Term Sheets - Debt and Equity
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Transcript of Term Sheets - Debt and Equity
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TERM SHEETS – DEBT AND EQUITY Key Terms and Concepts
Presented by: Alex Kilgour and Neil Schwartz
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Overview
• Common terms in debt and equity term sheets
• Key terms in debt term sheets
• Key terms in equity term sheets
• Most negotiated terms
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Common Terms • Non-binding except for confidentiality and exclusivity (and
sometimes, expenses)
• Full legal name of the issuer and jurisdiction of incorporation
• Type of security (debenture, common shares, preferred shares)
• Size of the round
• Price per security / valuation / conversion price
• Number of closings / number of tranches / milestones
• Identity of the investors
• Targeted closing date
• Use of proceeds
• Term sheet expiration date
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Common Terms (Valuation and Conversion)
• Pre-money valuation
• Amount to be invested
• Post-money valuation
• Attach cap tables (pre-money and post-money)
• Stock option pool (pre-money (VC) or post-money (founders)?)
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Debt Offering Terms (Debt Characteristics)
• Loan / Debenture / Promissory Note / Credit Facility
• Demand or term/maturity date?
• Secured or unsecured?
• If secured, some or all assets?
• Interest – fixed, floating or none?
• Priority/ranking – deal with existing creditors/postpone or subordinate?
• Convertible – automatic and/or optional?
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Debt Offering Terms (Conversion)
• Convertible – if so, define share terms in advance?
• Fixed or indeterminate conversion price?
• Automatic conversion – significant financing/qualified change of control/maturity
• Optional conversion – at any time or only at maturity? Change of control?
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Debt Offering Terms (Control)
• Positive covenants – “thou shalt”
• Negative covenants –”thou shalt not”
• Equity kicker – “free” shares or warrants (pricing)
• Board participation
• Information rights
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Equity Offering Terms
• Common shares/preferred shares/units
• Liquidation preference – participating/non-participating
• Convertible – conversion price/valuation
• Automatic conversion – qualified IPO / qualified acquisition
• “Pay to play”
• Anti-dilution – full ratchet or weighted average
• Pre-emptive rights
• Protective provisions – “preferred majority” approval
• Voting rights
• Shareholder rights
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Liquidation Events/Exits
• Qualified IPO = $X raised for the company + listing on recognized stock exchange
• Qualified Acquisition = sale of all shares or all assets for at least $X with at least Y% in cash at closing
• Management carve-out on acquisition
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Governance
• Board nomination rights/board composition
• Board observer rights
• Quorum
• Number of meetings per year
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Shareholders Rights
• Pre-emptive right
• Right of first refusal
• Co-sale right/tag-along right
• Drag along right
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Closing Conditions
• Completion of due diligence
• Authorizing board and shareholder resolutions
• Shareholder and creditor consents and waivers
• Officer’s certificates
• Certificate of compliance / status
• Executed versions of definitive agreements
• Ancillary agreements
• Stock option plan
• Legal opinion
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Most Negotiated Terms
• Valuation (dilution)
• Type of security (voting)
• Board of directors (control)
• Significant financing threshold
• Qualified IPO threshold
• Drag along threshold
• Anti-dilution
• Pay to play
• Management carve-out