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Who needs legal jargon? Passion Capital rewrites term sheet in plain English

For Dummies

For Dummies

Why should investment offers be packed with indecipherable legal jargon if they're not legally binding? With that rather sensible question in mind, early-stage London VC Passion Capital will now be working with a new term sheet – in plain English.

To give a quick idea of new version versus old version, here's the clause dealing with warranties in the new term sheet:

Documentation and Warranties
It’s worth mentioning that our standard investment docs will include some “representations and warranties”. These are assurances that you give to us that the business we’re investing in is what you say it is. Normally investors have the right to financial claims against the founders if they’ve misrepresented the business, but we limit our right to claim so that it’s only against the company, not the founders, and the amount can’t be more than the amount we’re investing.

Here's the same clause in the old version:

The Founders and the Company shall be required to provide reasonable joint and several warranties, which shall include: limited trading history, ownership of share capital and related matters; ownership of intellectual property; capacity to enter into the agreement; and disclosure of material facts relating to the business.

The liabilities of the Company will be capped at the total aggregate amount subscribed for by the Investors under the Investment Agreement (including the reasonable legal costs of the Investors).

The liabilities of the Founders will be capped at [ ] times their current salary (including the reasonable legal costs of the Investors).

Eileen Burbidge, who runs Passion Capital with Stefan Glaenzer and Robert Dighero, said via email that the team were inspired by Toronto-based photo community 500px's decision to offer a parallel version of its Terms of Use in plain English.

Terms of service and privacy policies are legally binding contracts and need to have a version in legally defensible language, she pointed out. Term sheets offered by VCs are not – so, after some "beta testing" with founders, Burbidge, Glaenzer and Dighero decided to go for it and replace their old term sheet altogether.

"We realised the only reasons were around 'dressing things up' or trying to appear more formal and technical. (To impress? Intimidate? Guess that depends on how cynical one is!) We didn't need that and were glad to take out a step in the process – and save everyone some time," Burbidge said.

The language isn't the only aspect to get an overhaul – the old term sheet required an exclusivity period of six weeks, for example; the new one just four weeks.

The full plain English term sheet, below, is also available on Passion Capital's website:


Passion Capital Term Sheet for [Non-Hipster Limited]
We, Passion Capital LP, want to invest money in your company, [Non-Hipster].

Structure of Financing
We’re making you an offer of a £ [ ] investment as your seed round. This investment will be for [ ] % 
of the ownership in your company. Your company will issue to us the same type of common shares that you already have.

Option Pool
Our offer assumes that you’ve already or will set up an employee stock option pool before our money goes in, so that our ownership is "fully-diluted" after accounting for that option pool. We 
think you'll need at least a 10% option pool after the investment round in order to hire some key management team members and senior people. To make this really clear, see the attached table to see how this looks with actual shareholding and ownership percentages after the investment.

Conditions to Close
Before we sign the paperwork and transfer our money, we have to do some basic due diligence on 
the company and also on you, the founders. This includes anti-money laundering checks and having you complete a Founder’s Questionnaire. We also want to see that all of the company's relevant employees and freelancers have signed employment or similar contracts which make it clear that the company owns all of the intellectual property that’s been created for the business you’re building.

At the same time, if you haven’t already done so, you should also do a bit of due diligence on us. For example, speak to some of our existing founders and get a feel for what they think of us. We’d be glad to make introductions if it helps.

Estimated Closing Date
We’ll use our standard legal agreements which you should review, preferably with a lawyer to help 
(and again, maybe also speak to a couple of founders who will have seen and agreed to the same docs). We hope that we can wrap this all up and finish the investment round with signed paperwork and money in your account no later than 4 weeks from today, [date].

Documentation and Warranties
It’s worth mentioning that our standard investment docs will include some “representations and warranties”. These are assurances that you give to us that the business we’re investing in is what you say it is. Normally investors have the right to financial claims against the founders if they’ve misrepresented the business, but we limit our right to claim so that it’s only against the company, not the founders, and the amount can’t be more than the amount we’re investing.

Liquidation Preference
We’re not asking for any complex preference rights (see pointers here and 
here, but we do ask for a so-called simple 1x liquidation preference. This means that if the company is sold, we’ll get the higher of either the amount of our investment or our ownership percentage of the sale value. In the worst case if the company is wound down with very little left, then anything left would be distributed to us as the investor.

Important Decisions
We’re here to support you, not to interfere in your day-to-day business operations, but we do have a 
list of decisions that we believe should be approved by a majority of the investors. This includes issuing new shares, raising new finance, selling the business, etc. You can see the full list here

Pre-emption Rights
We think all shareholders, including the founders, should have the right to invest in future financing 
rounds to avoid being diluted. This doesn’t mean shareholders have to put more money in, but if they want to and are able to, they have that right to maintain their ownership in any future funding round.

Right of First Refusal and Co-Sale
If any shareholder wants to sell their shares to someone else, we and other investors have the option to buy those shares on the same terms or to sell our own shares, again on the same terms.

If shareholders, which of course includes you, owning more than 50% of the shares in the company want to sell their shares (typically to accept an acquisition offer) then, as long as the board and a majority of the investors approve it, all other shareholders must also sell their shares. This protects all shareholders from, say, one small, stubborn shareholder refusing to sell their shares in an acquisition offer and blocking a deal everyone else wants to see happen.

Restrictive Covenants
We don’t want any of you to start a competitive business or to leave and take team members with 
you to another business even if it’s not competitive. That’s not why we are investing in the company and your co-founders wouldn’t be very happy with you either. These restrictions apply for as long as you’re employed by the company or hold at least 10% in equity and for 1 year after that.

Founder Shares
Even after our investment, you the founders will normally own the majority of the shares in the 
company. However, our nightmare scenario is that we invest and then the day after you skip off to Timbuktu and we’re stuck as shareholders. It may sound far-fetched, but it happens. We are fundamentally investing in you and your co-founders for the long haul and we expect you to have the same view. Making your shares subject to reverse vesting protects us and your co-founders if one of you changes your mind. Your shares will be earned monthly over 3 years meaning, for example, that if you give up on the team after 12 months, the company has the right to buy back two-thirds of your shares from you.

Board of Directors
We think you should control your board, but we generally like to have a seat too. We don’t take board control. Sometimes it makes sense for us just to have a less formal observer, non-voting seat.

Information Rights
We’d like to get regular status updates from you in whatever format makes most sense for us all. For our own fund reporting purposes we’ll need monthly financial reports from you.Expenses You pay for your legal costs and we pay ours. We don't see why we’d invest cash in your business only for some of it to come straight back out in order to pay our legal bills. We see whatever this deal costs us as our cost of doing business.

If we both sign this term sheet, it means we’ll all be putting time and effort into completing the investment over the next 4 weeks. We don't want you to keep pitching to other investors potentially to replace us during that period. If you decide to switch to another investor in that period and it's not because we've done anything wrong, then we might charge you for our costs.

We trust your judgement in deciding who to talk to about this offer and when. This is a non-binding offer and things can unfortunately always fall through, so it's really not in your interest nor ours to 
pre-announce anything until it's done.

Non-binding Effect
This document isn't legally binding but we're still pretty excited about it and the prospect of working with you.

We hope you’ll decide relatively quickly on whether or not you want to move ahead with us. Obviously it's a big decision so don't take it lightly, but time is your most valuable asset right now and the quicker we move forward and get cash into the company, the quicker you’ll be able to focus on building a great business. This offer remains open until we email you to tell you that we've moved on.


If you’re happy with all of this, sign below, or just tell us so in an email reply. Thanks for giving us the chance to pitch to you!


Offered by
Passion Capital


Signed and accepted above by
Name: ------------------------------------
Company: -------------------------------
Date: --------------------------------------

Image credit: Flickr user Nik Cubrilovic


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