Transcript TS Presentation -- 0208

PE INVESTMENT – DISSECTING A TERM SHEET
FEBRUARY 2008
Private & Confidential
A term sheet is the beginning of the negotiation process …

The basic commercial understanding between the promoters, company and
investor for a given transaction which prior to the transaction is to be detailed
into definitive legal documentation

Generally prepared post a limited review of the business and the industry but
prior to detailed due diligence of the company
Receipt of
information /
IM and
preliminary
analysis
Industry
review,
management
meetings, fin
analysis
Term Sheet
negotiations
Operational,
financial and
legal DD,
definitive
documentation
Conditions
precedent and
subsequent &
Closing

A Term Sheet is the beginning of the negotiation process and not the end –
nature of negotiating behaviour decides relationship with promoters

Many names but one objective viz to capture the commercial understanding:





Term sheet
Memorandum of Understanding
Letter of Intent
Bid Document
Non binding and indicative in nature, except certain clauses relating to events
prior to the definitive documentation
Private & Confidential
Page 2
… and its key elements …
• DD, condition precedent, definitive
documentation
• Representations, warranties and
indemnities
• Non compete
• Investor, investee, promoters
• Transaction structure
Other
covenants
• Investment amount / drawdown
• Valuations
• Instrument and rights of the
instrument
• Expenses
• Arbitration, governing law
• Confidentiality
• Exclusivity, term, termination and
break away fee
Dilution and
exit rights
Investment
structure
Term Sheet
• Anti dilution / Right of preemption
• Composition of board
• Liquidation preference
• Veto rights
• Tag along
• Drag along
Corporate
Governance
• Business plan
• Use of funds
• IPO
• Dividend policy
• Trade sale
• Information rights
• Buyback
• Related party transactions
• Right to further subscription
• ESOPS
• Full /weighted ratchet rights
• Role in top management
Private & Confidential
Page 3
… are governed by a host of factors
• First generation entrepreneur
• Family business
• Exposure to financial investors
Promoter
quality
• Cash transactions
• Start up capital
• Early stage funding
• Growth capital
• Acquisition funding
• Number of promoters
• Pre-IPO funding
• Buy outs
Competitive
situation
Investment
stage
Term Sheet
• Number of bidders
• Single digits
• Attractiveness of proposal
• Minority (10% to 30%)
• Time line
Quantum of
stake
• Significant minority (30% to 49%)
• Majority (51% to 75%)
• Buy out (>75%)
Private & Confidential
Page 4
A term sheet is a tool to negotiate term sheets …

Valuations are the single biggest reason for break down in negotiations



Difference in the business assumptions
Exit and entry multiple assumptions
Size of the Company

The investment instrument significantly resolves this issue

There are multiple options available and each one has the effect of mitigating a
particular fear or bringing sanity to the table






Straight equity
Pure convertible structures
Milestone based structures
Clawbacks
Profit sharing
Mezzanine instrument
Private & Confidential
Page 5
… from valuations and corporate governance …

Here, the stage of the company is extremely important

Composition of board is extremely important





Veto rights







Number of investor directors
Independent directors
Proportion to ownership
Meeting frequency and quorum norms
Generally geared towards protection of investment
Strategic moves
Dividend policy
Start up and early stage require more operational involvement
ESOPS and management hiring and firing
Related party transactions
Business plan and use of funds




Investment drawdown
Periodicity of reviews
How to tackle significant variations
Level of monitoring use of funds
Private & Confidential
Page 6
… to dilution and exit norms …

The investor order for an exit


Anti dilution and right to further subscription


Typically in start ups and early stage where the risk of failure is high
Tag along and drag along – depends on the stage of funding and the quantum
of stake acquired



Typically anti dilution is given; Right to further subscription is dependent on a case to
case basis
Liquidation preference


IPO followed by a trade sale followed by a buyback
Tag along is generally given but proportionately
Drag along is viewed by most promoters as a draconian provision; however if the
investor holds a significant majority or above this is sometimes accepted
Ratchet rights – Full or weighted
Private & Confidential
Page 7
… and other covenants

Non compete – important clause to retain in situations of family businesses,
multiple promoters, where the investor has a significant majority or more

Expenses – a tricky clause, but important that a small funds incorporates this
clause (conversely where does a start up company get this money)

Exclusivity, term, termination and break away fee – important provisions in a
competitive situation
Private & Confidential
Page 8
There are a host of age old challenges …

Striking the right balance in detail and conciseness

You do not want the Term Sheet to look like a full fledged agreement but at the same time you need
to protect yourself

Making the term sheet “investor heavy”

Use of lawyers?

Constructing the “ideal term sheet”

Consistency in negotiating stance

Do not treat term sheets as templates


Each situation is different and the ability to spot the difference prior to submitting the Term Sheet is
key to a quick resolution of the same
The Term Sheet is an active tool that helps you negotiate better and to differentiate you from
competition
Private & Confidential
Page 9
… which should be mitigated by keeping things simple

Keep the term sheet simple

Remember a term sheet can help you gain promoter trust or can make you lose
his faith very quickly

Each situation is unique – do not treat a term sheet as a template

Understand the psyche of the promoter prior to submitting a term sheet

Put in some clauses which you can give away to get what you want
Private & Confidential
Page 10
Thank you

Mosaic Capital Services Pvt Ltd

Mumbai

Bangalore

London

Vinay Shah

[email protected]

Ashutosh Ghanekar

[email protected]

Vikram Bihani

[email protected]

Sanjay Krishnan

[email protected]
Private & Confidential
Page 11