Coverage by Bhat Dittakavi @ Variance.AI of session “Decoding Term sheets and investments” at THUB on 8th December 2016
Murali Krishna Gunturu, Parampara Capital
Viveck Verma, Hyderabad Angels
V V S N Raju, Juris Prime Law Services
BDD: Business due diligence
FDD: Financial due diligence
Co-investment deal: DD got done when we entered. For an angel it is different. For a fund, it is different. Losing an opportunity is part of the whole investment game.
Viveck: it takes two to three meetings for both the parties to understand each other. Typically it is 30-45 days for us to present to investors.
Delay is due to accounting and customer contracts not being ready. These are the places, most of the time is lost.
If the startup is ready, 2-3 months is the time from initial handshake to money in the bank.
For a fund, 30-45 days to understand. We take it to investment committee. Then 40-55 days for FDD. My lag time is total 3-5 months. In a co-investment it can be shortened if the initial DS was done by the time we entered.
Raju: From the day 1, have a good CA, CS and legal council for all compliances. If tou are compliant, timelines can be drastically reduced. Do filing as on date, periodic forms and all.
AJ: Any legal terms one shall look for?
Raju: you need to look at each and every point in the term sheet. Every term is important. All the 17 terms. Here are some common terms in term sheet.
Valuation: Pre-investment and post-investment
Closing conditions: Pre-agreement conditions and post-agreement conditions
Status-quo Operations clause: Once term sheet is given, you shall not sign other agreements
Conversion price: Preferential route and when the equity gets converted
Anti-dilution: Your shareholding may be diluted but my shareholding shouldn’t be diluted
Buyback or put option:
First right of refusal: Either way. It should be both ways.
Tag along rights: if you sell your shares, you shall also sell mine
Drag along: if I sell, you have to also sell with me. Be careful with this clause
Management of the company:
Vito rights and reserved matters:
Board of directors:
ESOPs: What are the reserves? After signing the contract if you ask them to contribute to ESOPs, they may not accept
Term sheets are rules of engagement. Read every word.
Who is in control? It also matters. By and large, investors are the ones who drive. Individual investors ask the promoter to approach a fund or a network . Get scientific valuation. Valuation is a contentious topic.
Is term sheet with detailed clauses and upfront negotiation is better?
Murali: once we are convinced about the business, then we take investment committee approval, then we issue the term sheet.
Term sheet and then SHA ( Shareholding agreement)
Viveck: We need to have a certain number of minimum members except REDD willingness to be part of the investment.
Usually, standard term sheet is floated first since the round is not closing. If the round is closing, a detailed term sheet will come,
No shop clause?
Murali: We convince the promoter, if someone else knocks his door. We do moral play. We include a break fee big enough say Rs. 25 lakhs so it works as deterrent.
Expression of interest (EOI) ahead of term sheets can be given.
Third party permission take longer time. Customer due diligence. Revenue due diligence.
Q) Super market if start-ups is one thing and opaque system of VC community is the other side. Time is key for the entrepreneur.
A database of alternative investment funds does exist. They list out the names of numbers and email ids. There can be themes around what sectors a fund choose to invest in. Even, after one year, fund objectives could change. It works same way for Startups also with pivoting.
Q) Fund got resources to see trends. Herd mentality of investors has become a fashion trend?
Murali: We can’t easily get out of the herd mentality.
Q) Anti dilution and drag along rights?
Anti dilution means investor’s shareholding doesn’t change despite dilution.