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Decoding Term Sheets & iSAFE Notes

Understand how term sheet and iSAFE works when startups raise seed funding from investors. Complete comparison table.

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221 views

Decoding Term Sheets & iSAFE Notes

Understand how term sheet and iSAFE works when startups raise seed funding from investors. Complete comparison table.

Uploaded by

Mehta Subscriptions
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Decoding Term Sheets

&
iSAFE Notes

@mehtasanjay
[email protected]
What is a Term Sheet

Term Sheet is only a Letter of Intent

Focus on the deal from investor is at its


maximum while being signed
Legality of Term Sheet

Term sheet is simply a contract that outlines the


key terms of a deal between the startup and a VC
and does not represent a legal promise to invest.

Binding, Non Binding, Confidentiality, Exclusivity


Understanding Valuations

Valuation will determine how much of your


company you have to sell to raise a given
amount of money.
Pre-Money, Post Money Valuations

Pre-money is the valuation of your business prior to


an investment round.

Post-money is the value of your business after an


investment round.
Valuation Math Example
• Founders own 100% of the company
• Founders & Investor both agrees to value company at 10Crore
• Investor agrees to invest – 2.5Crore
• If the 10Crore Valuation is Pre-Money, then Post Money is
12.5Crore so the equity ownership now is 80% with founder and
20% with investor
• If the 10Crore Valuation is Post Money, then the Pre Money is
7.5Crore so the equity ownership now is 75% with founder and
25% with investor
Investment Document Types
• SHA – Share Holder Agreements
• Convertible Notes
• iSAFE – India Simple Agreement For Future Equity
Liquidation Preference
Primarily a down-side protection for investors in
the event of a less than desirable liquidity event
(sale, merger, bankruptcy, etc.) that returns money
to investors before founders

Liquidation preferences today are typically 1X at


seed stage investments
Drag Along, Tag Along
Drag-along rights is a provision that enables
investor to force founders to join in the sale of
a company. 

Tag-along rights are used to ensure that the


shared of investor is considered during a
company sale.
Antidilution Rights

Anti-dilution rights provide protection to


investors in the event that the company raises
additional financing at a lower valuation than
in a previous financing
Other Terms
• Information Rights
• ROFR – Right Of First Refusal
• Pre-emptive Rights – Pro-Rata Investing
• Affirmative Rights – Veto Rights
• ESOP Pool
• Board Composition
• Vesting Of Shares
• Tranches & Milestones
• Cap Table
iSAFE – India Simple Agreement For Future Equity

An iSAFE note is not a debt instrument, a founder friendly


convertible security note, that is beneficial for both startups and
investors. To comply with applicable Indian law, iSAFE note takes
the legal form of compulsorily convertible preference shares
(CCPS) which is convertible on occurrence of specified events.
Why iSAFE notes should be preferred investment instruments in India?  

An iSAFE is neither debt nor equity, and there is no interest accruing, (though
for legal compliance purposes, iSAFE note carry a non-cumulative dividend @
0.0001%).
If the startup fails, whatever money they have left after discharging other
liabilities, will be returned to investors/iSAFE note holders in preference over
the equity shareholders until iSAFE note holders receive their investment
amount. Such liability is on the company, not on the founder individually.
A convertible note is debt, while an iSAFE note is a convertible security that
is not debt.
Description Standard iSAFE terms Rationale / Remarks
terms
Post money Yes, No. Decided later Early stage companies (Start-ups) are generally at Idea
Valuation Important at equity pricing stage and hence it’s unfair to assign a valuation to such
clause in all round Start-ups at the initial stages.
term sheets
Board seat Yes No Board seat A board seat is generally ineffective (where it’s a
minority stake in favour of investor) in situations, where
an Investor and Founder don’t meet eye to eye.
SHA Yes No 100X wishes to keep documentation as simple as
possible, though there will be certain necessary
amendments to AoA to comply with Indian Laws.
Consent Long list by Very Few items Objective is to provide the founder with the freedom
rights / way of an included in a and flexibility to operate.
Reserved Annexure single term sheet
matters
ESOP Pool Standard No such clause 100X does not wish to force founders to keep aside
clause to ESOP kitty for future employees, so early in the
create an company’s lifecycle. Those discussions are best done at
ESOP kitty equity pricing round / pre Series A.
Description Standard iSAFE terms Rationale / Remarks
terms
Voting rights Yes No 100X does not wish to take voting rights in the
company, and hence provide greater flexibility to
founders / company to carry out its operations / seek
shareholder approvals
Employment Yes No 100X does not wish to force employment terms with
agreements founders. We want the same to be a more consultative
with founders process than a consent one.
– Investor
consent
Exit Rights Yes No 100X does not wish to force exit rights on founders /
company. Only transfer rights available to iSAFE note
holders
Change in Yes No 100X does not enforce a say in this matter. We believe in
Founders mutually discussing and arriving at a consensus.
Remuneration
Commitment Yes No We believe in trusting the founders and working with
and Non- them to build and scale their start-ups.
Compete
clause
Thank You

@mehtasanjay
[email protected]

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