Key takeaways:

1. Engage early and be transparent about yourself and your company history
2. Identify which terms are must-haves and be flexible on the nice-to-haves
3. Have an eye on the long-term vision for the company and how the investor can support you along the journey

Congrats on receiving a term sheet from an investor for your business! It is an absolute watershed moment in the life of a founder and the business and validates years of hard work. However, the term sheet is only the beginning of the arduous process of finalizing the paperwork and closing the transaction before the money hits the bank.

All parties involved – the founders, the investor(s) as well as the company itself need to clearly articulate their rights and obligations towards each other, which is captured in a binding document called the Shareholders Agreement (SHA) in an Indian context or an Investment Agreement (IA) in the United States, or something equivalent in other jurisdictions. A typical SHA can run into hundreds of pages and can often be confusing and overwhelming to founders new to the entrepreneurial circuit.

To make it easy for first-time entrepreneurs and founders, we have compiled this SHA summary that serves as a quick primer on the key terms & clauses in typical agreement and the intent underlying them.

Note: Most of these clauses are subject to negotiation and can vary in content, coverage, and intent across transactions

1. Board rights: From our experience, having an independent Board is non-negotiable irrespective of the stage of your business. Board members not only bring their external insights and perspectives to the decision-making table but also support companies and create growth opportunities to accelerate development for the company. A typical SHA includes the process for appointing and removing Board Directors and Observers, quorum and voting rights, indemnification, and non-executive statuses as well as any other matters.
2. Investor rights: As an agreement between a minority investor and the founder of a company, typical SHAs have rights and representations & warranties that the founder and the company provide, owing to the asymmetricity of the relationship. A standard set of investor rights include Affirmative Voting Rights, Liquidation Preference clauses, Anti-dilution clauses, Pre-emptive rights, Lock-in and Transfer rights (both for founders and investors), Participation rights, Information rights and Exit rights. All these rights are structured for the long-term benefit of the company with appropriate interventions between founders and investors to tackle and resolve issues effectively.
3. Representations and warranties: Each signing party to the shareholders agreement is required to represent and warrant for the accuracy of the information shared with each other through the course of the engagement and negotiation leading up to the SHA stage. Representations and warranties typically include clauses for transparency amongst all stakeholders and parties to the SHA, such as effective share capital authorization to incoming investors, transparency and compliance on organizational structures, possession of legal rights for IP, no previous/ongoing/expected litigation, availability, and compliance to all regulatory and employment agreements etc.