Investment term sheet: preferred shares

When do I use this document?

• for a proposed investment for preferred shares in a private limited company
• to set out the principal agreed terms for the investment on a non-legally binding basis
• as a preliminary step before preparing long form investment agreements
• to save time and future discussion and negotiation on the transaction documents

What are the key features?

• clear and user-friendly format
• table structure with explanatory commentary in the guidance note on alternative options for consideration and discussion
• comprehensive term sheet covering matters including:
  • investment terms, including pre-investment valuation and pre and post-investment capital
  • preferred share rights, including preferred dividend, liquidation preference and anti-dilution
  • key terms of investment agreement
  • preferred shareholder director appointment rights
  • preferred share consent matters, including schedule of reserved matters
  • future share issues and transfers of shares
• legally binding provisions covering:
  • confidentiality of investment terms
  • exclusivity for the investor for a defined period
  • fees
  • governing law and jurisdiction
• share capital table

What else do I need to know?

Preferred (or preference) shares grant holders specific preferred, or priority, rights over the holders of ordinary shares.  Reflecting the investor’s risk, an investor may require preferred shares over ordinary shares.

Depending on the negotiated terms, preferred rights might include some or all of the following:

• dividend: priority entitlement to, typically based on an annual percentage of the invested amount. Preferred dividends can be cumulative, meaning that any unpaid amounts (due to the company not having sufficient distributable profits) accumulate and remain payable in subsequent periods
• liquidation preference: priority right to proceeds on the company’s sale or liquidation. The preference may be the amount invested for the preferred shares or a multiple of it
• conversion: right to convert preferred shares into ordinary shares based on a specified conversion rate
• anti-dilution: entitlement to either additional preferred shares or to adjust the conversion rate into ordinary shares, if new ordinary shares are issued below a specified price (usually the preferred share subscription price)
• director: right for the preferred shareholders to appoint a director
• consent matters: rights for the preferred shareholders to consent to specific matters

What other documents are available?

For an investment term sheet for ordinary shares, see

• Investment term sheet: ordinary shares