Founders pay attention: Terms sheet reflects the genuine relationship 創業者要認清 條款就是最真實的關係

be cautious about the terms in terms sheet

Having been around the startup community for a while, I was surprised to find that many founders are quite unfamiliar with certain terms or contract behaviour with investment terms sheet. No matter how happy the founders and investors are feeling with each other, the actual terms on the terms sheet reflect how the relationship actually looks like. Sadly speaking it is always the investor side who involve in the startup investment education, well this is how capitalism works right? As a matter of fact there are also dedicated investors who are willing to spend resources on educating entrepreneurs how startup investment works.

In accordance with what I know from direct contact of myself or what I personally experienced, the followings are the points that need to be watched out when founders come across with terms sheets that put on their tables:

  1. The investors are asking for preferred / preference shares, simply speaking preferred shares allow holders to redeem the shares before common shareholders but after debt holders in case of liquidation.
  2. Added “Liquidation preference” terms: depends on how the contract is set up, this term shall in general gives the investor priority to redeem the amount invested before all other existing shareholders.
  3. Added “early payback clause”: in general, if an entity invest $10,000 into a company for 10%, the investor could be payback in 5 years if the company payout $20,000 annual dividends so that this investor could get $2,000 each year. Some investors might request to be payback and recover all the investment amount first regardless of how much the company’s dividend payout ratio is.
  4. Add in conditional shares trading clauses: it would be like, if in case, the turnover or user volume could not reach the agreed amount by certain period, the founder would have been forced to sell the shares to the investor. In some case the founder might have lost the control of the company when this clause is executed.
  5. Add in expenditure approval mechanism: under this clause, the management team (the founder) would be required to get written consent from the investor if they are going to spend money on an item over certain amount.
  6. Amend Memorandum of Association : This document governs how the company operates and how the voting among shareholders or directors works. The investor might alter the majority vote requirement from 75% to 85%. It looks like a minor change but for case like the investor so happened to just have 15%, major decisions would require the investor’s consent to pass.
  7. Strange In kind service VS Cash investment ratio: it happens when strategic investor use their resources such as software developers or networks to invest into startups, but when the ratio of these resources are counted as more valuable than money, the founder needs to be alert and think deeply if the resources really worth this much.

From investor perspective, it makes sense to preserve investment, minimise risk and maximise return. Those terms would be sort of reasonable if these are regarded as necessary measures in the name of corporate governance. Nevertheless we couldn’t stop thinking if startup could really take off under these terms.

Founders need not to be too “surprised” when they see these terms or feeling intruded. All contracts are supposedly signed with all terms both parties agreed. Just that most of the time it’s the founder side lacking in money, and all these terms would seemed “reasonable”.

I wish even if founders are on the “weak” side , they still have the choice. And realise the fact that terms are the real relationship, what the other side said or how you feel about the relationship was comparatively vague. No matter how the comment from investor sounds like, the real relationship reflects on the contract terms and the money. It shows how much the investor utilise his/her strong side or how much trust or how much understanding was provided.

在創科圈混了好一陣子,發覺有很多人原來不太認識一些投資合約 (或Term sheet )上出現的條款或合約行為。在這幾年間認識了不同創辦人,也認識了好些天使人,慢慢就會發現不論在創辦人跟投資者認識或交往的時候有多愉快,terms sheet 或合約上條款的訂立就是投資關係最真實的反映,可惜創科界在初創投資教育上佔了主導的都是投資方(可能是事實上社會本來就是資本家主導的關係吧),當然另一方面就是,願意花資源去教育創辦人團隊的也是有心的投資人也是事實。

可是由於創辦人很多時接觸到的 Terms sheet 的訂立都在乙方位置 ,所以如果你是菜鳥創辦人,見到下列的條款/ 合約行為時就要特別留心一下:

1)要求優先股 (prefered / preference share),簡單說說是贖回權在債方之後,普通股之前的股分。

2)加入liquidation preference 條款,簡單講就是公司清盤時投資方可以拿回自己錢走先;

3)要求分錢先; 一般情況下公司賺 100萬,持有 10%的投資者會分到 10萬,但不排除為了降低投資風險投資方可能會要求這類條款以降低風險,需要公司賺到錢後先分錢要求投資方回收本金先,之後才按一般情況賺取股息(dividends)。

4)加入對賭條款:例如做不到某個營業額數或者用戶量就要強迫用某個不合理價錢賣掉股權,甚至失去控制權。

5)加入花錢額度通過審批機制: 如花錢多過某額度,如 HK$50,000 就需要投資方書面同意。

6)更新公司章程 (Memorandom of Association/ Article of Association) / 更改股東或董事投票通過機制,公司章程設定了一間公司怎樣才能作出重大決定,normal / special resolution 要多少票才能通過,例如如果改動MOA ,使得大比數通過由 75%變做 85%,看似很小事,但如果投資方持有剛好是 15%,這樣的話就會變成雖然只是持有15%,但所有重大決定都需要他通過才能通過。

7) in kind 服務/ 現金投資的比例: 很多時策略投資者都會以服務或產品來投資以換取股權,在乎初創公司對於現金及有關服務的需求,如果有關服務對於該新創的重要性沒有想像的高,那麼團隊要留意一下。

站在投資方,想的是保障投資,最小化風險及最大化回報; 所以設立以上部分條款站在所謂公司治理 (corporate governance )上是無可厚非的。不過這樣處理新創公司的方式是不是真的能幫助公司騰飛呢?

當創辦人面對這些條款設計或合約行為時,毋需要大驚小怪,或者感覺太委屈,所有合約都是你情我願雙方同意下才能真正成立的。亦因為缺錢一方多為創辦人團隊,所以條款多是逆來順受,「你話點就點」。

我分享以上數點主要是要讓創辦人搞公司時了解即使做「乙方」也是有權選擇的,也需要認知到,條款是實在的關係,言語及感受相對上是虛無的。無論說得對創辦人團隊有多認同,花錢去投資及條款的細則就是對雙方關係最真實的反映,顯示出投資方真實風險承受能力, 顯示出對團隊在資金運用的信任度,顯示出投資方有多在意自己是「甲方」(雙方真實平等性)及顯示出投資方希望你信任他多一點還是他信任你多一點。又是那一句,你情我願的。