A Guide to Private Equity - BVCA admin

and other enquiries and the conclusion of the negotiations. The term sheet, without being legally
binding on either party, demonstrates the investor’s commitment to management’s business plan and
shows that serious consideration is being given to making an investment. The term sheet represents
the private equity firm’s preferred terms and not necessarily and indeed, unlikely at this early stage in
negotiations, your preferred terms.
The private equity firm may change the terms as the due diligence process and negotiations progress,
for example adjustments to the overall valuation, refinement of ratchets etc.
The terms in the term sheet will be incorporated into the shareholders’ agreement at the end of the
negotiation process. It is better for the term sheet to be as detailed and unambiguous as possible
so that there are no surprises when the eventual shareholders agreement has been drafted for you
to sign.
You can obtain an example of an indicative term sheet from the BVCA. Whilst there are no standard
term sheets you can expect that the term sheet will cover the following areas all of which are briefly
described below:
• amount to be invested, instruments (eg. convertible preferred shares), valuation, capital structure;
• liquidation preferences, dividend rights, conversion rights, anti-dilution protection, redemption
rights, lock-ups, pre-emption rights;
• board composition, consent rights, information rights;
• warranties, vesting, option pool, milestones;
• confidentiality, exclusivity, fees, conditions precedent.
Areas covered by term sheet
Amount to be invested and instruments
The term sheet will set out the amount that the private equity firm is to invest in the company, the
format in which the investment is to be made, eg. convertible preference shares, and the number and
price of the shares.
Valuation
The valuation (pre-money) should be firmly buttoned down in the term sheet. The pre-money valuation
is the value of the business or company before the particular finance raising round has been completed.
Capital structure
The capital structure should be shown in the final term sheet both before and after the private equity
firm’s investment, on a fully diluted basis, including all share options.
Liquidation preferences
These are the right of the preference shareholder to receive before any other shareholders cash that is
available in the event of the company being liquidated or indeed sold, as in a trade sale, or achieving
an IPO. The private equity investor may express that he requires a multiple of his original investment
in these situations.
Dividend rights
The right to receive dividends may be cumulative or non-cumulative. If cumulative the dividend due
to the preference shareholder accrues even if the company does not have adequate distributable
reserves to be able to pay a dividend when it is due. The accumulated dividends then become payable
to the private equity firm in the event of a liquidation occurrence as above. Non-cumulative dividends
are not accrued if the company does not have distributable reserves to pay them.
Conversion rights
Preference shareholders usually have the right to convert their shares into ordinary shares, for example
in the event of an IPO. They will do this only if it is a ‘qualifying’ IPO where above a certain minimum
The investment process
A Guide to Private Equity 35