Tuesday Post | Be careful while signing a term sheet

Tuesday Post | Be careful while signing a term sheet
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First Published: Tue, Aug 12 2008. 01 17 AM IST
Updated: Tue, Aug 12 2008. 01 17 AM IST
Start-up Saturday, 9 August
Mumbai
What exactly are the terms specified on a term sheet? At the August edition of Start-up Saturday, Mumbai, Seedfund’s Anand Lunia gave a crash course on the subject to a room of about 50 current and aspiring entrepreneurs, explaining both the basic clauses and the fine print that goes into the initial agreement signed between a start-up and venture capitalist (VC).
Lunia pointed out the two aspects of a term sheet. There is a purchase agreement to transfer stake to the VC at a given valuation and a shareholders’ agreement between the promoters and the VC, which specifies among other things, veto and exit rights of the VC. So even if the founders own 70% of the company and the investor only 30%, it can go over the founders’ heads in certain circumstances. Veto rights could be specified for issues such as capital expenditure beyond a certain level, selling company stake to another party, and hiring and firing of key persons in the firm.
The VC also gets tag-along and drag-along rights: If a promoter wants to sell his stake to another party, he has to ensure the VC firm gets to sell its stake at the same price as well. Similarly, if the company gets an acquisition offer and the VC wants to exit, he can drag along, or force the promoters to sell their stake as well. Prompted by an audience question, Lunia also warned start-ups of common pitfalls while signing a term sheet: “Don’t sign anything that involves personal obligation, for example a clause that says the promoter has to buy back shares with his own money”. He also advised start-ups to negotiate for more time before the drag-along rights can be implemented.
The event also had a talk and demo by Collcraft Technologies, an IIT Bombay-incubated start-up that offers a common information-sharing platform for enterprises under the brand Uhuroo.
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First Published: Tue, Aug 12 2008. 01 17 AM IST