The ratched-based anti-dilution is more investor-friendly, while the broad-based anti dilution is more founder-friendly.
A broad-based weighted average accounts for all equity previously issued and the shares issues in the down round, including all convertible securities. With the broad-based weighted average formula, investors will receive a number of shares issued at a reduced price that will be calculated on the price per share of the previous rounds.
Ratched-based anti-dilution means that if the company sold one share to someone for a price lower than the previous round, all of the previous round shares to which the anti-dilution protection is applicable would be repriced to the new issuance price.
The ratched-based anti-dilution is more investor-friendly, while the broad-based anti dilution is more founder-friendly.
Pre-emption rights give shareholders the right to participate in future financing rounds to the extent necessary to maintain their percentage stage in the company.
This is an important right for Keen as it would like to continue investing in the company in future financing rounds.
This is an important right for Keen as it would like to continue investing in the company in future financing rounds.
The right of first refusal, also called a ROFR, gives shareholders the opportunity to buy shares from other shareholders (in a non-exit scenario) before they are offered to a third party. This means that in case any shareholder wishes to sell its shares to a third party, these shares will first have to be offered to the other shareholders. Only after the other shareholders confirmed that they will not exercise their right to acquire (a part of) the shares, the relevant shareholder shall be allowed to offer its shares to the third party.
Tag-along rights are also known as 'co-sale rights’, and are the inverse of drag-along rights. When a shareholder sells its shares, a tag-along right will entitle the other shareholders to participate in the sale at the same time for the same price for the same percentage of shares. The other shareholder then may 'tag along' with the selling shareholder's sale.
Tag along rights ensure equality amongst all shareholders and protects minority shareholders - if a larger shareholder suddenly sells half their shares, the smaller shareholders also get the right to sell.
Tag along rights ensure equality amongst all shareholders and protects minority shareholders - if a larger shareholder suddenly sells half their shares, the smaller shareholders also get the right to sell.
Drag-along rights give the majority shareholders in the company the power to compel minority shareholders to participate in an exit.
The aim of drag-along rights is to provide liquidity, flexibility and an easy exit route for majority shareholders. Many potential buyers of the company will want 100% control over the business and rarely agree to allow a minority shareholder to retain a minority share, meaning that without a drag-along right the minority shareholders can effectively block an exit. In practice, drag-along right are almost never enforced but it’s tool but can be used as an ultimate remedy if shareholders cannot align on the exit.
It is market standard that a majority of the common shareholders together with the Investor Majority can drag the minority shareholders in the event of an exit.
The aim of drag-along rights is to provide liquidity, flexibility and an easy exit route for majority shareholders. Many potential buyers of the company will want 100% control over the business and rarely agree to allow a minority shareholder to retain a minority share, meaning that without a drag-along right the minority shareholders can effectively block an exit. In practice, drag-along right are almost never enforced but it’s tool but can be used as an ultimate remedy if shareholders cannot align on the exit.
It is market standard that a majority of the common shareholders together with the Investor Majority can drag the minority shareholders in the event of an exit.
Sometimes under ‘Investor Majority’ it will be specified that the specific consent of a new VC is necessary to enforce the drag along. Especially in later rounds, VCs that entered the cap table later will want some form of control on exit timing. As their cost of equity ownership is much higher than that of the early-stage investors, opinions on what a good exit is can be misaligned.
The shares held by Founders are subject to a vesting schedule.
If a founder leaves early in the company’s existence, the vesting restriction protects the other founders and investors from the “free rider” problem that would otherwise exist. While some founding teams stay together from beginning to end, it is fairly common for one or more Founders to leave the company in its early years. Absent a vesting restriction, the departed Founder gets a “free ride” of equity ownership on the efforts of those who remain to build the company.
Typically, the shares held by the founders vest over 4 years with a 1 year cliff in a seed round. This means that a founder/employee will have to be around for at least 1 year to receive any vesting and on that day will be entitled to 25% of its (options for) shares held. If the founder/employee leaves before the 4 year period, the vesting formula applies and he/she only is entitled to a certain percentage of the shares.
If a founder leaves early in the company’s existence, the vesting restriction protects the other founders and investors from the “free rider” problem that would otherwise exist. While some founding teams stay together from beginning to end, it is fairly common for one or more Founders to leave the company in its early years. Absent a vesting restriction, the departed Founder gets a “free ride” of equity ownership on the efforts of those who remain to build the company.
Typically, the shares held by the founders vest over 4 years with a 1 year cliff in a seed round. This means that a founder/employee will have to be around for at least 1 year to receive any vesting and on that day will be entitled to 25% of its (options for) shares held. If the founder/employee leaves before the 4 year period, the vesting formula applies and he/she only is entitled to a certain percentage of the shares.
Keen typically requests a board seat and a board observer seat for series A and up. This is an important right for Keen to be involved in the management of the company. Board observers have no voting rights.
Early stage companies will usually not immediately have a board in place but the board will be installed at a later stage upon request of the Investor Majority.
Early stage companies will usually not immediately have a board in place but the board will be installed at a later stage upon request of the Investor Majority.
Information rights typically are monthly and quarterly management updates, annual accounts and any information that the investors request or leads a material adverse change on the business.
In the event of a potential reputational risk - e.g. if the company appears to have committed fraud as a result of which Keen no longer wishes to remain involved in the Company, Keen always requires the option to sell its shares against EUR 1.
Keen tries to close the financing round within the exclusivity period. Sometimes, the period needs to be extended which will be agreed among parties.
Legal note
KEEN Venture Partners
Placeholder
Exclusivity