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 While most Angel deals in Canada are for common shares (44%), this structure is often used only for very small investments, or when required to take advantage of government incentives. Most of the larger deals use preferred shares (35% of all deals last year). In certain cases (15%), especially when large capital asset purchases are involved, Angels will use debt or convertible debt (also called convertible debentures). More recently, some Angels, especially in the US, are using discount to next round or SAFE agreements.
Breakout of Deal Structure Congurations
Preferred Shares
Common Shares
44%
Multiple Securities
Other
35%
Convertible Debenture
Loan (Debt)
Source: Schure & Dodaro , 2014 Report on Angel Investing Activity in Canada
11%
5% 1%
4%
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.
61 A Practical Guide to Angel Investing: How to Achieve Good Returns
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