The issuance of preferred shares for seed financing requires legal assistance not only in establishing the necessary legal documents, but also in ensuring compliance with the Federal Securities Act of 1933 and all government securities laws (Blue Sky). Investors will be likely to demand that specific provisions be included in the founding act, such as: blank cheques, certain veto rights and the right to the first offer/refusal (for future investments). All amendments should be voted on at the same time. The left column of the table lists the (some) provisions that have been agreed over seed cycles that are important to us, either because they allow us to put more money in or sell them when the founders/key operators sell. On the other hand, legal clauses generally only become relevant when things are not going well — they protect investors from the flip side of the law. The middle column is – of course – the middle way, where we do not see any particular bias in both directions. A terminology sheet is a largely non-binding sheet that defines what the parties want to commit to. The investor makes the appointment sheet available at the beginning of the potential investment. This agreement contains provisions such as the proposed purchase price, due diligence procedure, terms of agreement, confidentiality rights, exclusivity and compensation rights.
Although most terms are non-binding, exclusivity and confidentiality clauses are generally binding. The concept sheet formalizes the investor`s offer and provides an additional level of protection in the event of a dispute. Sometimes you may find little difference between an angel or a Term Sheet investor seed and a Venture Capital Term Sheet. Both the investment structures required by engeln and the founding alliances are less limited by standardized institutional practices. The third frequently used seed financing technique is to issue a cycle of preferred shares. Preferred shares can be attractive to investors because they give investors more rights within the company than common shares. These rights include: Common shares are residual value shares of the same class issued to the founders of a start-up. Convertible preferred shares are shares that have a liquidation preference over common shares (with Engel transactions, usually the initial price of the investment) and can be converted into common shares of residual value. Series A fundraising is usually in the form of a convertible stick, which gives the investor certain economic and control rights, including the right to exchange preferred shares for common shares.