Fundamentals of Private Equity and Venture Capital - PEI Media

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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 COPYING WITHOUT PERMISSION IS UNLAWFUL
Module 5: Management and leveraged buyouts COPYING WITHOUT PERMISSION IS UNLAWFUL THE FUNDAMENTALS OF PRIVATE EQUITY
Page 1 and 2: THE FUNDAMENTALS OF PRIVATE EQUITY
Page 3 and 4: Contents About the author iv Gettin
Page 5 and 6: GETTING THE MOST OUT OF THIS MODULE
Page 7 and 8: Module 2: Private equity as an asse
Page 9 and 10: About the author Garry Sharp - inde
Page 11 and 12: Exhibit 3: Distribution when one fu
Page 13 and 14: Module 3: Structuring and raising a
Page 19 and 20: Module 4: Venture and development c
Page 23: GETTING THE MOST OUT OF THIS MODULE
Page 31 and 32: Module 6: Private equity real estat
Page 35 and 36: preceded the private equity hotel c
Page 37 and 38: Module 7: Due diligence COPYING WIT
Page 43 and 44: Module 8: Aftercare and exits COPYI
Page 49 and 50: Module 9: Secondaries and their alt
Page 55 and 56: Exhibit 7: Secondary private equity
Page 57 and 58: Published in September 2007 by: PEI
Page 59 and 60: About the author David Huckfield -
Page 61 and 62: of members including representative
Page 63 and 64: Published in September 2007 by: PEI
Page 65: The Fundamentals of Private Equity

Fundamentals of Private Equity and Venture Capital - PEI Media

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