Term sheet explainer Malpani Ventures

Term sheet explainer

Clause Explanation
Key Man Exclusivity This clause states that a specific person who is crucial to the
success of the business deal cannot work with any other
company during the term of the agreement. It is designed to
ensure that the person stays committed to the deal and does not
work for a competitor.

Non-Compete This clause states that one party agrees not to engage in similar
business activities as the other party for a certain period of time.
It is designed to prevent one party from taking advantage of the
other party's confidential information, trade secrets, and other
valuable business information.

Non-Solicit This clause states that one party agrees not to hire or solicit the
employees, customers, or suppliers of the other party. It is
designed to prevent one party from poaching valuable assets of
the other party.

Promoter’s Lock in share Investors want to make sure that the promoters are committed
transfer to the company and won't just sell their shares and walk away
after they get the investment money. The lock-in period gives the
investors some assurance that the promoters will be in it for the
long haul.

Investors or Board Consent Investors or Board Consent Matters are certain actions that a
Matters company cannot take without the approval of its investors or the
board. These actions could include selling the company,
changing the business in a major way, or borrowing a lot of
money. Investors put money into a company and want to make
sure it is managed responsibly, so they (or nominate someone
on the board to) may want to have a say in certain decisions. The
term sheet outlines what decisions require investor or board
approval and how much approval is needed. As an investor, this
gives them some assurance over the company's direction and
protects their investment.

Dilution Dilution in a term sheet is when a startup company issues new

shares of stock, which reduces the ownership percentage of
existing shareholders. It's like cutting a pizza into smaller pieces,
each piece representing a share of the company. Dilution is
important for startups because it allows them to raise more
money by selling new shares of stock to investors. However, it
also means that existing shareholders will own a smaller
percentage of the company. So, it's important for startup
founders and investors to understand how much dilution will
occur and how it will affect their ownership stakes.

First Pre-emptive rights First pre-emptive rights in a term sheet are a type of protection
given to current investors in a company. It means that if the

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company decides to issue new shares or securities, the current

investors have the right to buy those new shares before anyone
else. This helps ensure that the current investors don't lose
control or value of their investment by dilution.

Pro rata rights Pro rata rights in a term sheet mean that if a company wants to
sell more shares, existing investors have the right to buy more
shares to keep their ownership percentage the same. For
example, if an investor owns 10% of a company and the
company issues new shares, the investor can buy enough new
shares to maintain their 10% ownership.

Right of First Refusal (ROFR) Right of first refusal is a term that gives someone the chance to
buy something before anyone else can. For example, if you have
a right of first refusal on a house, the owner has to offer it to you
first before they can sell it to anyone else. It's important because
it gives you a special opportunity to buy something you might
really want, and it can also help you avoid getting into bidding
wars with other buyers.

Right of First Offer (ROFO) Right of First Offer (ROFO) is a clause in a contract that gives
someone the first chance to buy something before others can.
For example, if you have a ROFO on a house, you get to buy it
before anyone else can.

ROFO is important because it gives you a better chance of

getting something you really want. It also gives you more control
over the situation because you get to decide if you want to buy it
or not. ROFO can be used in business deals to protect your
interests and make sure you have the option to buy something
before anyone else can.

Usually given to promoters. This is important for the promoter

because it allows them to maintain their ownership stake in the
company and potentially increase it, without having to compete
with others.

Tag Along Tag-along rights are a provision in a business agreement that

allows minority shareholders to sell their shares alongside
majority shareholders (usually founders in case of very early
stage company) in case of a sale of the company. It means that if
the majority shareholder wants to sell their shares, the minority
shareholder has the right to join the sale and sell their shares as
well. This is important because it protects the minority
shareholder's investment and ensures they are not left out of a
potential profitable sale.

Liquidation preference Liquidation preference is a term in a business deal that says if

the company gets sold or shuts down, some people get their
money back before others.

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For example, if an investor put in $10 million and had a 2x

liquidation preference, they would get $20 million back before
anyone else gets paid.

It's important because it can affect how much money people get
back if things go wrong. Investors want a high liquidation
preference to protect their investment, but founders want a low
liquidation preference to keep more money for themselves.

There are a few common types of liquidation preferences:

1. Non-participating: Investors get their money back first
and then split the remaining money with everyone else.
This is the most founder-friendly option.
2. Participating: Investors get their money back first, and
then also get to split the remaining money with
everyone else. This is less founder-friendly.
3. Capped: Investors get their money back first, and then
split the remaining money with everyone else, but there
is a cap on how much they can get back. This is a
compromise between the founder-friendly and investor-
friendly options.

Anti-Dilution Protection Anti-dilution protection is a term in a contract that helps protect

investors from losing value in their investment if the company
issues more shares in the future at a lower price than what the
investor paid. It adjusts the number of shares the investor owns
to keep the value of their investment the same. It's important
because it gives investors confidence that their investment won't
be diluted if the company raises more money in the future.

There are two common types of anti-dilution preferences in a

term sheet: full ratchet and weighted average.
• Full ratchet means that if the company issues more
shares at a lower price than what the investor paid, the
investor's ownership percentage is adjusted to the
lowest price.
• Weighted average is a more common and fairer type. It
takes into account both the price and the number of
shares issued in the new financing round and adjusts the
investor's ownership percentage based on a formula that
considers these factors.
Both types of anti-dilution preferences are important because
they protect investors from losing value in their investment if the
company issues more shares in the future at a lower price.
However, the weighted average is usually preferred because it is
more flexible and fairer to all shareholders.

Exit Rights Exit rights in a term sheet refer to the rights of investors to sell
their shares in a company in certain situations, such as when the
company is acquired or goes public. These rights are important
because they give investors the ability to cash out their

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investment and make a profit if the company is successful.

Without exit rights, investors may be stuck with their investment
for a long time, even if the company is not doing well. Exit rights
help make investing in a company more attractive and can help
the company raise more money to grow and expand.

Information and Inspection Information and inspection rights in a term sheet are rights that
Rights give an investor the ability to access a company's financial
records and other important information. This includes the right
to review the company's financial statements, business plans,
and other relevant documents. These rights are important
because they allow an investor to evaluate the company's
performance and make informed decisions about their
investment. Without these rights, an investor would have limited
access to important information, which could lead to a poor
investment decision.

Conditions Precedent Conditions precedent in a term sheet are things that need to
happen before a deal can be finalized. Imagine you and your
friend want to trade your bikes. Before you both agree to trade,
you might set some conditions like "my bike needs to be checked
by a mechanic" or "your bike needs to be cleaned." These
conditions are important because they make sure that
everything is fair and agreed upon before the trade actually
happens. In a business deal, conditions precedent are important
because they protect both parties and make sure that everything
is clear and agreed upon before the deal is finalized.

Conditions Subsequent Conditions subsequent are terms in a startup agreement that

need to be met in order for the agreement to become final. For
example, if a startup wants to get funding, the term sheet might
say that the investor will only give the money if the startup
reaches a certain milestone.
This is important for startups because it helps protect both
parties. The startup knows what they need to do to get the
funding, and the investor knows that their money will be used
for a specific purpose. It also helps prevent misunderstandings or
disputes in the future.