Fundamentals of Private Equity and Venture Capital - PEI Media

exercise, without the danger of the company
agreeing a deal with a different investor.
In addition to the financial aspects we have
already discussed, the major commercial points
addressed in a term sheet are:
• preconditions to investment;
• representations and warranties;
• board structure and membership;
• provision of information;
• consent matters;
• share rights;
• service agreements;
• confidentiality;
• payment of costs;
• arrangement and monitoring fees; and
• exclusivity.
Preconditions to investment
Completion of the investment will always be
subject to the satisfactory completion of due
diligence, agreement of legal documents and
final approval from the investor’s investment
committee. In addition to these generic conditions,
the term sheet will also spell out specific
conditions, including:
• a detailed outline of the due diligence requirements
(see Module 8);
• where appropriate, contemporaneous completion
of investments from co-investors;
• restructuring, or creation, of a share option
pool for employees;
• regulatory and tax clearances; and
• key man insurance on senior members of the
management team.
There may also be specific milestones to be
achieved; for example the securing of a patent,
the appointment of a new member of the management
team or signing of a commercially significant
contract.
The use of milestones can be refined by breaking
an agreed investment amount into tranches,
individual slices which can only be drawn
when the company achieves specific pre-agreed
objectives.
Representations and warranties
The simple objective of warranties provided by the
company and its management is to ensure that the
information they have provided to investors is
accurate, complete and not misleading. The principal
areas covered by warranties are:
• historic accounts;
• current trading and management accounts;
• financial projections and forecasts;
• the business plan;
• due diligence reports;
• ownership of assets including IP; and
• no litigation or contractual breaches
outstanding.
Board structure and membership
One of the major changes that accompanies raising
venture capital for the first time is the introduction
of a formalised reporting and decision
making process, which will be centred around
the board of directors. The board acts as both the
primary decision making body and the main
interface between management and investor. It is
essential that board meetings are a forum for
open debate and discussion, and that the management
team does not attempt this to circumvent
this by making decisions in private and
presenting the board with fait accompli.
The investor will invariably require, at the very
minimum, the right to appoint an investor director.
An important consideration here is that company
law requires directors to act in the best
interest of all shareholders, and not a particular
group. To avoid conflicts of interest, the investor
may appoint an observer to the board, or use a
different executive from the investor director
when decisions are needed.
Appointment of a chairman or additional nonexecutive
directors will be made in agreement
with the management team, although the
investor may reserve the ultimate right to decide
should agreement not be reached.
Other areas relating to the board are:
• frequency and timing of board meetings; and
• the composition of audit and remuneration
committees or their equivalent.
Module 8 looks at the composition and management
of boards, as part of the aftercare process,
in greater detail.
Provision of information
The reporting cycle will be closely linked to the
16 THE FUNDAMENTALS OF PRIVATE EQUITY
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