The term sheet, sometimes referred to as the letter of intent or memorandum of understanding, is a preliminary document containing a summary of key terms agreed between parties to be used as a basis for preparing definitive agreements.

In the context of equity financing, the unassuming yet impactful term sheet can either make or break negotiations in a funding round.

In this article, we shed some light on the term sheet for Singapore startups looking to secure equity financing from external investors.

The big picture

Here is how the term sheet fits into the big picture and why it matters.

While the term sheet is usually drawn up at the start of talks with investors and is intended to be only preliminary to kickstart the funding process, it records the parties’ starting positions on key terms, which sets the tone for negotiations on the definitive agreements.

This is the case even if the term sheet is not legally binding as it is meant to signify the parties’ good faith in seeing the transaction through, much like a gentlemen’s agreement. In the course of the funding process, the term sheet will often be cited as a reference point, and a sharp deviation from its terms may risk rocking the boat.

Also Read: While traditional funding penalises a biz at its worst time, Jenfi gives them more leeway

As such, the term sheet should not be taken lightly, especially if it is legally binding, as it may end up being the only contract that parties can rely on if they fail to reach a consensus on the definitive agreements.

The use of the term sheet does not usually come into the picture until the company is ready to raise significant funds from external investors, where each funding round is typically demarked as series A, B, C and so forth.

This is because venture capitalists and other sophisticated investors coming in at such rounds with higher stakes often demand a greater level of assurance upfront through the term sheet compared to earlier investors at pre-series funding rounds.

It is common for the lead investor in a series funding round to dictate the form of the term sheet based on the lead investor’s preferred template or the previous term sheet used by the company in its last funding round (which goes to show the lasting effect of a term sheet in setting precedent for future funding rounds).

The life of the term sheet is intended to be a short one, surviving until such time the definitive agreements are executed to supersede and replace the term sheet. The main definitive agreements based on the term sheet for a series funding round will usually be the share subscription agreement and the shareholders’ agreement, from which other transaction documents may follow.

Binding or non-binding?

The term sheet can be legally binding or non-binding on the parties, the company and the incoming investors. While a legally binding term sheet may seem attractive to the company to secure the investors’ financial commitment as early as possible, the company should be wary of agreeing too soon to terms that it has yet to discuss with its key shareholders, especially if such terms adversely affect their rights.

The company ultimately needs to perform a balancing act to negotiate the terms with the investors whilst ensuring that such shareholders will be on board with such terms. If a longer runway is required for this, a non-binding term sheet may be more appropriate to give the company the flexibility it needs to adjust the terms down the line.

It should be noted that a non-binding term sheet can still contain certain binding terms, such as confidentiality provisions to keep the details of the proposed investment confidential (including any information disclosed for the purposes of the investors’ due diligence on the company) and exclusivity provisions often requested by investors to restrict the company from concurrently entertaining third-party offers for a limited period of time.

The key terms

The key terms in the term sheet typically revolve around three areas:

Also Read: With a looming recession, is office space really a wise investment?

• the deal economics (e.g. the investment amount, the class and number of shares to be issued and the ownership percentage they represent, and the valuation of the company used to calculate the share price);
• the rights attached to the class of shares to be issued (e.g. any dividend preference, liquidation preference, conversion right, redemption right, or anti-dilution protection); and
• specific investor rights and requirements (e.g. any board seat, inclusion in the quorum for meetings, reserved matters, information rights, pre-emption rights, right of first refusal, right of the first offer, tag-along right, drag-along right, founder liability, or founder restrictions).

Below are general tips on how start-ups and their founders can navigate some of the more contentious key terms. The information in this article is provided for informational purposes only and does not constitute legal advice which should be sought on a case-by-case basis.

Valuation

Ensure parties are negotiating with the same valuation metrics in mind (whether pre-money, post-money, or on a fully diluted basis) and look out for provisions which allow investors to adjust the share price in their favour or otherwise be compensated for any changes to the pre-agreed valuation of the company.

Dividend preference

Investors may ask for an annual dividend rate, a percentage of the share price, on a cumulative / non-cumulative basis and a compounding / non-compounding basis in priority to any earlier class of shares.

Also Read: Term sheet negotiation: 3 ways you can win investors

Consider negotiating for a non-cumulative basis (whereby dividends are declared and paid for any profitable year and do not accrue for non-profitable years) and a non-compounding basis (whereby the dividend rate will only apply to the share price and not together with any accrued dividends) in favour of the company.

Liquidation preference

The liquidation preference determines how the investors will cash out of the company upon the occurrence of a liquidity event, which the investors may try to define as broadly as possible to include not only the winding up of the company but also a trade sale or even a change in control of the company.

The liquidation preference is usually set to a multiplier (e.g. 1x or 2x) of each investor’s initial investment amount in priority to any earlier class of shares and can be participating (giving the investor upside benefits via a double dip to receive the multiplier amount and participate in remaining proceeds of the liquidity event in proportion to its ownership percentage on an as-converted basis) or non-participating (giving the investor downside protection via a single dip to receive either the multiplier amount or convert its preference shares to ordinary shares to receive its pro-rata share in the total proceeds of the liquidity event).

As the liquidation preference can set a precedent for future series funding rounds and eventually affect the exit strategy of the founders, who are usually at the bottom of the liquidation waterfall, consider keeping the liquidation preference minimal at a 1x multiplier on a non-participating basis.

Anti-dilution protection

Where the company issues preference shares to investors with a right to convert such preference shares to ordinary shares (whether at the investors’ option or upon the occurrence of certain events such as an initial public offering of the company), the investors may ask for anti-dilution protection so as to be compensated in a down-round where the company subsequently issues new shares at a price lower than the conversion price offered to the investors.

This is achieved by adjusting such conversion price downward based on any of the following formulae (ranked from least to most company-friendly):

• full ratchet (where such conversion price is adjusted to the lower price in the down-round);
• narrow-based weighted average (where such conversion price is adjusted by considering only outstanding ordinary shares in issue and/or issuable upon conversion of the investors’ preference shares); or
• broad-based weighted average (where such conversion price is adjusted by considering all outstanding ordinary shares calculated on a fully diluted basis).

The broad-based weighted average formula is most commonly used by companies as it results in fewer ordinary shares being issued to the investors upon conversion of their preference shares and consequently less dilution of ownership percentage of the founders and other shareholders with no anti-dilution protection.

Consider introducing exceptions to the anti-dilution protection, such as share issuances pursuant to the company’s employee share option scheme or the exercise of any options, warrants or convertible securities.

Reserved matters

Investors receiving only a minority stake in the company will often request reserved matters to allow them to veto and hence control certain matters relating to the company (whether at the board or shareholder level) despite having no general voting power over such matters as a minority shareholder.

Ensure the reserved matters are not likely to impede the founders’ ability to operate the company’s business. In particular, consider setting less rigid reserved matter consent thresholds by tying them to shareholding percentages rather than particular investors and qualifying any reserved matters to exclude low-risk recurring activities of the company.

If the founders lose board or shareholding control over time (which is inevitable the more investors the company onboards), reserved matters can similarly be used by the founders to retain some control over the company by adjusting the reserved matter consent thresholds in their favour.

Drag-along right

A drag-along right benefit specifies majority shareholders looking to sell their shares to a third-party buyer by compelling the remaining shareholders to participate in such a sale on the same terms, thus increasing the marketability of the company’s business for a trade sale.

Consider aligning the triggering conditions for the drag-along right with the founders’ exit strategy to allow the founders to cash out on such conditions, e.g. by prescribing a minimum sale price or determining whether the drag-along sale should cover all and not only some shares or extending to an asset sale.

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At e27, we have kickstarted a new articles series called work-life balance to learn more about tech enablers and executives and their lives beyond working hours.

As the Marketing and Content Manager, Sheryl Chen leads marketing, content strategy, partnerships, and community programmes at at Qualgro. Previously, she was a Programme Manager at Google Cloud for Startups, covering events, programmes and partnerships across JAPAC.

Chen holds a Bachelor’s in Sociology and a Minor in Entrepreneurship from Nanyang Technological University.

She is a regular contributor of articles for e27 (you can read her thought leadership articles here). 

In this candid interview, Chen talks about her personal and professional life.

How would you explain what you do to a 5-year-old?

This is tough! I still struggle to tell my relatives what I do during Lunar New Year gatherings, but I recently had a crash course on Baby Shark, so let me try.

Baby Shark wants to create a company that solves some of the world’s most significant problems, from the Pacific to the Atlantic Ocean. His solution knows no bounds. Baby Shark needs seashells to start his company to expand from his Sea Hometown to the Global Oceans.

Baby Shark seeks help from a V.Sea, a school of fish, which gives him seashells, dishes out advice, and helps him meet other sea creatures to help him in his quest.

The V.Sea, a school of fish, has many different roles, all of which are important. Some of them give out seashells, some advise the other sea creatures on where to look for the best food, and some make sure that the school of fishes are in the best shape to perform their roles.

My role at the V.Sea is to help Baby Shark look good when he is ready to put his best fin forward, so the world will know of the fantastic work that he has done! Baby Shark also has friends who have big dreams to change the world, and I hope to help them.

PS: Pinkfong, please hit me up if you want to do a series on popular but unconventional careers (e.g., data scientists, project managers) so we can tell the wee ones that there is more to life than being a doctor or lawyer.

What has been the biggest highlight/challenge of your career so far?

My biggest challenge was to pick myself up after being displaced thrice.

My heart is in pain with the current spate of layoffs. I am not a stranger to them. I’ve experienced my restructuring and was made redundant three consecutive times. This is something that I wish nobody had ever experienced, and each time I see news of mass layoffs, my heart breaks for the affected individuals.

I hold no grudge against the organisations I worked for and still keep them in high regard. They were all business decisions, and I tried my best in each role.

I spent a lot of time grieving each role and the future I thought I had, and each time felt like a kick in the gut. I didn’t know who I was outside of work and struggled to find meaning and value in life. I had days where I was unable to pull myself out of bed. I regret not reaching out to industry friends to ask for help or introductions earlier.

Also Read: Blockchain promises to be as foundational and indispensable as the internet: Amit Ghosh of R3

I started going to therapy, and we worked on building a sense of self outside of work and reframing my self-talk to be kinder to myself. Most importantly, how I shouldn’t let these setbacks define my career.

It took me a few years to be ready to share what happened to me, and only when I started sharing my vulnerabilities did I learn that it was more common than I thought and LinkedIn feeds (primarily) only show the glitzy side of peoples’ lives.

To anyone who is struggling and needs a listening ear, I’m here if you want to talk. Take all the time you need to grieve and heal. When you’re ready, pick yourself up, knowing that you have people around to support you. Know that what happened to you didn’t come from lack but was a factor of market conditions and business decisions.

How do you envision the next five years of your career?

I still see myself connecting people to people, people to ideas, and people to resources. It’s what sparks joy in me.

What are some of your favourite work tools?

Notion, EverNote, Trello, and Notability for iPad for time boxing (or old-school pen and paper work too).

What’s something about you or your job that would surprise us?

I unintentionally went viral twice.

The first time was because I stood up to a racist commuter on the bus. The second time was on TikTok when I filmed two cats at the right place at the right time.

Do you prefer WFH, WFO, or hybrid?

Hybrid. I still appreciate WFO because of the productivity, sharing, and cross-pollination of ideas. However, WFH is still better for me when I need to be creative and ideate.

What would you tell her if you could reach out to your younger self?

Your identity shouldn’t just be limited to what you do at work.

A friend once sent me this HBR article: What Happens When Your Career Becomes Your Whole Identity.

The article asks the reader five questions:

• How much do you think about your job outside of the office? Is your mind frequently consumed with work-related thoughts? Is it challenging to participate in conversations with others that are not about your work?
• How do you describe yourself? How much is this description tied to your job, title, or company? Are there any other ways you would describe yourself? How quickly do you tell people you’ve just met about your job?
• Where do you spend most of your time? Has anyone ever complained that you are in the office too much?
• Do you have hobbies outside work that do not directly involve your work-related skills and abilities? Are you able to consistently spend your time exercising other parts of your brain?
• How would you feel if you could no longer continue in your profession? How distressing would this be to you?

If we take a step back, we should also see that having a job is one of the many roles you play in your life. You can be a manager at work, but you are a daughter, wife, girlfriend, or mother.

I want to challenge you not to limit your identity to your roles. Sure, these are essential aspects, but what’s more important is the traits that make you who you are.

Also Read: Try to look at the world through a beginner’s eyes: Joey Alarilla of Playfix.io

So instead of How is Sheryl like? She’s a super hard worker, and she tries her best in everything she does. She’s executed xx conferences, worked with xx speakers, and put together xx minutes of stage content which achieved xx NPS score and xx audience turnout.

I would reframe it to Sheryl is exceptionally empathic, and I know she will always have my back. She’s also super compassionate, and she even gave herself a crash course on caring for neonatal kittens so that she could foster a two-day-old kitten. She’s also a great cook, and her memes are impeccable.

Can you describe yourself in three words?

Empathic, compassionate, resilient.

What are you most likely to be doing if not working?

Find me where the animals are!

After my third layoff, I started volunteering at a local no-kill shelter. They are home to over 100 dogs, 300 cats, and a couple of terrapins.

I upkeep my animal TikTok account, taking advantage of the following I gained from my one-hit wonder to educate the public to adopt and not shop. But content creators know how tiring churning out content is hence the word ‘try.’

What are you currently reading/listening to/ watching?

Unfortunately, I have a very short attention span for non-fiction books, so I toggle between a few books.

During a recent event we hosted, my portfolio company founders recommended a few books they keep returning to. I immediately carted the books out. 

They are: 

• High Output Management by Andrew S. Grove
• The Great CEO Within by Matt Mochary

I’m reading ‘You’re About to Make a Terrible Mistake’ by Olivier Sibony, a Senior Advisor at Qualgro. He talks about why organisations make terrible mistakes due to cognitive biases and how to create processes and environments to make better decisions.

I read fiction books like candy, and my all-time favourite author is Jeanette Winterson because she makes me feel all my emotions.

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Join the e27 contributor community of thought leaders and share your opinion by submitting an article, video, podcast, or infographic.

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Singapore-headquartered insurtech startup Igloo announced an additional US$27 million to close its Series B round at US$46 million.

The InsuResilience Investment Fund II, initiated by German development bank KfW and managed by impact investor BlueOrchard Finance led the capital extension, along with WAM, Finnfund, La Maison, and Series B lead investor Cathay Innovation.

The Series B raise was started with US$19 million in funding in March this year.

The additional funds will provide Igloo with a comfortable multi-year runway. With 50 per cent of Igloo’s team committed to R&D, the company plans to double down on attracting the best engineering, product, design and data talent across all geographies.

Igloo is also in the process of identifying and closing on various M&A opportunities.

Also Read: ‘Microinsurance will play a pivotal role in accelerating financial inclusion in SEA’: Raunak Mehta of Igloo

Incorporated in 2016 by Wei Zhu (ex-CTO of Grab), Igloo leverages big data, real-time risk assessment, and end-to-end automated claims management to create B2B2C insurance solutions for platforms and insurance companies.

It primarily targets the gig economy segment by providing “comprehensive and competitively-priced” insurance for delivery riders, through its Foodpanda partnerships in Thailand, Singapore, and the Philippines, as well as Lozi and Ahamove in Vietnam.

Recently, Igloo launched a Weather Index Insurance product in Vietnam – one of the top five rice-exporting countries. The product utilises blockchain-based smart contracts to automate claims payouts calculated using pre-assigned values for losses due to weather events or natural calamities.

In 2020, Igloo raised an undisclosed Series A-plus funding round, led by InVent. It also counts ACA and Openspace Ventures among its investors.

“Women are a major contributor to the economic activity in SE Asia and Igloo’s technology-led impactful model plays a critical role in securing their financial resilience by making insurance accessible to the most vulnerable and underserved segments,” said Rajat Arora, Head of Asia at WWB Asset Management.

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Singapore’s sovereign wealth fund Temasek Holdings has written off its entire investment in cryptocurrency exchange FTX irrespective of the outcome of the US-based company’s bankruptcy protection filing.

Temasek invested US$275 million in FTX International and FTX US across two funding rounds from October 2021 to January 2022. This comprises US$210 million for 1 per cent in FTX International and US$65 million for 1.5 per cent in FTX US. 

In an updated statement issued on November 26, the VC firm said the write-down would not impact its overall performance as it is just 0.09 per cent of its net portfolio value of SG$403 (US$293) billion as of March 31 2022.

“Similar to all investments, we conducted an extensive due diligence process on FTX, which took approximately 8 months from February to October 2021. During this time, we reviewed FTX’s audited financial statement, which showed it to be profitable,” it said. 

Also Read: Our main competition in SG is the idle cash lying in banks: Kristal.AI CEO Asheesh Chanda

The due diligence efforts focused on the associated regulatory risk with crypto financial market service providers, particularly licensing and regulatory compliance — i.e. financial regulations, licensing, anti-money laundering/know your customer, sanctions, and cybersecurity.

“Reports have since surfaced that customer assets were mishandled and misused in FTX. If these statements are true, then this amounts to serious misconduct or fraud at FTX. All of this is currently being investigated by the regulators,” Temsek said.

Temasek also clarified that its investment in FTX was not an investment in cryptocurrencies and currently has no direct exposure to cryptocurrencies.

“The thesis for our investment in FTX was to invest in a leading digital asset exchange providing us with protocol agnostic and market neutral exposure to crypto markets with a fee income model and no trading or balance sheet risk,” it said.

Temasek’s announcement comes a few days after Sequoia Capital decided to write down the full value of its US$214 million bet on FTX. SoftBank, another high-profile FTX backer, said it anticipates an investment loss of around US$100 million. FTX’s other investors include BlackRock, Tiger Global, Insight Partners and Paradigm.

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Work-life has drastically changed since the pandemic began, and while the hybrid workforce has become the ‘new normal’, there is increasing conversation globally on how organisations can potentially adopt a four-day work week.

In fact, some countries such as Australia and the UK have already implemented trials of this new working style. Although Australia had only started running the trials recently, a spokesperson has already mentioned that the study looks “very encouraging”, and additionally, the UK trials saw no loss in productivity.

However, it was noted by the chief executive at 4 Day Week Global, a non-profit organisation in New Zealand, that there were some “understandable hurdles” for businesses whose cultures “date back well into the last century” during their trial.

Also Read: How to tackle cybersecurity threats during the holidays

Closer to home, a survey conducted by Indeed found that 88 per cent of Singaporean employees advocated for a four-day workweek with the same pay.

In spite of the findings, Singapore would need a nationwide shift in mindset from its dominant work culture; the country has been ranked the most overworked country in APAC by The Instant Group.

As interest in flexible working grows, there is still a large swathe of people within organisations who hold roles that cannot be “switched off”.  In particular, we are talking about cybersecurity professionals responsible for managing the explosion of endpoints as remote workforces expand and the frequency of cyberattacks increases.

Staying safe has no holiday

Between July and September alone, BlackBerry’s Threat researchers reported that they had prevented 1,129 cyber-attacks within its customer base in Singapore. These days, there are rarely any days off and uninterrupted holidays for cybersecurity professionals.

In fact, the REvil ransomware gang took advantage of the US’s largest holiday, the fourth of July, as a distraction while they commenced their attacks.

Additionally, the pandemic has put underlying pressure on cyber skills and resources. When organisations expanded their roster of connected services and devices to adapt to the challenges posed by remote working, more security vulnerabilities arose for attackers to gain entry and cripple businesses.

That said, it is not impossible for cybersecurity professionals to adopt a four-day workweek. Modern cybersecurity tools such as artificial intelligence and machine learning (AI/ML) make it possible to keep up with modern threats, such as malware and ransomware.

For example, a leading express delivery service provider in Malaysia and other markets in Southeast Asia wanted to put intelligent cybersecurity at the forefront of its digital transformation. Hence, they adopted BlackBerry’s automated AI/ML cybersecurity software to prevent malware infections and potential data breaches.

Benefits of AI and ML

The use of AI and ML solutions offers several benefits to organisations. Firstly, AI-driven security reduces human error and can ensure security policies are promptly updated to prevent hackers from worming their way into workers’ devices and networks to steal their identities and passwords.

Also Read: Best cybersecurity practices for startups to stay ahead of the curve

These ‘smart’ tools are also proactive, helping workers locate and solve problems that may appear as network systems are updated, modified, or replaced.

Secondly, AL and ML help to reduce threat alert fatigue and stress on cybersecurity professionals. Eliminating manual processing of security alerts is not only practical, given the volume and velocity of daily threats, but gives cybersecurity teams the bandwidth to determine what more urgently needs their attention.

Smarter security, powered by AI, allows IT teams to manage these threats in a practical and manageable way with automated labelling, even as the machine learning algorithm solves some threats on its own.

Lastly, AI and ML-based cybersecurity solutions can significantly reduce threat response time, which is one of the most pivotal metrics for measuring a cybersecurity team’s efficiency. While human responses may lag, AI/ML-assisted security never does, as these solutions can pull data from an attack to be immediately regrouped and prepared for analysis.

Taking it one step further, automated security also provides reports with recommendations and insights to prevent future attacks.

Final thoughts

Although a hybrid workplace has existed in some form for several years, it is now clearly here to stay. Whether cybersecurity professionals adopt a four-day workweek, they would have to continue evolving their solutions to fit this new configuration of work.

Ultimately, organisations need to consider implementing AI/ML in their cybersecurity models to aid their employees in the fight against the barrage of cyber threats they must deal with on a daily basis. Not only will this reduce burnout among cybersecurity professionals, but it also keeps the organisation safe from cyber threats 24×7.

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Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic

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