In case of an interest between investors and founders the next step normally is drafting a term sheet. It is important to understand the parameters and current and future implications of those. The following aspects shed a light on some of the major aspects of a term sheet.

One of the favorite tools for growth financing are convertibles or direct capital increases. It is necessary to find the best possible compromise between the amount of money to be collected and the current valuation of the company in order to identify the dilution for the existing shareholders. As they impact directly the shareholder and equity distribution it is important not only to know the mechanics but also be aware of the impact for future investment rounds. We help our clients understanding and managing those impacts in order to provide a sound basis for future growth.

When a capital increase takes place and one or more shareholders get on board, the existing shareholders get diluted if they do not participate in the capital increase. Although the arithmetics are straightforward, the mechanics of the dilution protection procedures and the subsequent impact on the company are not obvious and require some explanation to become clear.

In general, the valuation of a company increases, however, in some instances a down round needs to be taken into consideration. It is also important to understand the differences between full-ratchet, broad-based or narrow-based weighted average methods.

Drag-along allows majority shareholders to force minority shareholders to also sell their shares, ensuring simplicity in full company sales and avoiding being blocked by minority shareholders. The minority shareholders are then „dragged along“.

Tag-along rights allow minority shareholders to sell their shares on the same terms as majority shareholders, offering protection in a sale and avoiding being left out of a share deal. The minority shareholders can then just „tag along“ if a share deal comes into play.

The right of first refusal applies, when a shareholder wants to sell some of his shares. It allows all existing shareholders to buy the shares from that shareholder for the same conditions that an external buyer has offered. 

Pro rata rights allow existing shareholders to maintain their percentage in case of a capital increase for the same conditions as the other participants in the capital increase. This allows existing shareholders to prevent dilution. 

Vesting is a means to ensure a long-term motivation for the major shareholders (mainly founders) and often a requirement from lead investors. It means that a shareholder cannot sell all of the shares at once but gradually recuperates them over a period of time, normally a few years and it normally covers only a part of the shares. An additional requirement can be a cliff period, before the real vesting starts. We help founders and investors find the best possible balance to ensure the future growth together.

A Virtual Employee Share Option Plan allows a company to offer benefits to employees when the liquidity does not yet allow market rate salaries and helps the employees participate in the future growth of the company. Basically, they are without voting rights and have got the same monetary value in an exit case as real shares. Virtual shares can also follow a vesting scheme.

Normally there are different investment rounds and the later investors require a liquidation preference, it is important to understand the differences between single, double, participating or non-participating liquidation preference when it comes to an exit. If they do not pay attential and stay on top of the numbers founders may exit empty handed despite having owned a double-digit percentage of their firm. 

The basis for a cooperation between the founders and further shareholders is the shareholder and investment agreements, which encompasses to above aspects, among many others. The objective is to find a sound balance between all parties and design the parameters accordingly. We help understanding the different aspects of such agreements from a business point of view.