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The following template term sheet for a seed investment is suitable for use between a
company incorporated in Hong Kong and potential seed-round investors.
This term sheet has been drafted to include the provisions that a sophisticated seed investor
would typically expect to see and may not be appropriate for all types of investor. Save in
relation to the expenses, exclusivity and confidentiality sections, the term sheet is not a
binding legal document. It sets out the basic commercial points to be agreed by the Company
and investors up front, with these matters being reflected in binding legal documentation (such
as a subscription and shareholders' agreement) at the time the investors invest money in the
company.
The text in square brackets indicates that information needs to be added or confirmed.
Please ensure that all square brackets are completed and removed prior to signing the term
sheet.
This document is not a substitute for legal advice and may need to be tailored to the
circumstances to appropriately reflect the intentions of the parties.
13 July 2016
[COMPANY]
This summary of terms represents the current understanding of the parties with respect to
certain of the major issues relating to the proposed investment in the Company (as defined
below). Nothing in this summary of terms constitutes a legally binding agreement. The parties
intend to enter into a detailed, definitive and legally binding subscription and shareholders'
agreement in due course to reflect these terms in a legally binding format.
Noting in this summary of terms constitutes an offer to sell or a solicitation of an offer to buy
securities in any jurisdiction where the offer or sale is not permitted.
Company [Company]
Share Class Newly issued seed [convertible] [preferred] shares (“Seed Shares”),
which will rank senior to all other shares of the Company in all
respects [and be provided with the same rights as the next series of
preferred stock (with the exception of anti-dilution rights).] [Note:
Discuss with your legal, financial or other advisor if shares are to be
convertible or preferred].
[Liquidation Preference Upon a liquidation, dissolution, winding up, merger, acquisition, sale or
other disposal of substantially all of the assets or a majority of the
shares of the Company (a “Change of Control”):
Option 1: [the holders of the Seed Shares shall receive the higher of:
(a) one times the original purchase price for the Seed Shares; or (b)
the amount they would receive if all shareholders received their pro
rata share of such assets or proceeds.]
Option 2: [(a) the holders of the Seed Shares shall receive one times
the original purchase price for the Seed Shares; and (b) all
shareholders shall receive their pro rata share of any remaining
assets or proceeds.]
[Note: Include this option if the Seed Shares are to have a preferential
right on liquidation or winding up of the Company]
[Anti-Dilution] [If the Company issues additional shares at a purchase price less
than the current conversion price for Seed Shares, then the
conversion price will be reduced to the price at which the new shares
are issued, adjusted on a broad based weighted average basis.]
[Note: Discuss with your legal advisors if specific anti-dilution
protections should be included]
Important Decisions [Certain important actions of the Company require the consent of the
holders of a majority, including a majority of the Seed Shares (a
“Seed Majority”), including, amongst others, actions to: (i) alter the
rights, preferences or privileges of the Seed Shares; (ii) allot any
new shares beyond those anticipated by this investment; (iii) create
any new class or series of shares having rights, preferences or
privileges senior to or on a parity with the Seed Shares; (iv) increase
the number of shares reserved for issuance to employees and
consultants, whether under the ESOP or otherwise; (v) redeem or
the selling of any shares; (vi) pay or declare dividends or
distributions to shareholders; (vii) change the number of board
members; (viii) take any action which results in a Change of Control;
(ix) amend the constitutional documents; (x) effect any material
change to the nature of the business or the agreed business plan;
(xi) subscribe or otherwise acquire, or dispose of any shares in the
capital of any other company.] [Note: The majority threshold can be
altered as appropriate]
Conversion Each holder of Seed Shares will have the right to convert its shares
at any time into ordinary shares of the Company (“Ordinary
Shares”) at an initial conversion rate of 1:1, subject to proportional
adjustment for share splits, dividends or recapitalisations. The Seed
Shares will automatically convert into Ordinary Shares if; (a) a Seed
Majority consents to such conversion; or (b) upon the closing of a
firmly underwritten public offering of shares of the Company.
Pre-emption All shareholders will have a pro rata right, but not an obligation,
based on their ownership of issued capital, to participate in
subsequent financings of the Company (subject to customary
exceptions). Any shares not subscribed for may be reallocated
among the other shareholders.
Right of First Refusal / Co-Sale The holders of the Seed Shares will have a pro rata right, but not an
obligation, based on their ownership of Seed Shares, to participate
on identical terms in transfers of [any shares] [transfer of over [] %
of the shares] of the Company, and a right of first refusal on such
transfers (subject to customary permitted transfers, including
transfers by Investors to affiliated funds). Any shares not subscribed
for by the holders of Seed Shares would then be offered to the
holders of Ordinary Shares.
[Equalization of Financial Terms] [In case the offer for a proposed acquisition of (all or part of the)
shares includes, in addition to the purchase price offered for such
shares, additional consideration or advantages offered to one or
several shareholders [or employees] (including without limitation,
any additional cash payments, securities or other assets, retention
bonuses, salaries above market standards, and so forth), even if
made conditional upon the occurrence of certain future events or
with deferred payments terms, the value of such additional
consideration or advantages will be added to, and will be deemed to
form part of, without any discount of any kind, the purchase price
offered for the relevant shares of the Company (the “Aggregate
Purchase Price”).
Founder Shares Shares held by the Founders will be subject to reverse vesting
provisions over [three] [four] years as follows: [25% to vest one year
after Closing and the remaining 75% to vest in equal monthly
installments over the next following [two] [three] years (“the Vesting
Period”).] The terms of reverse vesting and bad leaver provisions
will be set out in a Founder Vesting Agreement in a form reasonably
acceptable to the [Seed Majority][Lead Investor]. Any shares held
by Founders that do not vest will be [distributed equally between the
remaining Founders for nominal consideration] [bought back by the
Company at the lowest repurchase price permitted by applicable law,
and then cancelled].
Board of Directors [The board of directors of the Company (the “Board”) shall consist of
a maximum of [three] members: the holders of Ordinary Shares may
appoint [two] directors and [the Lead Investor] [Seed Majority] may
appoint [one] director.]
Information and
Management Rights The Lead Investor shall receive [weekly/monthly/quarterly] reporting
and monthly financial information [and a management rights letter to
satisfy its venture capital operating company requirements.]
Option 2 [Each party shall pay their own legal and other fees and
expenses in the transaction.] [If the transaction does not complete
within 60 days or because the Company withdraws from negotiations
(except as a result of the Lead Investor making a material change in
the terms), the Company shall bear the [Lead Investor’s] [Investors']
legal costs incurred to that date.]
Non-binding Effect This Summary of Terms is not intended to be legally binding, with the
exception of this paragraph and the paragraphs entitled "Expenses",
"Exclusivity" and "Confidentiality", which are binding upon the parties
hereto and shall be governed and construed in accordance with the
laws of Hong Kong. Each of the parties irrevocably submits to the
exclusive jurisdiction of the courts of Hong Kong to settle any dispute
(including non-contractual disputes) arising out of or in connection with
this Summary of Terms.
[FOUNDER 1]
By:
Date:
[ADDITIONAL INVESTOR]
[FOUNDER 2]
By:
Date:
[FOUNDER 3]
By:
Print Name:
Title:
Date:
APPENDIX A
CAPITALISATION TABLE