Expected Term Sheet Provisions
When Maine Angels takes the role of lead investor we will work with potential investment companies on a term sheet. In general, we use variations standard ACA (Angel Capital Association) documents.
We recognize that every company has different needs and each term sheet is different, but from experience we like to see the following provisions in the term sheets for our investments whether or not we are the lead investor.
Minimum and maximum investment for this round.
A time frame for the round.
Pre-money valuation or cap in the case of a convertible note.
If there is a minimum investment for an investor it should usually not to exceed $10,000 for early rounds.
Angel investors treated as a group. For all areas where size of investment is used to define a class of investor currently or subsequently, such as a major investor provision, the investments of all Angel investors from a recognized ground shall be aggregated together for the purposes of calculating whether Maine Angel investors qualify.
Generally the entity in which the investment is made should be a C corporation at the time of the investment.
Participation/Right of First Refusal on Sales by the Company in order to give seed investors the ability to avoid dilution (See Example 1).
Information Rights and Reporting - Standard information that is typically provided to stockholders and lenders (See Example 2).
Board of Directors
Some representation of this series (typically Series A) – Seed Series Investors.
Insiders should not constitute a majority of the voting board members (See Example 3).
Some standard protective provisions
Enable investors to approve changes that materially impact their investment (See Example 4).
Example 1 - Participation/Right of First Refusal on Sales by the Company
Investors will have a right to maintain their pro rata interest in the Company on a fully diluted basis in any subsequent offering of securities other than a public offering. In any subsequent rounds of financing where the round is limited to major investors, the investments of all Seed Investors shall be aggregated together for the purposes of calculating whether Seed Investors count as a Major Investor.
Example 2 - Information Rights
1) If audited financial statements are required, audited annual financial reports to Investors within 180 days of the end of the fiscal year.
2) Monthly unaudited financial summary (which typically includes an income statement and a balance sheet) and “management dashboard” updates on progress and accomplishments against targets in past and next period, in a mutually agreeable form, to Investors by the 15th calendar day of the following month.
3) Annual budgets will be supplied to the board of directors at a regularly noticed board meeting, but in no event later than 45 days prior to the beginning of each fiscal year for approval.
4) Customary inspection rights. If these are provided to other investors based on the amount of their investment, Maine Angels will work with the Company through a lead investor designated by Maine Angels.
Example 3 – Board of Directors
The Board of Directors shall initially consist of five directors:
A Director to be selected by the CEO
An investor from the current seed round
Another investor – acceptable to a majority of investors in the current seed round (generally from the current round)
An independent director acceptable to the CEO and the majority of the Series Seed round.
3 and 4 are Seed Series Investors
Investors may have observers (typically not more than 2) acceptable the CEO, and the majority of the Seed Series Directors. Observers shall have no voting rights.
At the first board meeting after closing, the company shall establish a compensation committee and an audit committee; the Series Seed Director(s) shall be member(s) of each committee
Example 4 – Protective Provisions:
So long as 50% of shares of Series Seed Preferred are outstanding and Series Seed shareholders account for 10% of total investment, in addition to any other vote or approval required under the Company’s Charter or By-laws, the Company will not, without the consent of the holders 60% of the Company’s Series Seed Investment, either directly or indirectly by amendment, merger, consolidation, or otherwise:
(ii) increase or decrease the size of the Board of Directors
(iii) remove the CEO except for cause (fraud, theft, job conduct in violation of the law, willful conduct injurious to the company)
(iv) enter into any material agreement, not approved by the Board of directors that has a term of longer than five years
(v) liquidate, dissolve or wind up the business and affairs of the Company, or effect any Deemed Liquidation Event or consent to any of the foregoing;
(vi) amend, alter, or repeal any provision of the Certificate of Incorporation or Bylaws;
(vii) reclassify, alter or amend any existing security that is junior to or on parity with the Series Seed Preferred, if such reclassification, alteration or amendment would render such other security senior to or on parity with the Series Seed Preferred;
(viii) purchase or redeem or pay any dividend on any capital stock prior to the Series Seed Preferred, other than stock repurchased from former employees or consultants in connection with the cessation of their employment/services, at the lower of fair market value or cost; other than as approved by the Board, including the approval of Series Seed Director;
(ix) create or authorize the creation of any debt security other than equipment leases or bank lines of credit unless such debt security has received the prior approval of the Board of Directors, including the approval of Series Seed Director;
(x) create or hold capital stock in any subsidiary that is not a wholly-owned subsidiary or dispose of any subsidiary stock or all or substantially all of any subsidiary assets.
(xi) create or issue any capital stock, or any security convertible into capital stock, which is senior to or on a parity with the Series Seed Preferred with respect to liquidation preferences or registration rights, or which is senior to the Series Seed Preferred with respect to dividend rights (including without limitation any capital stock with an accruing or required regular dividend), which a majority in interest of the Preferred A investors consider adverse to the Preferred A interests;
(xii) make any expenditure not in the approved operating or capital budget that is above $35,000 in the aggregate during any fiscal year; or
(xiii) increase the aggregate employee incentive pool.
(xiiii) the Compensation Committee of the Board must approve any deferred compensation to employees and any accrual of unpaid salary.