Investment term sheet: preferred shares

Investment term sheet: preferred shares

Term sheet for the investment in a company for preferred shares

Background

What is an investment term sheet?

An investment term sheet is a written statement of the agreed terms for an investment in a company.  The purpose of a term sheet is to agree the structure and material terms of a proposed investment prior to the preparation and negotiation of the full form investment documents.

A term sheet will usually not be legally binding, except in relation to:

• confidentiality
• if agreed, exclusivity of negotiations

What are preferred shares?

Preferred (or preference) shares entitle the holder to certain preferred, or priority, rights over the holders or ordinary shares.  Depending on the terms negotiated and in addition to the typical rights that an investor for ordinary shares may require, the preferred rights might include some or all of the following:

• dividend: prior right to dividends, usually by reference to an annual percentage on the amount invested for preferred shares.  The preference dividend can be cumulative, which means that, to the extent not paid in any year due to the company not having sufficient distributable profits, the unpaid amount cumulates and remains payable as a preferred dividend
• liquidation preference: a prior right to payment on the sale or liquidation of company.  The liquidation preference can be the amount subscribed for the preferred shares or a multiple of that amount
• conversion: right to convert preferred shares into ordinary shares by reference to a defined conversion rate
• anti-dilution: the right to receive either additional preferred shares or to adjust the conversion rate of preferred shares, in the event of a future issue of ordinary shares below a specified price (usually the subscription price paid for the preferred shares
• director: right for the holders of preferred shares to appoint a director
• consent matters: right for the holders of preferred shares to consent to certain specified matters

About this term sheet

This term sheet is for the investment for preferred shares in a private limited company.

Document features

• summary of investment terms, including pre-investment valuation and capital and number of new shares and price per share
• summary of investment process and principal investment documents
• range of preferred share rights
• exclusivity provisions

Explanatory guidance

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