Understanding term sheets for Singapore Startups

Singapore Startups need to understand term sheets when negotiating each new funding round.  This article will set out a few key terms that a startup founder needs to know when reading term sheets from VCs. 

#1: Board Representation for a Singapore Startup

When a startup negotiates a term sheet, one of the most important thing to negotiate is the board composition.  The founder should aim to have a majority of directors on the board from the start as each funding round will see at least one lead investor being appointed to the board of the company.

We should aim for the board to have an odd number of directors so either a 3 man board or a 5 man board is deal.  The founder(s) should then have the right to appoint a majority of the board.  So for a 3 man board, 2 directors will be appointed by the founder and for a 5 man board, 3 directors will be appointed by the founders.

#2: Amount of funding and valuation of the company

If you are a Singapore Startup founder, you need to do up a budget for your product creation/roll out and marketing needs.  Once you have a rough budget for your company, you need to figure out what the pre-money and post-money valuation for your company.  With this understanding of valuation, you would be able to negotiate the amount of dilution that you can give to your new round of investors.

#3: Pre-Emption Rights for Share Transfers

Many Singapore startups stick to the standard clause provisions in the VIMA documents that allow every existing shareholder to tag along to the proposed sale of any selling shareholder.  When startup companies grow larger, they can result in the startup company spending a lot of time having to trade or procure the sale of the preference shares of investors.  So such secondary sales take up a lot of time for the startup.  One way to deal with this issue is to limit the pre-emption rights, tag along and drag along rights to the founder’s share sales (instead of including preference shares).   

In conclusion, this article has highlighted 3 key terms that founders need to note when negotiating startup founding with investors.  A good corporate lawyer at the early stages of startup funding can help you solve many issues 2 to 3 funding rounds down the road.  Do spend time getting good legal advice for your startup issues earlier rather than later.

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