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Key terms of a seed investment agreement

Term Sheet (also referred to as the Heads of Terms or LoI)

A non-binding agreement that outlines the major aspects of an investment to be made in a company. A Term Sheet sets the groundwork for building the detailed legal documents.

Subscription and Shareholders’ Agreement (also referred to as the SSA)

The basis on which an investor will subscribe for shares in a company and how that investment will be managed (generally by way of subscription for new shares rather than a purchase – unless there is a “secondary sale”). This document may be broken up into a standalone subscription agreement with a separate shareholders’ agreement.

New articles of association of the Company (also referred to as the Articles or Arts)

The articles of association are a document which forms the company’s constitution. A VC investor will typically insist on certain changes being made to the existing articles.

May be another form of constitutional document if the company is not an entity incorporated in England & Wales (such as Bylaws for a US corporation).

Advance assurance letter (if necessary)

If the investment is intended to qualify for EIS, it may be necessary to make an application to HMRC for advance assurance.

Disclosure Letter

A letter containing a statement or statements which states a set of qualifications to Warranties laid out in the SSA.

New employment agreements (if required)

Due diligence may suggest that new agreements are required to ensure that the investors have security that the founders / key employees of the company commit their time entirely to the company, and enter into non-compete and non-solicitation covenants.

Such agreements will usually contain IP assignment provisions which automatically assign to the company any intellectual property produced by the employee in the course of their employment.

The investor may also request “key-man insurance”.

Founders questionnaires (if required)

These help the investor understand the financial standing of the Founders (and therefore the value of the Warranties) as well as clarifying any outside interest(s) or past dealings which the Founders may have. The results are typically warranted as being accurate by the relevant Founder (on a several basis).

Board minutes and shareholder resolutions / consents

Minutes are necessary to give the company authority to enter into the VC transaction.

Others, depending on issues raised during due diligence

These may include, for example, IP assignment agreements to ensure that any historic IP has been properly vested in the Company or amendments to the Employee Option Scheme to ensure that it conforms with typical standards.

 

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