\u00a0<\/span><\/a><\/p>\nThe Angel Association of New Zealand (AANZ) recently updated its standard term sheet for priced equity investment rounds, a pivotal document in the early-stage ecosystem. This session, led by Murray from Evan Legal, provided a comprehensive overview of these changes, their rationale, and their implications for investors and founders. This rewritten summary aims to capture the key insights, jargon, and real-world context shared during the discussion, offering a detailed yet engaging perspective on the current state of angel investing in New Zealand.<\/span>\u00a0<\/span><\/p>\nThe Foundational Role of Term Sheets:<\/span><\/b>\u00a0<\/span><\/p>\nThe session began by establishing the fundamental purpose of a term sheet. <\/span>A term sheet serves as a faster and more efficient starting point for investment negotiations compared to immediately drafting lengthy legal documents like subscription agreements, shareholders agreements, and constitutions<\/span><\/b>. Consolidating key investment terms onto a few pages, typically written in <\/span>plain English<\/span><\/b>, allows for quicker alignment on crucial aspects before significant legal costs are incurred.<\/span>\u00a0<\/span><\/p>\nMurray highlighted two primary contexts for utilizing term sheets:<\/span>\u00a0<\/span><\/p>\n\n- With a Lead Investor:<\/span><\/b> In this common scenario, particularly in New Zealand, where the <\/span>ANZ term sheet is frequently used as a starting point by 80-85% of investors<\/span><\/b>, the lead investor often provides the initial draft. The company then reviews and responds, initiating the negotiation process.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Without a Lead Investor (Party Rounds):<\/span><\/b> Increasingly prevalent is the situation where multiple investors participate without a designated lead. In these \u201c<\/span>party rounds<\/span><\/b>\u201c, a term sheet can be instrumental in getting various parties on the same page, outlining the proposed terms to garner commitments and facilitate the investment round.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
Key Updates and Their Underlying Drivers:<\/span><\/b>\u00a0<\/span><\/p>\nThe core of the session focused on the updates to the ANZ term sheet, driven by <\/span>evolving market norms, efficiency gains learned over time, and recent changes in the law<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n\n- Addressing the Rise of Syndication and Co-investment:<\/span><\/b><\/li>\n<\/ol>\n
A significant shift in the angel and venture capital landscape since the 2019 version of the term sheet is the <\/span>significant rise in syndication and co-investment<\/span><\/b>. Single-investor transactions, once relatively common, are now rare. This trend necessitates re-evaluating control rights traditionally granted to a singular \u201cthe investor\u201d.<\/span>\u00a0<\/span><\/p>\n\n- Introduction of \u201cInvestor Majority\u201d:<\/span><\/b> The updated term sheet introduces the concept of an \u201c<\/span>investor majority<\/span><\/b>\u201d for certain control rights, moving away from the need for approval from just one investor.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Default Definition of Majority:<\/span><\/b> The default for this majority is based on the <\/span>number of shares held in the current investment round<\/span><\/b>, excluding shares from previous rounds.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Optionality for Broader Majority Definitions:<\/span><\/b> The term sheet offers flexibility to define \u201cinvestor majority\u201d more broadly, potentially including shares from previous or future rounds, depending on the specific context and negotiation. This is particularly useful for longevity term sheets across multiple funding rounds.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Accounting for Lead Investors in Syndicated Rounds:<\/span><\/b> The updated term sheet acknowledges the continued importance of <\/span>lead investors<\/span><\/b> who may not hold most shares but still play a crucial role in due diligence and setting terms. It allows for requiring the <\/span>named lead investor\u2019s approval as part of the investor majority threshold<\/span><\/b>. Murray cited <\/span>Motion Capital<\/span><\/b> as a prime example of a lead investor who often doesn\u2019t hold a majority stake.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Context for Different Majority Definitions:<\/span><\/b> Murray clarified that using a majority based solely on the new investment round is often relevant for distinct new rounds, such as a Series A following a seed round led by an angel club. This facilitates a natural \u201c<\/span>handing of the baton<\/span><\/b>\u201d regarding investor director appointments and control as new, more prominent investors come on board.<\/span><\/li>\n<\/ul>\n
\n- Accommodating the Influx of Fund Managers:<\/span><\/b><\/li>\n<\/ol>\n
The market has also witnessed an <\/span>influx of fund managers investing in early-stage companies<\/span><\/b> alongside traditional angel clubs. Even angel clubs themselves are increasingly running their own funds. This shift brings specific requirements standard to fund structures:<\/span>\u00a0<\/span><\/p>\n\n- Assignability of Pre-emptive Rights:<\/span><\/b> Fund managers often seek the <\/span>ability to assign their pre-emptive rights to related funds<\/span><\/b> within their management structure (e.g., from fund 4 to fund 6). This is now explicitly captured in the updated term sheet.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Enhanced Information Rights:<\/span><\/b> Funds typically have more extensive <\/span>information rights requirements<\/span><\/b> due to their reporting obligations to their <\/span>Limited Partners (LPs)<\/span><\/b>. This can include <\/span>ESG reporting requirements<\/span><\/b> that they need to flow down to their portfolio companies. The updated term sheet now consists of these more common requests for information, improving efficiency.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- The Growing Prevalence of Sunset Clauses on Investor Rights:<\/span><\/b><\/li>\n<\/ol>\n
A notable trend, particularly in New Zealand, is the increasing negotiation of \u201c<\/span>sunset clauses<\/span><\/b>\u201d on certain investor rights. These clauses stipulate that specific rights are not evergreen but expire under certain conditions. While less common internationally, sunsets can be a valuable tool for compromise during negotiations. Common areas for sunset clauses include:<\/span>\u00a0<\/span><\/p>\n\n- Anti-dilution Rights:<\/span><\/b> These rights protect investors from a \u201c<\/span>down round<\/span><\/b>\u201d (a subsequent funding round at a lower valuation) by providing them with extra shares to adjust as if they had invested at a lower price. Sunsets on anti-dilution rights can be <\/span>time-based<\/span><\/b> (e.g., expiring after two years) or <\/span>triggered by the size or valuation of a future funding round<\/span><\/b> (e.g., a subsequent round at a higher valuation and of a significant size). The rationale behind valuation-based sunsets is that a successful up-round de-risks the earlier investment, making the continued need for anti-dilution less critical.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Investor Director Appointment Rights and Approval Rights:<\/span><\/b> Sunsets can also be applied to the right to appoint an investor director or the approval rights held by such a director. A common trigger for sunsetting director rights is the investor\u2019s <\/span>ownership percentage falling below a certain threshold<\/span><\/b>, often around 10% of the cap table. This ensures that investors remain sufficiently relevant to the company to justify board representation.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Elevated Thresholds and Special Resolutions:<\/span><\/b> Sunsets can also be negotiated on requirements for elevated shareholder approval for specific actions.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
Murray noted a growing maturity in the New Zealand market regarding the understanding that businesses need to raise capital in rounds. Some rights should naturally transition or expire if investors don\u2019t continue to participate and maintain their relevance.<\/span>\u00a0<\/span><\/p>\n\n- Clarifying Liquidation Preference Rights:<\/span><\/b><\/li>\n<\/ol>\n
The updated term sheet provides more detailed guidance on \u201c<\/span>liquidation preference rights<\/span><\/b>\u201d to address increasing misunderstandings, particularly from investors outside traditional US\/UK venture capital ecosystems.<\/span>\u00a0<\/span><\/p>\n\n- Non-Participating vs. Participating Preference:<\/span><\/b> The footnote guidance now clearly explains the difference between <\/span>non-participating liquidation preference<\/span><\/b>, where investors receive either their initial investment back or their pro-rata share as ordinary shareholders (whichever is greater), and <\/span>participating liquidation preference<\/span><\/b>, where investors receive their initial investment back <\/span>plus<\/span><\/i> their pro-rata share of the remaining proceeds. An example illustrates that in a sale for less than the post-money valuation, non-participating preference holders get their initial capital back first, while participating preference holders also share in the remaining proceeds, potentially leaving less for ordinary shareholders.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Normalization Towards Preference Shares:<\/span><\/b> There\u2019s a strong trend in New Zealand towards using liquidation preference rights (i.e., issuing preference shares) in seed rounds, now closer to 90% of deals, aligning with US practice. Previously, ordinary shares were more commonly used.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- The Prevalence of \u201cOne Time\u201d Preference:<\/span><\/b> The most common liquidation preference is \u201c<\/span>one time non-participating<\/span><\/b>\u201c. Multiples like \u201c<\/span>two times<\/span><\/b>\u201d or \u201c<\/span>1.5 times<\/span><\/b>\u201d are less frequent and typically seen in later-stage, more mature companies where investors have a higher return expectation or in <\/span>distressed company investment scenarios<\/span><\/b> where investors take on significant risk.<\/span>\u00a0<\/span><\/li>\n<\/ul>\n
\n- Enhancing Transparency Around ESOP Pools:<\/span><\/b><\/li>\n<\/ol>\n
The updated term sheet encourages more upfront disclosure and better quality conversations regarding <\/span>Employee Share Option Plans (ESOPs)<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n