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This article is written by Abhishek Dubey, a law student. The article compares the term sheet of an angel investor in all three cases such as issue of equity, CCPS and CCD share and also the difference in any of the particular clause of the term sheet.

Instrument clause

Under the equity term sheet, equity share has a face value of INR at the price of per-share equity share. And in CCPS(Compulsary Convertible preference Share)  term sheet, companies have a face value of INR at each price of share along with certain rights as agreed by the parties in the documentation of preference and subscription share. And in CCD(Compulsory Convertible Debenture) term sheet, the total value of INR and certain rights are attached in the debenture documentation.

Interest clause

In terms of equity, there is no interest clause. There is a dividend clause which says that holders of preference share shall be entitled to the payment of % non-cumulative per annum on each of preference share by way of dividend from the company in preference to holders of equity share or any other securities of the company.

In the term sheet of CCD, the debenture shall bear an interest of % on a non-cumulative basis per annum.

Valuation clause

In term sheet of equity, there is pre-money valuation is required in INR, in term sheet of CCPS the pre-money valuation is required but it is not required in CCD term sheet.

Advisory clause

In the term sheet of equity, the company agrees to issue the equity share to an advisor on an ongoing basis in value and consideration of advice.

In the term sheet of CCPS, the company agrees to issue advisory equity equivalent to the investment per cent in value in consideration of the advisory services on an ongoing basis.

In the term sheet of CCD, the company at the time of closing agrees is to issue equity shares.

The difference in these term sheets for advisory equity is optional and the investor will only issue when he has taken advisory services but it is compulsory in case of term sheet of CCD where the investor has to definitely issue advisory equity.

Board composition and incidental matter clause

In all 3 term sheets, investors shall be entitled to nominate at least one director, others will be nominated by the promoters. But in the term sheet of CCPS, if the investor does not have representation for the board of directors then the board observer position may be granted to the investor.

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Pre-emptive rights clause

The investor shall have pro-rata right to participate in case of issue of share to the third party in future and retain their shareholding on same terms and condition but it is only applicable in equity and CCPS term sheet but not in CCD term sheet.

Conversion clause

There is no conversion clause in the term sheet of equity. In terms of the CCPS sheet after liquidation and after 20 years from the date of allotment of share, the preference share shall convert into equity share in the ratio of 1:1. The conversion shall be adjusted in future according to bonus, employee stock option plan and equity splits etc.

But in the term sheet of CCD, there is a conversion clause which says that if the company raises the qualified financing then debenture will be automatically converted into equity share. Qualified financing refers to the investment lower than the INR.

Promoters and non-selling investors right of the first offer

In the event selling, investors sell whole or any part of their shareholding to the third party. The selling investor has to first offer it to the promoters. This is applicable only in CCPS and equity term sheet but not in CCD term sheet.

Employee stock option plan clause

The company shall implement an employee stock option plan not exceeding than the post-issue share capital of the company on a fully diluted basis with the approval of investor and director. This is applicable in case of term sheet of equity and CCD but in CCPS term sheet, the employee stock option plan shall be at least 10 per cent on the post-issue share of capital. However, there is no minimum condition in the term sheet of equity and CCD.

Exit mechanism clause

The exit mechanism provides that the company and promoters shall make all ways to provide the exit opportunity to the investor.

In terms of equity, there are various ways to provide the exit opportunity such as initial public offering at a time mutually agreed upon, within 5 years from the date of closing.

At the strategic sale of equity share means at the price acceptable to the investor within 6 years from the date of closing.

Drag along with rights: In the event, if the company and promoters fail to provide the exit opportunity then the investor can sell its share to the third party.

In terms of CCD also, there are various ways to give the exit opportunity to the investor such as IPO, strategic sale of debenture and drag along with options etc.

But in term sheet of CCPS, there is qualified financing that the company shall endeavour to ensure that any future issuance by it of securities of a cumulative value equal to or higher than 125 per cent. It shall be done in such a way that 25 percent of the amount proposed to be raised.

Holders rights

The investor shall be granted all rights that are granted to all the investors subscribing to the securities of the company. This is given only in the term sheet of CCD but not in the term sheet of equity and CCPS.

Power of attorney

This clause is given only in the term sheet of CCPS  which says that the investor shall be the power of attorney to other investors defined in the documentation.

Governing law, jurisdiction and arbitration

There is governing law which says that it shall be governed by the law of India and dispute will be settled in the court but there is arbitration in CCPS where the party can appoint the arbitrator but in equity it and CCD the dispute will be settled in the court.

S. NO

Basis of difference in clauses

Equity 

CCD

CCPS

1.

Instrument clause

Under the equity term sheet,  equity share has a face value of INR at the price of equity share.

Under the CCD term sheet, certain rights are agreed by the parties in the documents called debenture definitive documentation.

In the CCPS, the rights of the parties are governed in the documentation called preference share and equity and preference share have face value collectively known as subscription share.

2.

Interest Clause

In equity term sheet there is no interest clause.

In CCD term sheet, the debenture shall bear interest on non-cumulative basis per annum.

In CCPS term sheet, the holders of the preference share shall be entitled to the payment at certain percentage on non-cumulative coupon per annum on each of preference share by way of dividend from the company.

3.

Valuation clause

The pre-money valuation is required in case of the equity term sheet.

But no such valuation is required in case of CCD term sheet.

The pre-money valuation is required in case of CCPS term sheet.

4.

Advisory clause

In the equity term sheet, the company agrees to issue the equity share to an advisor on an ongoing basis and in consideration of advice.

In CCD, the company agrees to issue equity shares at the time of closing to an advisor.

In CCPS term sheet, the company agrees to issue the advisory equity on an ongoing basis equivalent to the investment per cent in value.

5.

Board composition and incidental matter

Investors shall be entitled to nominate at least one director, others shall be nominated by the promoter. 

Investors shall be entitled to nominate only one director, others shall be nominated by the promoters.

Investors shall be entitled to nominate at least one director and others shall be nominated by the promoter and in case of the investor does not have representation, the board observer position may be granted to the investor. 

6.

Pre emptive rights clause

The investor shall have pro-rata right to participate in case of equity share to the third party and retain their shareholding.

Pre emptive rights clauses are not specified in case of CCD term sheet.

The investor shall have pro-rata right to participate in case of equity share to the third party and retain their shareholding.

7.

Conversion clause

There is no conversion in equity term sheets.

In the case of CCD term sheet, if the company raises qualified financing, the debenture will be automatically converted into equity.

In the case of CCPS term sheet, after 20 years and after liquidation, the preference share shall convert into equity share in the ratio1:1.

8.

Promoters and non-selling rights of the first offer

The investor if selling the share to any third party, has to first offer it to the promoter.

The investor without giving offer to the promoter can sell the share to the third party.

The investor before selling the share to the third party has to offer it to the promoters.

9.

Employee Stock option plan clause

The company shall implement the employee stock option plan on the fully diluted basis with the consent of the director and investor.

The company shall implement the employee stock option plan not exceeding than the post-issue share of the capital on fully diluted basis along with the consent of the director and promoters.

The company shall have the stock option plan for at least 10 per cent of the post-issue share capital with the fully diluted basis with the consent of directors and promoters.

10.

Exit Mechanism clause

There are various ways to provide the exit opportunity to the investor such as Initial public offering, strategic sale of equity share and drag along option.

There are various ways to provide the exit opportunity to the investor such as initial public offering, strategic sale of debenture and drag along option etc.

There are various ways to provide the exit opportunity such as initial public offering, sale of subscription share and drag along with options.

11.

Holders rights

The investor shall not be granted all the rights subscribing to the securities of the company. 

The investor shall be granted all the rights subscribing to the securities of the company.

The investor shall not be granted all the rights subscribing to the securities of the company. 

12.

Power of attorney

The investor shall not  be the power of attorney to other investors defined in the documentation.

The investor shall not be the power of attorney to other investors defined in the documentation.

The investor shall be the power of attorney to other investors defined in the documentation.

13.

Governing law jurisdiction and arbitration

This term sheet shall be governed according to the law of India. And any disputes will be settled in the court.

The term sheet shall be governed according to the law applicable to India. And any dispute will be settled in the court.

The term sheet shall be governed according to the law applicable in India and any dispute shall be settled by the arbitrator.


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1 COMMENT

  1. Hello, Thank you so much for sharing this useful information with all of the readers. Keep sharing such useful information.

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