Term Sheet (Germany) by Seedsummit

Founders

[■] and [■] (together, the "Founders").

Investors

[[Lead investor]] (the “Lead Investor”) in conjunction with other investors [[Additional investors]] (the “Investors”) mutually agreeable to the Lead Investor and the Company.

Investment

Total investment round of at least EUR [■]² and up to EUR [■] of which 

(a) [■] ("[■Lead Investor]") will invest an amount of at least EUR [■]; and
(b) additional investor(s) mutually agreed between [■Lead Investor] and the Company will invest up to EUR [■]³.

[■if applicable: The investment round shall be closed in [■2] tranches with the first tranche amounting to [■up to] EUR [■] due upon Closing (as defined below) and the second tranche amounting to [■up to] EUR [■] due [■].]

All proceeds from the Series Seed are to be used for general working capital purposes but not for the repayment of existing shareholders' liabilities or other distributions (other than under existing management service agreements with the Founders).

² Note to draft: If valuation and investment amounts are stated in USD, it makes sense to clarify which FX rate shall be decisive; e.g., "For the financing documentation, the EUR/USD FX rate as of the end of the date of this Term Sheet and as shown by REUTERS shall be used."
³ Note to draft: If needed, the Term Sheet can also provide details on a second closing mechanism.

Type of Security

Preferred shares of Series Seed, with a nominal value of EUR 1.00 each (together, the "Series Seed Shares").

Pre-Money Valuation

EUR [■] on a fully diluted basis, including all warrants, convertible securities and the Available Option Pool (as defined below).

[ESOP / VSOP Top-up / ESOP / VSOP]

[■if no ESOP/VSOP exists yet: The Company will implement a [virtual] employee participation program ("[■ESOP/VSOP]") within [■ three (3)] months following completion of the [■first closing of the] Series Seed ("Closing") with terms approved by the shareholders with the approval of the [■Lead Investor]. The pool for the [■ESOP/VSOP] shall correspond to a total of [■]% of the Company's fully diluted capitalization table following Closing ("Available Option Pool").]

[■if there is an existing program: The [■unallocated] pool for the Company's existing [■(virtual)] employee participation program ("[■ESOP/VSOP]") shall, prior to the completion of the [■first closing of the] Series Seed ("Closing"), increase to a total of [■]% of the Company's fully diluted capitalization table following Closing ("Available Option Pool").]

Series Seed Share Price

Price per Series Seed Share of EUR [■] ("Series Seed Share Price").

Capitalization Table 

Following Closing, the Company's non-diluted and fully-diluted capitalization table [■(disregarding any secondary share sales)] will be as shown in Annex A hereto.

[■Further Investment Right [■Lead Investor]]

[■Lead Investor] shall, at its option, have the right to subscribe for additional Series Seed Shares in the aggregate amount of up to EUR [■] applying the Series Seed Share Price. This option can be exercised within a period of [■] months following Closing.⁴

⁴ Note to draft: TBC by founders/company if they want to give a further investment opportunity; amongst others, the dilutive effect in case of an otherwise quickly increasing equity valuation should be considered.

Guarantees

Each shareholder of the Company will give customary title and other fundamental guarantees, and the Company as well as the Founders as individual and not as joint and several debtors (als Einzel- und nicht als Gesamtschuldner) will give operational and financial guarantees that are customary for a financing of this type. Subject to customary limitations and liability caps, a breach of the guarantees can, upon selection by the [■Lead Investor], be compensated by virtue of a compensatory capital increase.

Anticipated Closing Date; Documentation

The Negotiating Parties will use their reasonable best efforts to procure that Closing will occur no later than [■]. First drafts of the main financing documentation shall be prepared by the [■Company's / [■Lead Investor]'s counsel].

Preference Rights

Unless provided otherwise herein, the Series Seed Shares shall carry the same rights as the Common Shares and shall further be entitled to the following preference rights and privileges:

(a) a 1x non-participating⁵ liquidation preference (einfache, anrechenbare Liquidationspräferenz) in case of a typical liquidity event (each an "Exit"), including (i) the liquidation, dissolution or winding up of the Company, (ii) the sale and/or (exclusive) out-licensing of more than 50% of the Company's assets and (iii) the sale or contribution (including any merger or consolidation) of more than 50% of all of the Company's shares in a single transaction or a series of related transactions (also in connection with the exercise of any rights of first refusal, drag-along and tag-along rights) ("Share Sale Exit"); and
(b) a [■full-ratchet / [■broad-based / narrow-based] weighted average] anti-dilution protection in case of a down round,⁶

each in accordance with customary provisions and exemptions in line with prevailing market standards.

⁵ Note to draft: This is―at least in early rounds―currently by far the most common form of a liquidation preference. Only in exceptional circumstances and later rounds do we currently see participating liquidation preferences and/or less than one-time liquidation preferences. Occasionally, we see computational interest on the liquidation preference amount (e.g., 8% p.a.) or a minimum IRR hurdle (akin to the preferred dividend concept in the United States).
⁶ Note to draft: In the current market environment, most anti-dilution protection provisions still follow the broad-based weighted average formula, while the more investor-friendly, narrow-based and, in particular, the full-ratchet provisions are less frequent (though in the recent quarters, we saw a rise particularly in narrow-based weighted average anti-dilution clauses). 

Advisory Board

Upon Closing, the Company's advisory board ("Advisory Board") shall [■comprise up to / be increased to] [■] voting members, which shall be appointed and revoked as follows:

(a) one member by [■];
(b) one member by [■]; and
(c) one member by [■Lead Investor] ("[■Lead Investor] Director").

In addition, [■] and [■] shall each have the right to appoint one nonvoting observer to the Advisory Board. 

The actions and measures set forth in Annex B shall require prior consent of the Advisory Board [■including, with respect to a subset of such actions and measures yet to be mutually agreed, the approval of the [■Lead Investor] Director].

Protective Provisions

The actions and measures set forth in Annex C hereto require the prior approval by the Company's shareholders meeting, including the approval by more than [■]% of the Series Seed Shares ("Preferred Majority"). 

Information Rights

Holders of Preferred Shares shall have customary information and reporting rights. [■Lead Investor] shall be entitled to a customary management rights letter reasonably acceptable to the Company].⁷

⁷ Note to draft: U.S. investors (and other investors) may request a so-called management rights letter to be able to rely upon the venture capital operating company exemption to avoid its assets from being subject to the Employee Retirement Income Security Act of 1974 (ERISA) in the United States. Such letters are generally not critical for the start-up.

Founder Vesting

[■]% of the Common Shares (directly or indirectly) held by each Founder (together, the "Vesting Shares") shall be subject to a [■four-year] linear monthly vesting (with a 12-month cliff) and a call-option in case of a leaver event. The Vesting Period shall commence upon Closing. [■If an Exit occurs during the Vesting Period, all unvested Vesting Shares shall vest immediately prior to the occurrence of the Exit [■(accelerated vesting) being further subject to a customary double-trigger vesting mechanism.] The transaction documentation will foresee customary definitions for good leaver and bad leaver events. In case of any leaver event, the respective Founder has to transfer to the Company, or a third party nominated by the [■Advisory Board / the Preferred Majority] all unvested Vesting Shares against nominal consideration and, in case of a bad leaver event only, also all vested Vesting Shares against payment of [■the lower of (i) their book value or (ii) their market value].

Share Transfers

General Provisions
Any share transfer shall require the approval of the shareholders' meeting including the Preferred Majority (customary exemptions shall apply).

Founder Lockup
No Founder shall directly or indirectly sell any Common Shares prior to [■] without approval by the Preferred Majority, such approval to be granted or denied in the sole discretion of the Preferred Majority. The same shall apply to a possible issuance and/or transfer of shares in the respective Founder's holding entities. Customary exemptions apply for transfers in connection with estate planning [■and limited secondary share sales in future financing rounds].

Right of First Refusal
All shareholders shall have a pro rata right of first refusal with respect to any shares in the Company proposed to be transferred by any shareholder (customary exemptions to apply for transfers in connection with estate planning, group reorganizations and similar matters (together, the "Permitted Transfers")).

Tag-Along Right
Upon any transfer of shares in the Company to a third party other than in case of a Permitted Transfer, all shareholders shall have a pro rata tag-along right at their discretion [■, provided that Founders may exercise their tag-along right only with respect to vested Vesting Shares]. Upon any transfer of shares in the Company to a third party resulting in a change of control of the Company [■or in case of a transfer to a competitor of the Company], all shareholders shall have a tag-along right for all of their shares in the Company.

Drag-Along Right
In case of a Share Sale Exit approved by the Advisory Board and the Preferred Majority, all shareholders shall sell and transfer their shares in the Company in the course of such Exit at terms and conditions accepted by the drag-along majority.

Put-Option
Each holder of [■Series Seed Shares/Preferred Shares] shall be granted by the Founders or their respective holding entities the right to transfer at any time given all shares held by the respective holder of [■Series Seed Shares / Preferred Shares] for a total amount of EUR 1.00 to the Founders or their holding entities by way of a put option.]

Conditions to Signing

The execution of the decisive transaction documentation shall be subject to the following conditions precedent:

(a) Completion of customary AML and KYC checks; 
(b) [■Completion of satisfactory due-diligence review of the Company by [■Lead Investor], including, amongst others, technical, legal and IP due diligence;]
(c) Approval of the [■Lead Investor]'s investment committee; 
(d) Agreement on mutually acceptable transaction documentation; [■and] 
(e) [■].

Confidentiality 

The terms and conditions described in this Term Sheet, including its existence, constitute confidential information and shall not be disclosed by any of the Negotiating Parties to any third party unless required by law, provided that the Company shall be free to share this Term Sheet with potential co-investors on a confidential basis.

Exclusivity

From the date of execution of this Term Sheet until the earlier of (i) [■30] days following the execution of this Term Sheet or (ii) the mutual termination of the negotiations between the Negotiating Parties (to be confirmed by each Negotiating Party at least via email), the Company shall not, and the Company shall cause its officers, directors, employees, advisers, representatives and other agents not to, solicit, enter into or continue any discussions or negotiations or make any agreement with any third party concerning a possible equity investment or loan or other type of funding, directly or indirectly, with regard to the Company.

Costs; Expenses

Each party shall bear its own expenses with respect to the transactions contemplated in this Term Sheet, provided that subject to Closing, the Company shall reimburse [■Lead Investor] for costs of its outside counsel up to a total amount of EUR [■] plus VAT.

Finder Fees

Investor shall have no obligation to pay for any finder's fees in connection with the transactions set out in this Term Sheet.

Governing Law and Venue

This Term Sheet shall be governed, construed and interpreted in accordance with the laws of Germany, without giving effect to principles of conflicts of law. To the extent permissible under applicable law, the courts of [■] shall have exclusive jurisdiction over any disputes arising out of or in connection with this Term Sheet.

Non-binding Nature

The Negotiating Parties acknowledge that this Term Sheet is not a legally binding agreement, except for the clauses entitled "Confidentiality," "Exclusivity," "Costs; Expenses," "Finder Fees," "Governing Law and Venue," "Nonbinding Nature," "Severability" and "Execution."

Severability

If individual binding sections of this Term Sheet are wholly or in part invalid, the other binding sections shall retain their validity. The ineffective sections shall be deemed replaced by the provisions the Parties would probably have agreed upon had they been aware of the invalidity of the section concerned.

Execution

This Term Sheet can be executed in text form in the meaning of sec. 126b German Civil Code (BGB), including DocuSign or by an exchange of signed signature page(s), transmitted by any means of telecommunication.

[■Lead investor]

[■Company]

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Place, Date

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Place, Date

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Name: [■]
Role: [■]

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Name: [■]
Role: Managing Director

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Name: [■]
Role: Managing Director

[■Founder 1]

[■Founder 2]

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Place, Date

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Place, Date

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