Term Sheets - Debt and Equity
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This document provides an overview of common terms in debt and equity term sheets. It discusses key terms related to valuation, security type, control, liquidation events, governance, and closing conditions. The most negotiated terms typically relate to valuation, type of security, board composition, financing thresholds, and anti-dilution provisions. The document is intended to outline the key concepts and terms that are generally included in term sheets for debt and equity financings.
Term Sheets - Debt and Equity
- 1. TERM SHEETS – DEBT AND EQUITY Key Terms and Concepts Presented by: Alex Kilgour and Neil Schwartz 1
- 2. Overview • Common terms in debt and equity term sheets • Key terms in debt term sheets • Key terms in equity term sheets • Most negotiated terms 2
- 3. 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 3
- 4. 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)?) 4
- 5. 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? 5
- 6. 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? 6
- 7. Debt Offering Terms (Control) • Positive covenants – “thou shalt” • Negative covenants –”thou shalt not” • Equity kicker – “free” shares or warrants (pricing) • Board participation • Information rights 7
- 8. 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 8
- 9. 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 9
- 10. Governance • Board nomination rights/board composition • Board observer rights • Quorum • Number of meetings per year 10
- 11. Shareholders Rights • Pre-emptive right • Right of first refusal • Co-sale right/tag-along right • Drag along right 11
- 12. 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 12
- 13. 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 13
- 14. Term Sheets - Debt and Equity Key Terms and Concepts