FOUNDER’S GUIDE IN FUND RAISE

- LEGAL ISSUES

Aug 2019
Transaction
flow
Transactional Process Flow

Closing

Statutory
approvals and
Definitive CPs
Documentation
Detailed DD

Term Sheet

Initial meetings
and preliminary
DD

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Key Documents

Initial documents Investment related documents Ancillary documents

• MoU • SPA • Employment Agreements

• Term Sheet – binding/ non- • SSA • Non-compete agreements
binding • Investment Agreement (SHA) • Disclosure letter
• AoA

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Key provisions
Term Sheet – Critical Terms
Structure
˃ Percentage of stake proposed to be acquired / subscribed should be mentioned
˃ Transaction will usually revolve around the types of securities involved and the principal terms of the
securities – preference shares, convertible securities, equity shares

Commercial consideration - valuation

˃ Term Sheet usually sets out pre-money valuation (based on financial track record of the company)

˃ Pre-money valuation would usually be used to determine price of shares proposed to be subscribed
to / acquired

Board composition, veto rights and management

˃ Depending on quantum of stake, composition of the Board needs to be specified

˃ List of key matters which require Investor’s approval

˃ Clarification of management rights –, making of business plans, use of funds, etc

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Term Sheet – Critical Terms
Conditions precedent
˃ Not customary to set out all the CPs – however, important to specify key CPs which
˃ enables the company and the promoters to start certain processes in advance; and

˃ helps them understand proposed timelines

˃ It is advisable to insert language to state that ‘other customary and standard’ CPs would be included
in the definitive documentation

Liquidation Preference
˃ Term Sheet would often specify that Investor would have the right to preferential payments in the
event of a liquidation event

˃ Could typically be a multiple of the investment, prior to any pay outs to any other classes of shares

˃ Investor could have a right on a participating basis or a non-participating basis

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Term Sheet – critical terms
Anti dilution
˃ Term Sheet would often specify whether anti dilution protection offered to the investor is on a full
ratchet basis or on a weighted average basis

Share transfer restrictions

˃ Depending on the proposed stake, Investor would impose share transfer restrictions on the promoters
which need to be specified in the Term Sheet and vice versa
˃ Restrictions could be in the form of ROFOs, ROFRs, tag along rights, etc.
˃ Promoters may insist on imposing restrictions on Investor for selling to competitors

Non-compete
˃ Purpose - Prevent the Promoters from competing with the business of the company whilst, and when
they cease to be, involved with the company
˃ Intent is also to have the Promoters focus on the business of the company

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Term Sheet – critical terms
Exit rights
► In case of a financial investor, Term Sheet should specify various exit modes / options sought by the
Investor

► Could be in the form of IPO, strategic sale, drag along rights, put/ call options, etc.
► For foreign investors, assured returns on any options may not be permitted

Exclusivity
˃ An investor would usually insist on exclusivity from the company and Promoters given that it would
expend substantial time and effort in conducting DD, etc.

˃ The company and Promoters should not be entitled to leverage better terms with other investors
based on the understanding arrived at in Term Sheet
˃ Company / Promoters may want to be cautious in agreeing to this since it may close out better
opportunities if done too early in the deal

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SPA/ SSA vs. SHA

Share Purchase/ Subscription Agreement Share Holders Agreement

Sets out the rights and obligations of Rights & obligations of counterparties post
counterparties at a point in time (i.e. at the time acquisition/ subscription of shares
of purchase of/ subscription of the shares by the • Safeguarding the interests of the minority
Investor) investor/ investor not in management control

▪ Commercial considerations for the

transaction ▪ Management of the company
▪ Closing formalities ▪ Transfer restrictions
▪ Redressal mechanism for diligence findings ▪ Exit Rights
▪ CPs & CSs ▪ Redressal mechanism in case of disputes/
▪ Representations & warranties, breaches/ deadlocks
indemnities

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Transaction Documents – Key Clauses

Key Clauses / Provisions Potential Conflict Redressal Mech.

▪ Cause ▪ Determining Cause ▪ Transfer to ESOP

▪ Vesting/Claw- and not for Cause
▪ Vesting Period Trust
back and treatment
▪ Upfront Vesting thereafter ▪ FMV for shares

▪ Extn of long stop

date
▪ Obligations of the
Parties at completion ▪ Failure to fulfill CPs ▪ Value adjustment via
▪ Closing
▪ CPs & CSs ▪ Comfort on CS holdback / escrow
amount
▪ Waivers by the
Investors

▪ Reps & ▪ Implications of

▪ R&W List breach of R&W ▪ DL
Warranties and
Indemnities ▪ Detailed indemnities ▪ Definition of ▪ Indemnity caps
Warrantor(s) (money and time)

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Transaction Documents – Key Clauses

Key Clauses / Provisions Potential Conflict Redressal Mech.

▪ Deadlock on ▪ Deadlock/ dispute

▪ Board representation
reserved matters resolution
▪ Administration ▪ Quorum participation mechanism ( inc.
Rights ▪ Issues with arbitration)
▪ Reserved matters adjournments
▪ Information rights ▪ Default Call / Put
▪ EoDs

▪ Non-compete/ non- ▪ Breach of restrictive ▪ Arbitration

▪ Restrictive solicitation covenants ▪ Injunctions
Covenants ▪ Transfer /dilution ▪ Event of default
restrictions ▪ Emergency Call / Put

▪ Failure to provide
▪ Pecking order – Exit
suitable exit option
▪ Exit Rights modes ▪ Call / put options
to the Investors
▪ Path to majority/ within stipulated ▪ Drag along
buyout - strategic time-frame

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Contact us

Mumbai Experience
Bangalore
Constellation Blu Blume Villa, 20, Fifth Main, Indiranagar II,
Unit 5A, JethaCompound, Opp. NirmalPark, Domlur, Karnataka, 560071 India
BycullaEast, Mumbai 400027

Contact: 022 43470370

Mail : [email protected]
Twitter : @urConstellation
Website : http://www.constellationblu.com

About Constellation Blu

Constellation Blu is a full service advisory firm with offices in Mumbai, Delhi and Bangalore. Led by 4 Partners
and over 35 professionals, we have operations on a PAN-India scale. We provide our clients with pragmatic
advice on matters relating to finance, venture capital funding, mergers and acquisitions, tax (direct and
indirect) and secretarial services.

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