Investment term sheet: ordinary shares

When do I use this document?

• for a proposed investment for ordinary 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
  • investment amount and investor shares
  • key terms of investment agreement
  • investor director appointment rights
  • investor 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?

An investment term sheet is a document setting out the agreed terms for a potential investment in a company.  Its purpose is to set out the agreed structure and material terms of the proposed investment prior to the preparation and negotiation of the full form investment documents.

A term sheet will usually not be legally binding, except for:

• confidentiality of the investment terms
• if agreed, exclusivity of negotiations
• costs
• governing law and jurisdiction of the legally-binding sections

Ordinary shares are:

• voting shares
• shares entitling the holder to receive a proportionate share of dividend income
• shares entitling the holder to receive a proportionate share of capital returns

If an investor invests in ordinary shares, the investor will usually receive the same class of shares as the founders and other shareholders in the company.

Preferred (or preference) shares are shares which have certain preferred rights in priority to the company’s ordinary shares.  To reflect the investment risk, an investor may require preferred shares rather than ordinary shares.  Typical rights of preferred shares include:

• priority rights to dividends
• anti dilution protection in case of future shares issues at lower valuations
• liquidation preferences – a priority return in the event of a sale of the company or other capital return
• consent rights for specific matters reserved for preferred shareholders

What other documents are available?

For an investment term sheet for preferred shares, see

• Investment term sheet: preferred shares