Term sheet conditions can be integrative, distributive or mutual agreement – Some deal terms are more important to one party than the other, so trading these off with the other party can increase the size of the pie and create win-win scenarios. This is discussed in section 4.4.
4.2 Deal Structure Historically, common shares have been relatively prominent in Canadian deals, but their use has fallen to 27% from the 44% of only two years ago cited in the first edition of this guidebook. Common shares are now primarily used for very small investments, or when required to take advantage of government incentives. Most of the larger deals still use preferred shares (35% of all deals again last year), but the use of convertible debt has climbed to 32% from 11%. More recently, some Angels, especially in the US, are using discount to next round or SAFE agreements.
Deal Structure
32% Convertible Debentures
5% Loans (Debt)
2% Other
35% Preferred Shares
27% Common Shares
Source: Mason and Tjahjakartana , 2016 Report on Angel Investing Activity in Canada
Common shares – Founders’ and investors’ shares are treated equally. Investors buy a percentage of the company based on the valuation price with no other special rights or restrictive covenants. Preferred shares – Investors’ shares are different from founders’ common shares. Investors’ class of shares can include terms like anti-dilution, liquidation preferences, voting rights, information rights, board seats, pay-to-play and other provisions (see section 4.4). Loans – This is a debt instrument and not an equity purchase. It can be collateralized against assets of the company such as equipment, intellectual property and source code; or it can be unsecured. It can be subordinate to other creditors, like banks.
How to Achieve Good Returns
69
Powered by FlippingBook