At Forward Partners we have the same resolutions every year: make great investments, deliver amazing help to our portfolio and fundraise with the best of them. With Fund II having closed in 2017, we’ve now got the luxury to focus entirely on investments and help for a while. As part of that, we had some service design consultancy on our ‘funnel’ last year. We wanted to see where we could optimise the experience for entrepreneurs at every given stage of interaction with us through the investment process.
We did plenty of customer development work and gained some great insights. One of which was a often-held desire from founders to see our standard terms ahead of time. And so, here it is, below you can find our termsheet for the pre-seed investments that we make.
There’s a couple of important points to note. We invest across the pre-Series-A spectrum and this termsheet is relevant for those exceptionally early stage businesses that we invite to work out of our offices and work in close collaboration with our Product, Tech and Growth team. We’ll publish our seed termsheet at a later date. Spoiler alert: it’s almost exactly the same. We’ll also be publishing our boilerplate legals — driven by this termsheet—shortly.
We like to strike a balance between detail and guidelines. We could have a much lighter termsheet though we feel that would obfuscate many of the things that founders could (and should) care about. We hope that this termsheet helps to outline our responsibilities to founders, and theirs to us. This also avoids overly long periods between signing terms and completion. Because we’re investing at such an early stage, there’s little purpose in getting into protracted discussions at that stage. Once we’ve both made our decisions we want to get to work as soon as possible and we hope that our termsheet provides a great platform for that.
For completeness, when we deliver this termsheet to entrepreneurs it comes along with a (proper) covering letter, a compendium of services and capabilities that will be made available to founders, a description of our FP50 mentor group and all of the discounts and freebies that we can offer given our relationships with suppliers from Google to our local coffee shop.
Finally, we offer terms to far less than 0.2% of the opportunities that we see. Whenever we offer terms we mean it and the whole team are always super excited about the prospect of working with the founder(s) and the business. When those signed termsheets come back in, they’re hands-down some of the best days in the office.
Without further ado, here is the termsheet. Additional notes that we’ve added will be telegraphed with a 5 of these guys *.
Company: The Company (the “Company”)
Forward Partners: Forward Partners II LP (the “Investor” or “FP”)
Founder (s): [Your Name] (the “Founder”)
Completion: As soon as possible — we’d like to return to the business of your business.
The Investment: FP will subscribe for [a number] Ordinary Shares in the Company at a share price of [pennies or pounds], representing [a percentage] of the Company’s fully diluted share capital for an aggregate of [pounds] (the “Investment”).
The cap table of the Company on Completion of the Investment will look as follows: (insert a picture of the cap table)
· See Appendix A for a full cap table
*****this isn’t a baked in structure. We can do staged investments aligned with our thinking of how best to build businesses: validate an idea, build a valued product, scale a valuable business. However each deal is tailored to each opportunity. We like to take ordinary shares as this ensures alignment with our founders. In terms of scale of investment, at pre-seed we typically invest anywhere from £300k to £500k.*****
Services: We invest far more than cash. From the year following completion our offer includes:
- Free desk space for up to six people in the FP office;
- Free support from the investment team, Head of Talent and Head of PR;
- Access to the services provided by Forward Partners start-up team members at their heavily subsidised day rates;
In the event that we decide not to make Further Investments, the Services will be made available for two months following that decision.
*****depending on how heavily founders use the team, the value of these services often amount to the same quantum as the investment again*****
ESOP: It is important that The Company can incentivise employees to join the business and can retain key members of staff. The Employee Share Option Pool (ESOP) is a crucial part of this.
[a number] shares will be created representing [a percentage] of the Company’s fully diluted share capital following the Investment.
*****the percentage value of the ESOP varies greatly. For those solo founders who’ll need to do a lot of hiring at the C-level (and in general), ESOPs tend to be up around 20%. For those pre-seed teams with more skills / less requisite hiring, this can be significantly lower*****
Board of Directors:
· [Your Name], so long as she/he is employed by the Company and she/he owns at least X% of the company’s share capital on a fully diluted basis (the “Founder Director”).
· FP will have the right to appoint one member to the Board so long as Forward Partners owns at least X% of the Company’s share capital on a fully diluted basis (the “Investor Director”)
In the event of an equal vote the Founder Director shall have a casting vote.
*****this is an example board structure. If there is more than one founder then they’ll be entitled to a board seat too. At pre-seed though, we don’t really “do” boards. We don’t think that preparing board packs or sitting in officious meetings is a particularly good use of time when you’re getting a business off the ground. Founders do have optional weekly catchups with the partners though. The threshold of a board seat is typically set around 10%*****
Important Decisions: FP’s or the Investor Director’s consent will be required for some key decisions (set out in Appendix B).
Pre-emption: All shareholders will have a pro rata right, but not an obligation, based upon their ownership % of issued shares, to participate in subsequent financings of the Company. Any shares not subscribed for may be allocated among the other shareholders.
*****You can find a useful glossary on key terms here*****
Right of First Refusal: All shareholders will have a pro-rata right of first refusal to purchase any shares proposed to be transferred.
Tag-Along: All shareholders will have a pro rata right, but not an obligation, based upon their ownership % of issued shares, to participate as transferee on identical terms in proposed transfers of any shares.
Drag-Along: In the event that the holders of a majority of the issued share capital including Forward Partners wish to accept an offer to sell all of their shares to a third party, then all other shareholders shall be required to sell their shares.
Exceptions to RoFR & Tag Along rights: These rights will not apply to any transfer or issue of shares by the Company if 75% or more of the shareholders of the Company vote to waive the rights.
Information Rights: The Company shall produce and supply the Investor with an annual budget, monthly management accounts and a board pack for each board meeting. As this is an early stage deal, we usually do not have formal ‘boards’ — we feel as though time is better spent on the business rather than creating board packs. You’ll be discussing the business in weekly catch-ups with the partners.
Employment Agreements: The Founder(s) will enter into market standard Employment Agreements with the Company. The agreements will be reviewed by and agreed with FP prior to investment.
Founder Shares: We’re on a long journey and you’re a huge part of why we’re so keen to get on board. We’d like you to be incentivised and aligned with us for the long term. The Ordinary Shares in the Company held by the Founder at Closing (the “Founder Shares”) will be subject to reverse vesting provisions over a four year period, commencing from the Date of Completion of the Investment (the “Commencement Date”). X% will vest on the Commencement Date, Y% will vest on the first anniversary of the Commencement Date and Z% will vest in 36 equal monthly instalments after such first anniversary.
*****We find 4 year vesting is appropriate for companies at or near their inception. This isn’t back-weighted though. Halfway through the period founders will have more than half their shares. If founder(s) has completed a great deal of work and their business is a little further along the vesting schedule will be more generous than if that isn’t the case.
Good Leaver /Bad Leaver /Intermediate Leaver: All investors have terms which they’re particularly keen on. We are very strong on encouraging good behaviours.
Upon termination of a Founder’s Employment Agreement with the Company by reason of being:
a) a “Good Leaver”, the Founder shall have the right to retain all of the Founder Shares.
b) an “Intermediate Leaver”, the Founder shall have the right to retain all of the vested Founder Shares.
c) a “Bad Leaver”, all Founder Shares will be converted into Deferred Shares if the Founder’s Employment Agreement is terminated prior to the fourth anniversary of the Commencement Date. if the Founder’s Employment Agreement is terminated on or after the fourth anniversary of the Commencement Date 50% of the Founder Shares will be converted into Deferred Shares.
In (a) and (b) above any unvested Founder Shares will be converted into Deferred Shares.
The Board may, in exceptional circumstances and with the approval of FP, elect to allow the vesting of some or all unvested Founder Shares to be accelerated on the termination of the Founder’s Employment Agreement with the Company, in which case the accelerated Founder Shares will be treated in all respects as if they were vested.
In the event that there is a sale of a controlling interest in the Company or an IPO of the Company prior to the fourth anniversary of the Commencement Date and the Founder’s Employment Agreement is terminated within 12 months following the sale or IPO by reason of the Founder being a Good Leaver the vesting of all then unvested Founder Shares (or any equity securities of the acquirer or cash consideration issued or paid to the Founder for the sale of the unvested Founder Shares and agreed to be subject to the vesting schedule) shall be accelerated and all Founder Shares will be treated in all respects as if they were vested.
Deferred Shares will have no rights to vote or participate in dividends or distributions other than a distribution on a liquidity event of £1 for the entire class of Deferred Shares. Deferred Shares may be transferred to the nominee of the Company at any time on the direction of the Company.
“Bad Leaver” means termination of the Employment Agreement by the Company for Cause.
a) the Founder’s gross misconduct or a material breach of the terms of his Employment Agreement or any other agreement with the Company, including any material breach of obligations to the Company concerning confidentiality or intellectual property or non-compliance with non-compete obligations applicable during the term of the Employment Agreement, if such acts cause harm to the company or its reputation;
b) fraud, acts of dishonesty or any acts that cause damage to or materially discredit the Company or its reputation;
c) being convicted of, or entering a plea of no contest to, an indictable offence (other than a road traffic offence).
“Intermediate Leaver” means the Founder’s voluntary termination of the Employment Agreement (save in circumstances amounting to constructive termination by the Company)
“Good Leaver” means any termination of the Employment Agreement where the Founder is not a Bad Leaver or an Intermediate Leaver.
Reps And Warranties: Post-terms and alongside legals we will ask you to fill in some short questionnaires about you and your business. The Company shall warrant to the Investor that, the information provided in the Founder and Company questionnaires are true, accurate and not misleading.
The Company’s liability in this respect will be limited to the amount invested by the investor.
Expenses: Each party shall pay their own legal fees and other transaction expenses.
*****as a bit of advice for founders out there: agree a cap with your lawyer and do some shopping around beforehand.*****
Exclusivity: The Company agrees to work speedily towards a completion. Neither the Company, the Founder nor any of its employees or shareholders, shall solicit, encourage, negotiate with, or offer, or sell any of its securities or any substantial part of the assets of the Company to any entity other than Forward Partners and other parties approved by Forward Partners for a period of 30 days from the date of execution of this Term Sheet.
Confidentiality: Forward Partners, the Company and the Founder agree to treat this term sheet confidentially and will not distribute or disclose its existence or contents outside the Company without the consent of Forward Partners, except as required to its professional advisors.
Non-binding Effect: This Summary of Terms is not intended to be legally binding, with the exception of this paragraph and the paragraphs entitled Expenses, Exclusivity and Confidentiality, which are binding upon the parties hereto and shall be governed and construed in accordance with the laws of England and Wales.
Due Diligence: This offer for investment is subject to legal, financial, management and other due diligence.
*****we also encourage founders to sign up to the Founder’s Pledge of charitable giving on exit though don’t insist on it*****
Acknowledged and Agreed this _______ day of ______________ 2018:
Forward Partners 2 LP
Insert full cap table
Appendix B — Forward Partners Consent Rights
Provided Forward Partners maintains the right to appoint an Investor Director, the prior written approval of the Investor Director (or if Forward Partners has not appointed an Investor Director, or if the Investor Director is not an employee of Forward Partners, then Forward Partners) will be required to:
*****it’s important for us to be able to invest our LP’s capital responsibly and for our reporting to them to be reliable and correct, these protections are a key part of this. On a more day-to-day level, we’re in the same share class as our founders. This means that we only do well if they do well and this is our quid pro quo.*****
· Change the share capital or issue any shares in the Company
· Amend the Articles of Association
· Declare or pay any dividends
· Create or issue Share Options other than that agreed as part of this investment
· Acquire any new business, shares or other securities
· Appoint advisers or take any other steps with a view to agreeing a sale or IPO of the Company
· Wind up the Company
· Enter into any material long-term financial commitment (including any guarantee)
· Materially change the nature of the business
· Set the annual budget
· Agree any borrowings, loans, advances or credit exceeding £20,000 within any financial year
· Appoint an employee or consultant or vary the terms of an existing employee where emoluments including any bonus exceed £60,000 or the notice period exceeds 3 months