Company

[company]

Founders

[founder 1], [founder 2], & [founder 3]

Investors

[[lead investor]] (the “Lead Investor”) in conjunction with other investors [[additional investors]] (the “Investors”) mutually agreeable to the Lead Investor and the Company. [The investors listed on the signature page to this Summary of Terms (the "Investors") in conjunction with other investors agreeable to the Investors.]²

² Typically a funding round will have a lead investor and may have more than one. If none is proposed use alternative language.

Structure of Financing

The financing will be up to an aggregate of £[___] at a fully diluted pre-money valuation of £[_ _ _]³, which will include an unallocated employee share option pool (“ESOP”) of []%⁴. [The Lead Investor(s) will invest up to £[_ _ _ _ _]].⁵ The capitalisation of the Company following completion of the financing (“Closing”) is set out in Appendix A.

³ To revise if currency of the round is in USD or Euro.
⁴ Subject to commercial agreement, typical unallocated ESOPs range from 5-15%, with most landing around 10%.
⁵ Include if relevant.

Conditions to Close

(i) completion of confirmatory due diligence and anti-money laundering checks (ii) all key employees having entered into service agreements containing IP assignment provisions and (iii) receipt of all necessary consents.

Estimated Closing Date

[closing date].

Type of Security

Newly issued series seed convertible preferred shares in the capital of the Company (“Seed Shares”), which shall rank senior to all other issued shares in the capital of the Company in all respects.

Liquidation Preference

Upon a liquidation, dissolution, winding up, acquisition, sale, exclusive license or other disposal of substantially all of the assets or a majority of the shares in the capital of the Company (a “Liquidation Event”) the holders of the Seed Shares shall receive the higher of: (a) one times the subscription price paid for their Seed Shares; or (b) the amount they would receive if all shareholders received their pro rata share of such assets or proceeds.⁶

⁶ This is a 1X non-participating liquidation preference and is the most common in seed rounds and later rounds as well. This means that an investor gets the greater of the subscription price paid for their shares or their pro-rata share of proceeds on an as-converted basis.

[Anti-Dilution Provisions]⁷

[In the event that the Company issues additional shares at a subscription price which is less than the subscription price paid by the Investors for the Seed Shares, then the holders of Seed Shares shall benefit from anti-dilution protection (based on a broad-based weighted average formula) subject to customary exceptions.]

⁷ Anti-dilution protection is often not provided in respect of seed preferred shares, although some investors will ask for this as part of their standard terms. This means that if the Company sells shares at a price lower than the price of the Seed Shares (a down round), the holders of the Seed Shares will receive an additional number of Seed Shares for free to adjust the subscription price at which they originally invested.

Important Decisions⁸

Option 1: [Certain important actions of the Company shall require the consent of the holders of a majority of the Seed Shares [(to include the Lead Investor)]⁹ (a “Seed Majority”) , to include amongst others, actions to: (i) alter the rights, preferences or privileges of the Seed Shares (ii) allot any new shares in the capital of the Company beyond those anticipated by this investment (iii) create any new class or series of shares in the capital of the Company having rights, preferences or privileges senior to or on a parity with the Seed Shares (iv) increase the number of shares in the capital of the Company reserved for issuance to employees and consultants, whether under the ESOP or otherwise (v) redeem or the selling of any shares in the capital of the Company (vi) pay or declare dividends or distributions to shareholders (vii) change the number of board members (viii) take any action which results in a Liquidation Event (ix) amend the constitutional documents of the Company (x) effect any material change to the nature of the business or the agreed business plan (xi) subscribe or otherwise acquire, or dispose of any shares in the capital of any other company.]

[Certain important actions of the Company shall require the consent of the director appointed by the Seed Majority (the “Seed Preferred Director”), to include: [tbc].]

Option 2: [The consent of the holders of a majority of the Seed Shares held by the Investors (a “Seed Majority”) [and the consent of the director appointed by the Seed Majority (the "Seed Preferred Director”), as the case may be,] shall be required for the important decisions, substantially in the form listed in Appendix [B]].

⁸ In relation to the Important Decisions (referred to also as "Protective Provisions"), there are two different approaches presented here. Option 1 would set out a short but not inclusive list of certain decisions requiring investor consent. If a Seed Preferred Director is to be appointed by the holders of the Seed Shares, then there may also be included a short non-inclusive list of actions requiring consent of the Seed Preferred Director. Option 2 would require the exact list of decisions requiring consent of the Seed Majority and the Seed Preferred Director, if relevant to be set out in the Appendix to the Summary of Terms. In the event investors are given the right to appoint a Seed Preferred Director(s) and no such director(s) is/are appointed, the right to approve the relevant decisions, if included, may default to the Seed Majority. A broad and representative list of decisions requiring consent of holders of Seed Preferred Shares and/or a Seed Preferred Director can be found in the BVCA model subscription and shareholders agreement for early-stage investments. See https://www.bvca.co.uk/Policy/Industry-guidance-standardised-documents/Model-documents-for-early-stage-investments

⁹ If the Lead Investor(s) do/does not hold a majority of the Seed Shares, they may ask to be included specifically in the definition of Seed Majority.

Conversion

Each holder of Seed Shares shall have the right to convert its shares at any time into ordinary shares in the capital of the Company (“Ordinary Shares”) at an initial conversion rate of 1, subject to proportional adjustment for share splits, dividends or recapitalisations. The Seed Shares shall automatically convert into Ordinary Shares if (a) a Seed Majority consents to such conversion or (b) upon the closing of a firmly underwritten public offering of shares in the capital of the Company [which results in gross proceeds to the Company of at least £[_ _ _ _]].¹⁰

¹⁰ To consider including a threshold of gross proceeds before automatic conversion applies. This is standard in later rounds but often not included in seed rounds.

Pre-emption Rights on New Share Issues¹¹

[investors] of the Company on a fully diluted basis following the Closing ("Major Investors") will have a pro rata right, but not an obligation, based on their ownership of issued share capital, to participate in subsequent financings of the Company (subject to customary exceptions). [Any shares not subscribed for may be reallocated among the other [shareholders] [investors] [major investors]. An Investor may assign this right to another member of their fund group]¹².

¹¹ All shareholders are sometimes given pro rata rights on new issues of shares in the first UK seed round. To consider this right only being granted to Investors or a "Major Investor" (which is the US style).

¹² This permits participating shareholders to subscribe for more than their pro rata share of new issues (referred to as "excess rights") and is fairly standard in the UK, although not in the US.

Right of First Refusal on Share Transfers

[all shareholders] [[major] investors] will have a pro rata right, but not an obligation, based on their ownership of issued capital, to participate in any share transfers of the Company (subject to customary permitted transfers, including transfers by Investors to affiliated funds).

Co-Sale Rights

The [major] Investors shall have a pro rata right, but not an obligation, based on their ownership of issued shares, to participate on identical terms in transfers of [any shares in the capital of the company] [ordinary shares] [founder shares]¹³ (subject to customary exceptions).

¹³ Subject to commercial agreement as to whether there is a right of first refusal and/or co-sale right in respect of all shares in issue or just Ordinary Shares or shares held by Founders and key employees. It can also be provided that a right of first refusal applies in respect of transfers of all shares but the co-sale right only kicks in on sales of Ordinary Shares or shares held by Founders and key employees.

Tag-Along

Any proposed transfer of shares in the capital of the Company (subject to customary exceptions) that would result in a change of control of the Company will require the purchaser to offer to purchase all of the shares in the capital of the Company on the same terms.

Drag Along

In the event that a Seed Majority and the [holders of a majority of the Ordinary Shares [held by the Founders who are employees]] wish to accept an offer to sell all of their shares in the capital of the Company to a third party, then subject to the approval of the Board, all other shareholders shall be required to sell their shares in the capital of the Company or to consent to the transaction on the same terms and conditions, subject to the Liquidation Preference of the Seed Shares.

Restrictive Covenants and Founders Undertakings

Each Founder will provide non-competition and non-solicitation covenants, and enter into an employment agreement in a form reasonably acceptable to the [Lead Investor] [Seed Majority], and shall agree to devote their entire business time and attention to the Company and to not undertake additional activities without the consent of the [Lead Investor] [Seed Majority].

Founder Shares

Shares held by the Founders (“Founder Shares”), will be subject to reverse vesting provisions over [four] years as follows: [vesting period] (“the Vesting Period”).]¹⁴

During the Vesting Period, any unvested Founder Shares shall be automatically converted into deferred shares in the capital of the Company (“Deferred Shares”)¹⁵, provided that if a Founder is a Bad Leaver all Founder Shares held by that Founder shall convert into Deferred Shares.

A Founder shall be deemed a "Bad Leaver" if, during the Vesting Period, (i) their engagement is terminated by the Company for gross misconduct or (ii) they are [convicted of][charged with] a crime [involving a custodial sentence][; or (iii) [they resign]].¹⁶

Option 1 [There shall be double-trigger acceleration of vesting if a Founder leaves [within 12 months] after a change of control of the Company, such that any unvested Founder Shares shall become vested.]

Option 2 [There shall be acceleration of vesting of any unvested Founder Shares upon any change of control such that any unvested Founder Shares shall become vested immediately prior to the legal completion of a change of control.]¹⁷

¹⁴ Subject to commercial agreement, any number of vesting periods can be applied to shares held by Founders, depending on the length of time they have held the shares/been with the company. It is not uncommon to see some portion of a Founder’s shares fully vested at Closing but this is less typical with fairly new companies that do not have significant traction. A one-year cliff as to 25% of the shares that are vesting is fairly standard. And it is not uncommon to see vesting over a four year period.

¹⁵ The preferred mechanism for dealing with recapturing shares held by a leaving Founder in the UK is for them to convert to deferred shares, which are worthless shares.

¹⁶ Consider whether voluntary resignation should be a Bad Leaver trigger where there is a cliff.

¹⁷ Option 1 is double-trigger acceleration of vesting on a change of control (US investors typically require this), meaning that if a Founder is either not offered employment with the acquirer or is offered employment but terminated (sometimes stated to be within 12 months of the acquisition) other than as a Bad Leaver, all unvested shares held by the Founder at the time of the acquisition become vested. Option 2 is single trigger acceleration and provides for immediate vesting of all unvested shares upon the closing of the acquisition.

Board of Directors¹⁸

[The board of directors of the Company (the “Board”) shall consist of a maximum of three members: the holders of a majority of the Ordinary Shares [held by the Founders who are employees] may appoint two directors and the holders of a majority of Seed Shares may appoint one director (being the Seed Preferred Director).]

The Lead Investor may appoint a non-voting observer to attend meetings of the Board.¹⁹

¹⁸ Subject to commercial agreement, board size and composition can vary and seed investors don't always ask for a Board seat at seed stage, or they may ask for one but not officially appoint a representative.

¹⁹ A Lead Investor often asks for the right to designate a non-voting observer to attend board meetings (irrespective of whether they are taking a board seat), and this right can also be granted to all Major Investors if that concept applies.

Information and Management Rights

The [Investors] [Lead Investor(s)] [Major Investors²⁰] shall receive standard information rights, to include annual accounts, [monthly/quarterly] reporting and monthly financial information [and, if required, an Investor shall receive a management rights letter to satisfy its venture capital operating company requirements.]²¹

²⁰ Information rights can be granted to all Investors, the Lead Investor(s) or to Major Investors only (as is more common in the US).

²¹ Some venture capital funds require a "Management Rights Letter" in order to comply with certain US legal requirements to which they may be subject.

Documentation and Warranties

Definitive investment documents shall be drafted by counsel to the Lead Investor (based on the British Venture Capital Association (BVCA)) form documents and shall include customary covenants and warranties of the Company (which shall be liable up to a maximum of the investment amount) reflecting the provisions set forth herein and other provisions typical to venture capital transactions.

Expenses²²

Option 1 [The Company shall pay the Lead Investor’s fees and expenses in the transaction at Closing, anticipated not to exceed £[_ _ _ _ _ _]].

Option 2 [Each party shall pay their own legal and other fees and expenses in the transaction.]

²² It is fairly standard for the Company to pay the legal fees and other expenses of the Lead Investor or of one counsel designated by a group of Investors. However Option 2 can be negotiated.

Exclusivity²³

In consideration of the Lead Investor committing time and expense to put in place this financing, the Company and Founders agree not to discuss, negotiate or accept any proposals regarding the sale or other disposition of debt or equity securities other than pursuant to this Summary of Terms, or a sale of material assets of the Company for [30] days from the date of the Company’s signature below.

²³ This Exclusivity provision is standard and requires the Company to stop entertaining offers from other investors (unless it's part of this Summary of Terms) for a set period of time, which is typically 30 to 45 days. This provision protects the investor from being "gazumped" while they are engaged in due diligence and negotiating the deal documents.

Confidentiality

The Company and Founders agree to treat this Summary of Terms confidentially and will not distribute or disclose its existence or contents outside the Company without the consent of the Lead Investor, except as required to its shareholders and professional advisors.

Non-binding Effect

This Summary of Terms is not intended to be legally binding, with the exception of this paragraph and the paragraphs entitled Expenses, Exclusivity and Confidentiality, which are binding upon the parties hereto and shall be governed and construed in accordance with the laws of England and Wales.

[lead investor]

[company]

By: __________________________

[founder 1]

Print Name: __________________________

By: __________________________

Title: __________________________

Print Name: __________________________

Date: __________________________

Title: __________________________

[additional investor]

Date: __________________________

By: __________________________

[founder 2]

Print Name: __________________________

By: __________________________

Title: __________________________

Print Name: __________________________

Date: __________________________

Date: __________________________

[founder 3]

By: __________________________

Print Name: __________________________

Date: __________________________

Shareholder

Class of Shares

No. of Shares.

Ownership (%)

[founder 1]

[Ordinary Shares]

•

•%

[founder 2]

[Ordinary Shares]

•

•%

[founder 3]

[Ordinary Shares]

•

•%

[lead investor]

[Seed Shares]

•

•%

[additional investor]

[Seed Shares]

•

•%

Option Pool

[Ordinary Shares]

•

•%

Total

•

100%