Today we’re launching of v2.0 of the Seedsummit Termsheet Initiative documents with revisions from feedback we’ve received since launching and with more explicit SEIS compliance as per direct discussions with the UK’s HM Revenue & Customs.
It was about a year and a half ago we launched the Seedsummit Termsheet Initiative, inspired by the Series Seed docs of the USA. Our goal for the initiative was to help make raising funds easier for startups and investing easier for investors across EMEA by providing accessibility and transparency of information between everyone. With the feedback we have received we have updated the two template termsheets – one general and one Angel version – for the EMEA startup community to adopt, adapt and discuss before engaging in a financing round.
The termsheet template framework has had a wide circulation among the startup community since its launch, and we’ve had some great feedback from both investors and startups who have put the termsheets to use. The idea behind the initiative is for both founders and investors to have access to the documentation and terms that are being generally used so as to have better and more meaningful discussions about what terms they would like to use and why.
Version 2.0: Fixing Bugs and Addressing the Latest Issues in Startups
We’re launching v2.0 of the General and Angel Investment TermSheets with revisions to address the bugs identified and concerns discussed. This revamping includes:
-Information Rights: We’ve sought to clarify the optionality of the frequency of information reporting by the startup to the Investor in the “Information Rights” section. Information rights are important to many investors and can be really beneficial to the startup by allowing the founders to mine the wisdom of experienced investors. But how often updates are provided is different for each startup/investor relationship. We’ve added in prompts for monthly or quarterly reporting, in addition to weekly, to highlight the flexibility of this term.
-Founder Share Section:
–Vesting: Version 2.0 now includes different reverse vesting provisions for bad leavers and good leavers in the “Founder Shares” section. There was a bug in the previous versions of the termsheets that allowed a bad leaver (someone who is fired for Cause and Gross Misconduct – see our Seedhack Founders Collaboration Agreement v2 post for discussion on the merits of good leaver/bad leaver provisions) to keep all the shares post-vesting period. Version 2.0 rectifies this issue and simplifies the process by stating what happens to shares of a bad leaver (which should be narrowly defined in the definitive documentation).
–Founder Departures: Additionally, we’ve added another optional piece in the “Founder Shares” section to help make cash distributions to founders on an exit fairer across all employees/founders and remaining shareholders when a founder leaves early. The example case here is what if a fully vested founder leaves in year 5/10, should they receive the value (or a portion thereof) of their shares of the company in year 5 or when the company is sold in year 10. Again, the user is given the choice of using it or not depending on how the founders feel about any kind of early departures from co-founders.
–Founder Shares Post-Vesting: Finally, we’ve addressed another point in the “Founder Shares” section that we’ve received some questions about. Namely, what happens to a leaving founder’s shares after the vesting period. The language we’ve included in the template prompts a decision on a percentage of the leaving founder’s shares to be sold back to the Company (with secondary purchase option for Seed shareholders). However, continuing on the discussion of good leaver/bad leavers and the fair treatment of employees and founders, we’ve gone a step further to outline the sale price for a good leaver (fair market value) and a bad leaver (lower of nominal price or subscription price).
-Equalization of Financial Terms. An optional new clause, depending on your needs, called “Equalization of Financial Terms” has been added. Based on some feedback we received, this optional clause seeks to deal with an increasingly problematic situation where large tech buyers are doing an acqui-hire of a company (only the team) and are effectively unfairly treating all of the remaining shareholders (and the work they’ve done) and the buyer assigning this positive value exclusively to the founders as a retention bonus after they left the startup company as bad leavers. Effectively, this leaves the remaining shareholders with only the delta of enterprise value (usually a nominal amount) after the removal of the retention bonus from the total package. This wording attempts to reduce the occurrence of this unfair action for the larger shareholder base and remaining company employees with options. Check out blog post on v2 of the Founders Collaboration Agreement for further discussion on acqui-hiring.
Angel Investment Termsheet: HMRC SEIS Stamp of Approval
In addition to working out bugs and fine-tuning the language, we’ve also sought to improve the Angel Investment Termsheet to make taking advantage of the generous Seed Enterprise Investment Scheme (SEIS) as easy as possible for startups and investors in England. We’ve worked closely with HMRC over the past few months and are thrilled to be able to offer the following updates to the template:
-Structure of Financing SEIS Guidance Notes: We’ve added in an explanatory comment to help inform and guide startups through the SEIS process. This comment is to be deleted from the final version of the document before execution. The comment outlines the caps for SEIS for both investors (£100,000 pa) and companies (£150,000). The comment also explains how to classify shares should the total investment amount for SEIS shares exceed the cap. In the event this occurs, two classes of ordinary shares would need to be issued, SEIS and non-SEIS, pro-rated for each investor according to their investment amount.
-Priority Payment on Exit Terms for SEIS and Non-SEIS Investors: We’ve bulked up the priority payment on exit section to provide guidance and language for investments that include both investors who seek SEIS qualification for their investment and for those who do not. To be eligible for SEIS tax relief, the shares being issued cannot be subject to any arrangements that, by insurance, indemnity, guarantee or otherwise, protect the investor from the risks attached to making the investment. We’ve thus provided optional priority payment on exit language that provides protection for non-SEIS investors and adheres to this requirement for SEIS investors.
If you’re interested in learning more about SEIS and the tools available to help startups achieve SEIS qualification, see our blog post on the SEIS Workshop we hosted in conjunction with 10 Downing Street and HMRC earlier this month.
These documents are drafted for use in England, however they can be modified with basic changes for the relevant jurisdiction. We’re also working on publishing the docs in several languages – stay tuned!
A big thank you to our friends at Brown Rudnick LLP and Kathryn Robertson, Senior Policy/Technical Advisor, HMRC.
As with all the Seedsummit documents, the Termsheets are meant to help the startup community grow by their use, adaptation, sharing and, with your comments and experiences, improvement. So please be in touch with your comments on the documents and how you have found them useful.
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The documents were prepared by Tina Baker of JAGShaw Baker.
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*Typically used by Institutional Investors (VCs)*
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* Typically used for smaller rounds, Angel investors, and S/EIS tax relief (see 3rd bullet for details)*
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