by Aggarwals Associates | Nov 28, 2022 | General
An agreement that outlines the terms and conditions of the investment is known as a term sheet. Even though it isn’t legally binding, any investor will expect you to uphold it after you sign it. You must therefore be fully aware of the issues involved and be able to negotiate the best term sheet for both you and your company. In an ideal world, a term sheet would include fair clauses that would protect the interests of both you and your investors. However, the truth is that term sheets aren’t always impartial or just, and they can have long-lasting effects on your company. This is due to the fact that an equity investment will essentially become a partner in your company. Therefore, it’s imperative to make sure you bargain for the greatest conditions before making a contract.
Key features in Term Sheet:
- An assessment:
An estimation of company’s worth as an investment opportunity. The enterprise value less debt is subtracted from the company’s equity value, which is then divided by all of the issued shares, securities convertible into shares, and options that have already been granted or are still available under the company’s Employee Stock Option Plan. This is how valuations are typically expressed: as a price per share.
- The issuance of securities
The stock or other securities that the investor is buying, together with the key terms (e.g., preferences upon a sale or dissolution of the company, dividends payable, rights to convert into common shares, rights to require a redemption, etc.). Typically, venture capitalists ask for convertible debentures or preferred shares.
- Board privilege:
The power of an investor to choose board candidates through appointment or election. Typically, investors will only ask for the ability to choose a small portion of the board members, but they may insist on the appointment of independent directors who will hold the balance of power and/or invite one or more observers to every board meeting.
- Protection of Investor:
Important company decisions need investor approval. These often include the creation and issuance of shares that are more valuable than the shares held by investors, taking on secured debt, restructuring the business, repurchasing shares, and paying dividends on shares. Additionally, management-level decisions like selecting and removing top officers and altering the course of the company’s operations may be included.
Why it is important to have term sheet?
Nevertheless, the creation of a term sheet is not legally binding on any party. But before engaging into a business contract, all parties will benefit greatly from creating a term sheet.
- Helps in building parties’ relationship– It establishes an easy-going interaction between possible investors and start-ups.
- Time-Saving– Negotiating a term sheet for a commercial deal takes less time.
- Removal of Misperception– It greatly lowers the likelihood of superfluous details occurring and decreases the likelihood of a misunderstanding.
- Leave the contract– If the agreement is not carried out as promised, it gives both parties the freedom to end it without damaging their reputations.
What steps must be taken to convert the term sheet into a signed deal?
Once venture capitalists have expressed interest in investing in the company, a number of processes must be taken before the term sheet and agreement are signed. Accepting the particular terms and conditions of the contract is the next stage. The procedure is extremely technical, so a lawyer must be properly involved in structuring it.
Several steps must be taken before you can sign the final contract. Before concluding the agreement, there are several actions that must be taken:
- Discussing about the term sheet,
- Doing a thorough investigation and negotiating the specifics of the final contract
- Deal completion.
- The completion of the deal also includes:
- Launching due diligence
- Contract understanding
- The time it will take before the term sheet is signed.
It is always a worthy option to read the things before signing it. A the term sheet is the drafted to reduce the distance between investors and start-up founders it is important that it should be drafted in a well designed format that leaves no place for the misconception between both the parties i.e. the effective clauses must be added with clarity in language for easy understanding. Term sheets are proven more crucial for the start-up companies as compared to the well developed companies.
Surbhi Singla
Associate at Aggarwals & Associates, S.A.S Nagar, Mohali
by Aggarwals Associates | Nov 24, 2022 | General
The capitalisation table is often referred as cap- table in the general terms. It is a systematic arranged equity of a company usually used by the start-up companies. The cap- table comprises of all the information about equity, their nature and quantity. Basically, capitalization table is an elaborated breakdown of a company’s shareholders’ equity. It will be beneficial for the investors and founders in one and another way.
What is included in the capitalisation table?
Capitalisation table lists the holdings of equity
- Preferential share
- Convertible Notes
- Common shares
Why it is important to prepare Cap Tab?
Cap- Table plays a significant role in raising funds from the investors at different levels. Also, it is beneficial on the part of investors at it gives the basic information regarding the company’s dilluted ownership structure.
The cap table is important for the investors as-
- Shows them how motivated the start-up founder are: The founders who hold some equity in the company gives a green signal to the investors about their motivation to take the companies on the sky by putting efforts in the company.
- Make them aware about the distribution of equity: A well prepared cap-table will let the investors know about the other investors who are holding share in the company. And, it will give motivation to the investors to invest in that particular company whose shares are vested in some trust worthy investors.
- Helps in deciding the quantum of investment they need to do: On the basis of cap-table investors can study the various aspects of company like their estimated pay back when they decide to withdraw the investment. So, according they can plan the amount they are going to invest in a particular company.
- Can pin point their dilution: By studying the types of shares in which the other investors have invested; investors can get an idea of dilution of shares. For instance, if the company have more equity in the preferential share then there is a chance that the company will dilute its equity in coming days.
- Helps in finding the details of co-investors: As the cap table is well acquainted with the details of other investors, the investor finds it helpful for boosting their confidence. The study of co-investors investment makes them feel positive that the founder has spent a good time on his project.
- Helps in evaluating the exit scenarios: The cap table enables the investors to gather information regarding the exit scenario by evaluating the co- investors’ record. That evaluation makes them understand about the company and clarifies their basic doubts.
The cap table is important for the founders as:
- Helpful in raising investment: A detailed cap table document will help the founder in raising funds from investors as it will attract the investors by giving a brief introduction of the company about their equity, their owners etc. Additionally, an updated cap table will help the founders to organise companies structure in a particular format that will eventually helps in the other round of fund raising and also to avoid the legal calamities in future.
- Helps in managing employees share: An organised cap table helps in providing the maintained data of employees share detail and the various options provided to them under employees stock option with respect to the date by which they can sell or purchase shares in the company at provided price.
- Helps in evaluating equity dilution at the time of ESOP Vesting: The cap table helps the founders to study the equity dilution when the company shares are issued in ESOP scheme. Accordingly, founder can plan the ESOP scheme for the talented employees of the company.
- Helps to trigger out the investor updates and gain clarity in ownership structure: As the cap table is detailed with the company’s equity, it is easy to extract the ownership structure, the amount of investment raised in the form of equity and other shares.
- Helps in evaluating the control retention in the company: The equity holders of the company have direct control over the company as they have decision making powers that eventually mean that they have the indirect control over the company. The cap table enables the founder to evaluate the control retention in the company.
The cap table is a key due diligence document that provides the basic information to the investors that makes it easy for them to decide whether to invest in a particular start-up or not. Therefore, it is essential to create a well organised cap- table in the company. There are many ways to create a cap- table depending on the stage of company i.e. some prefers to organise in the excel sheets, some companies use software for creating and updating cap- table.
– Surbhi Singla
Associate at Aggarwals & Associates, S.A.S Nagar, Mohali.
by Aggarwals Associates | Nov 21, 2022 | General
A shareholder agreement is a contract signed voluntarily by all of a company’s shareholders. It establishes regulations for policies and processes that are not covered by the forming agreement of the company. It governs the rights, duties, and relationships between the shareholders. Basically, it serves the purpose of providing common understanding among founders and investors to regulate day to day tasks. Apart from this, it formalizes a structure to be followed in case an investor leaves the company or a new investor joins the organisation.
The Shareholder Agreement is intended to treat shareholders fairly while protecting their rights. The agreement protects present shareholders from future management’s abuse. It is primarily concerned with being prepared in times of market instability.
Why Shareholder Agreement is important for a start-up?
A Shareholder Agreement provides legal protection to the start-up by managing future scenarios and determining answers to anticipated future difficulties.
To safeguard the start-up when shareholders disagree: To safeguard the corporation and its shareholders, Shareholder Agreement should be put in place. This is because stockholders are not always faithful to a firm and may try to align with competing corporations, causing troubles for the start-up. The agreement will spell out what steps must be followed if the two parties disagree.
To protect minor shareholders: A Shareholder Agreement for your start-up is an effective approach to protect minority shareholders, or those who have invested in the company. The agreement will define the roles and obligations of all parties, including shareholders, management, and other stakeholders. If members of the board of directors disagree, the agreement will specify how to handle the situation.
To make share transfers easier: The agreement describes the procedure of transferring shares in a corporation. It determines what occurs when one shareholder sells their shares to another or when the start-up decides to buy back shares from shareholders. In general, shareholders cannot sell their shares until a written agreement is executed.
Dispute resolution: The agreement is required for a start-up in order to avoid disputes and to ensure that all of its shareholders are on the same page. It may include a clause of dispute resolution. Start-ups can adopt methods of dispute resolution outside the court in order to avoid litigation expenses.
Company management: The agreement specifies who owns how much share of the company and what they should do with their stake. It can also specify how many votes each stakeholder has in the company. It can help prevent individuals from acting against the wishes of their fellow shareholders.
To sum up, a Shareholder Agreement is the best financial security if you have a start-up or are thinking about launching a new firm with partners, investors, or co-founders. When everyone understands and agrees on how the organisation works, there will be simpler transitions when someone departs, a new person joins the team, or when issues develop. It establishes a predetermined structure for dealing with a wide range of regular business scenarios.
-Kiranpreet Kaur
Associate at Aggarwals & Associates, S.A.S. Nagar, Mohali
by Aggarwals Associates | Nov 17, 2022 | General
Investment plays an important role in the Start-ups at each and every stage of the development in manufacturing and growth of the business. It is difficult to raise funds at initial stage, as the company has no income and the cash inflow will also take time. At the initial stage, Start-up Company get funding from the family, friends and relatives.
What are the various ways to raise fund at planning stage of start-ups?
Pre-seed Funding- This is the first stage of raising funds for start-ups. One can say that at this stage investors invest on the plan rather than on products because the product is not developed yet. The funds raised at this stage are used for developing the business ideas.
Seed Funding- This is the first official stage of funding in which the development of product starts and investors tends to get the profits from the business.
Angel Investors- Angel investors are those investors who have surplus money and want to invest it in the start-ups in exchange of the equity. They start earning their potential share as the business start growing.
Simultaneously, there are other methods from where the funds can be raised at initial stage whereas, the fund raising process does not end here as the business need funds at each and every level to make the business on higher edges and generate profit out of that. At every stage the motive of raising fund differs i.e. at initial stage it is for formation, next for survival, growth and furthermore. Thus, can be concluded fund raising is a never ending process.
What are the different series of funding?
After raising fund for the initial beginning, founder needs funds for the development and growth of business. The said funding is known as series funding i.e. Series A, Series B and so on.
Series A Funding: Generally, the series A funding is raised from where the start-up business gets its wings and start flying. Now, the product has created place in the market and for increasing the supply, money needs to be invested in the business. Here comes the role of series A funding when funds are raised for increasing the productivity in the business. The fund can be raised by various ways but the two common ways are venture capitalist (Private equity investors that provides funding to the companies with high growth potential) and the angel investors (Private investors having surplus money who wants to invest in start-ups in return of equity). To raise funds from these sources it is important to know some important facts such as where they invest, why they invest etc.
They invest in the companies with strong management, large potential market and unique product or service with a strong competitive market. And, the answer to the question why is obvious to generate profit out of that investment.
Before approaching to the investor for Series A funding you need to prepare well for the same. The questions that are asked by the investors must be answered by the founder precisely and correctly. The investors may ask for the growth chart, expected market, market value of the product or the expected profit in near future.
Series B Funding: This stage of funding is raised when valuation of company is higher than valued at time of Series A funding. The business needs to raise more fund as the market size of the business expands and there is substantial and sustainable market for the said market in future. In order to meet this increased demand, business needs to be expanded in every terms with respect to labour, machines, management team etc. The founder of the company can raise fund from the same ways as mentioned in Series A funding by presenting the order book, the expected market etc.
Series C Funding: This proves to be the last stage of funding as business self capable after the development stage. However there is no restriction to carry further the series in continuance in the form of Series D, E,F and so on. At this stage the business is fully developed and earning profit out of it but who does not wants to earn more profit. Therefore, in order to expand the business globally or introducing a new product targeting the same potential market there is a requirement of additional fund in the business. There are many investors who wants to invest money in the business at this particular stage as the business is generating profits and there must be some investors who wants to sell their equity for capital gains. After this stage the founder start gaining personal control over the business without interference of the investors.
It can be concluded from the above discussion that in order to develop the business in market, funding is required at each and every stage. The series of funding is somehow similar to each other except the expectation of investor from that particular stage. In order to get the funding from investors it is necessary to prove the sustainability and growth of business that eventually leads to the growth of all personnel in the company.
-Surbhi Singla
Associate at Aggarwals & Associates, S.A.S Nagar, Mohali.
by Aggarwals Associates | Nov 14, 2022 | General
A co-founder agreement is also known as a founder agreement, is a contract that governs the professional relationship between the founders of a new business. Each co-founder must devote time and resources into the venture. The co-founders may know each other personally or merely operate professionally; in either case, it is critical to determine certain concerns when co-founders settle on to come together so that there is transparency on what is expected from each other.
What are the important clauses of co-founder agreement?
Business description and goals: It is critical to define the company’s potential venture. It comprises naming the venture, encapsulating the aims, and mentioning about what sort of products/services will be offered by the company. The clause should be precise and not ambiguous. In case a co-founder leaves, the agreement may contain provisions such as prohibiting such co-founder from engaging in ‘competing’ business for a period of time and prohibiting them from using the company’s brand name. As a result, objectively characterising the startup’s businesses is critical. The co-founder agreement can be entered for a set period of time or a schedule or specific milestones can be specified for determining whether the idea has future business viability.
Financial stake and ownership: Defining current ownership frequently raises the likelihood that the agreement will be unenforceable unless it is registered as a partnership. At this point, parties are left with two options. First option is that they can make the co-agreement founder’s enforceable by registering it with the Registrar of Firms in the state where the business is located. In this case, they can define each co-economic founder’s interest. According to the second option, they may simply declare the future stake that the co-founders will have if they agree to create a formal structure for the business.
Non-disclosure and intellectual property obligations: Intellectual property in all work must be comprehensive and exclusive; utilised for business purposes only. If a co-founder leaves, he/she must waive all rights to any codes, layouts, business strategies, marketing and financial plans, and other information developed for the company. Such content may only be utilised for business purposes. He/she shall also be prohibited from disclosing any information, facts, plans, or insights relevant to the business of any third party without the written approval of the other co-founders.
Mechanism for determining ownership or financial interest: To determine ownership, several methods can be adopted, including equal allocation of interests on the basis of numbers of co-founders, division on the basis of tasks performed by the co-founders, and on the basis of capital contributed. To determine economic interest, a mix of the said methodologies should be employed. Resultantly, the quantity of capital contributed, the amount of effort expended, the relative worth of the task or responsibility assumed by the co-founder, and guaranteeing some level of parity amongst the different co-founders are important elements in determining the equality split.
Vesting: Co-founders either lose interest or get a better opportunity and willing to exit the business or fired. In such scenario, remaining co-founders need to secure their equity in the venture. For doing so, stakes of the co-founders are vested in the business for a certain time period. In co-founder agreement, vesting of stakes can be included in two ways i.e. milestone vesting and time-based vesting.
Roles & responsibilities: Responsibilities must be shared among the co-founders. It is critical that roles and responsibilities are clearly established for each of the co-founders based on what each of them brings to the table. Operations, sales and marketing, administration, finance, and so on are typical jobs and duties.
The decision-making procedure: How should disagreements be settled? In the event of a corporate debate about business strategy, who gets the final say? Although founders tend to have an inherent knowledge of one another in the early phases, disagreements do develop from time to time. When differences produce friction or take time to settle, the overall operating efficiency suffers. These issues must be addressed through a structured decision-making process. As a result, clause allocating tasks can be included in the agreement, which should be used as a framework for decision making. A voting method among the co-founders could also be included. If a voting method is used, decisions could be made by the majority of the co-founders, with each co-founder’s vote carrying equal weightage, or through a weighted vote, where voting power corresponds to the percentage of the economic stake that each founder owns.
Criteria for performance and termination: Firing is a delicate subject that is difficult to address in writing. Targets are routinely missed in business; however, this does not always result in the dismissal of a co-founder. As a result, firing must be addressed in a broader context. If it left unchecked, the absence of one of the co-founders might lead to slack among the others, as the others will perceive themselves as working extraordinarily hard while one of the co-founders is absent. Co-founders should endeavour to define the conditions under which they all agree that the removal of a founder member is justifiable.
Dispute resolution and conflicts: The co-founders must also define in the agreement the method to be used if there are major disagreements or a breakdown in the founders’ business relationship that cannot be resolved. For the business to survive, the disagreements must be settled swiftly and inexpensively. One must abandon the option of approaching the courts, which has always been available.
Non-compete clause: The agreement should include a provision that prohibits co-founders from continuing work on the same idea if one of them leaves, retires, or is expelled from the company. Strategic differences about the product, on the other hand, can cause co-founders to see multiple products in the same space.
Compensation: Provisions for recovery of costs incurred individually by the co-founders for the business as well as a system for sharing any revenue created, must be incorporated in the agreement.
Mechanism for exit: The agreement should specify how a co-founder may exit the company. This also includes provisions about the removal of a co-founder, such as the circumstances under which a co-founder may be removed and the system to be followed during and after the removal.
To recapitulate, for any entrepreneur, starting a new firm is an exciting time. However, co-founders frequently make the mistake of forgetting key items like entering into an agreement describing each other’s obligations and responsibilities. A co-founder Agreement is a contract between co-founders that specifies details such as initial capital contribution, obligations and responsibilities of each co-founder, and so on. This agreement can also serve as a safeguard in the event of a disagreement, since it may be used to demonstrate what the co-founder agreed to in the first place. A co-founder agreement benefits the founders not only by formalising their partnership, but also by providing direction on how to deal with duties and responsibilities, commitments, and any eventualities that may emerge in the coming times.
-Kiranpreet Kaur
Associate at Aggarwals & Associates, S.A.S. Nagar, Mohali
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