Decoding Term Sheets

&
iSAFE Notes

@mehtasanjay
Pitch@100X.VC
 What is a Term Sheet

Term Sheet is only a Letter of Intent

Focus on the deal from investor is at its

maximum while being signed
 Legality of Term Sheet

Term sheet is simply a contract that outlines the

key terms of a deal between the startup and a VC
and does not represent a legal promise to invest.

Binding, Non Binding, Confidentiality, Exclusivity

 Understanding Valuations

Valuation will determine how much of your

company you have to sell to raise a given
amount of money.
 Pre-Money, Post Money Valuations

Pre-money is the valuation of your business prior

to an investment round.

Post-money is the value of your business after an

investment round.
 Valuation Math Example
• Founders own 100% of the company
• Founders & Investor both agrees to value company at 10Crore
• Investor agrees to invest – 2.5Crore
• If the 10Crore Valuation is Pre-Money, then Post Money is
12.5Crore so the equity ownership now is 80% with founder
and 20% with investor
• If the 10Crore Valuation is Post Money, then the Pre Money is
7.5Crore so the equity ownership now is 75% with founder and
25% with investor
 Investment Document Types
• SHA – Share Holder Agreements
• Convertible Notes
• iSAFE – India Simple Agreement For Future Equity
 Liquidation Preference
Primarily a down-side protection for investors in
the event of a less than desirable liquidity event
(sale, merger, bankruptcy, etc.) that returns money
to investors before founders

Liquidation preferences today are typically 1X at

seed stage investments
 Drag Along, Tag Along
Drag-along rights is a provision that enables
investor to force founders to join in the sale
of a company.

Tag-along rights are used to ensure that the

shared of investor is considered during a
company sale.
 Antidilution Rights

Anti-dilution rights provide protection to

investors in the event that the company raises
additional financing at a lower valuation than
in a previous financing
Other Terms
• Information Rights
• ROFR – Right Of First Refusal
• Pre-emptive Rights – Pro-Rata Investing
• Affirmative Rights – Veto Rights
• ESOP Pool
• Board Composition
• Vesting Of Shares
• Tranches & Milestones
• Cap Table
 iSAFE – India Simple Agreement For Future Equity

An iSAFE note is not a debt instrument, a founder friendly

convertible security note, that is beneficial for both startups and
investors. To comply with applicable Indian law, iSAFE note takes
the legal form of compulsorily convertible preference shares
(CCPS) which is convertible on occurrence of specified events.
 Why iSAFE notes should be preferred investment instruments in India?

An iSAFE is neither debt nor equity, and there is no interest accruing,

(though for legal compliance purposes, iSAFE note carry a non-cumulative
dividend @ 0.0001%).
If the startup fails, whatever money they have left after discharging other
liabilities, will be returned to investors/iSAFE note holders in preference
over the equity shareholders until iSAFE note holders receive their
investment amount. Such liability is on the company, not on the founder
individually.
A convertible note is debt, while an iSAFE note is a convertible security
that is not debt.
Description Standard iSAFE terms Rationale / Remarks
terms
Post money Valuation Yes, No. Decided Early stage companies (Start-ups) are generally at Idea
Important later at equity stage and hence it’s unfair to assign a valuation to such
clause in all pricing round Start-ups at the initial stages.
term
sheets
Board seat Yes No Board seat A board seat is generally ineffective (where it’s a
minority stake in favour of investor) in situations,
where an Investor and Founder don’t meet eye to eye.

SHA Yes No 100X wishes to keep documentation as simple as

possible, though there will be certain necessary
amendments to AoA to comply with Indian Laws.
Consent rights / Reserved Long list by Very Few items Objective is to provide the founder with the freedom
matters way of an included in a and flexibility to operate.
Annexure single term
sheet
ESOP Pool Standard No such clause 100X does not wish to force founders to keep aside
clause to ESOP kitty for future employees, so early in the
create an company’s lifecycle. Those discussions are best done at
ESOP kitty equity pricing round / pre Series A.
Description Standard iSAFE terms Rationale / Remarks
terms
Voting rights Yes No 100X does not wish to take voting rights in the company, and
hence provide greater flexibility to founders / company to carry
out its operations / seek shareholder approvals

Employment agreements Yes No 100X does not wish to force employment terms with founders.
with founders – Investor We want the same to be a more consultative process than a
consent consent one.

Exit Rights Yes No 100X does not wish to force exit rights on founders / company.
Only transfer rights available to iSAFE note holders

Change in Founders Yes No 100X does not enforce a say in this matter. We believe in
Remuneration mutually discussing and arriving at a consensus.

Commitment and Non- Yes No We believe in trusting the founders and working with them to
Compete clause build and scale their start-ups.
100X.VC Investment Thesis
We look at

1. Founding Team
2. Market Size Opportunity
3. Business Model Strength
4. Unfair Advantage, Moat
5. Conviction of a minimum 20X returns.
 Thank You

@mehtasanjay
sanjay@100x.vc