BVCA Guide to Venture Capital Term Sheets

05/01/2004

Author:
British Venture Capital Assocation (BVCA)
London, United Kingdom

Categories:
Best Practices
Venture Capital

Article:

A Guide to Venture Capital Term Sheets

Letter of Introduction

The BVCA (British Venture Capital Association) has around 165 full member firms. This represents the vast majority of UK-based private equity and venture capital firms. Those firms are invested in over 11,000 companies, which between them employ nearly 3 million people. That is equivalent to around 18% of the private sector workforce. Our industry invests in every sector of the economy across all regions of the country. The UK accounts for some 40% of the whole of the European market and on the world stage we are second in size only to the United States.

The venture capital investment process is now a well-established means of raising funds for early stage companies, usually those involved in seeking to exploit new developments in technology or life sciences. A privately funded company might have a number of funding rounds. The first round is often to raise a small amount of money (seed capital), the investors often being friends and family or a specialist early stage venture capital investor. For rounds without a venture capital investor there may or may not be formal investment documents.

There is a big difference in the nature of venture capital investment depending on the stage of investment and it is important to try to match the skills of an investor with those required for a particular business. A first round of investment from venture capitalists is usually called a Series A round, with subsequent rounds progressing through the alphabet. This Guide reviews those terms that may be included in a Term Sheet for a Series A or for subsequent investment rounds, although not every term discussed will be necessarily appropriate for every investment. Sometimes investments are made by way of debt, but the majority of investments are made by way of a purchase of shares. This Guide deals only with the latter.

The aim of this Guide is to provide those who are not familiar with the venture capital investment process with an outline of how investments can be structured, the terms and terminology typically used in a Term Sheet, and the broader investment process. It is hoped that this familiarity will assist those who are trying to raise venture capital by helping them to understand the commercial implications of the terms being offered. This in turn will hopefully expedite the negotiation of Term Sheets and completion of the investment process.

After the section outlining the purpose of a Term Sheet, there is a section describing the investment process with some worked examples of how the share structure alters in certain circumstances. There is next a glossary of terms most often used in venture capital transactions. Where each term is used for the first time in this Guide it is in italics. Finally, there is an example of a Term Sheet for a Series A round. This has been included to show how the various terms described in this Guide might be set out in a Term Sheet.

The selection of terms addressed in this Guide will not be appropriate for every venture capital investment, but should cover most of the terms typically used in the UK today and point out a few of the major differences with the practices in Continental European jurisdictions.

It should be noted that private equity is the generally accepted term used to describe the industry as a whole, encompassing both management buy-out and buy-in activity and venture capital which relates exclusively to the seed through to expansion stages of investment. This Guide is relevant primarily to only the venture capital stages of investment and so this will be the term used.

The BVCA and I would like to thank the Technology Committee working group for the time and effort made in preparing this Guide. This was co-chaired by John Heard (Intel Capital) and Simon Walker (Taylor Wessing) and also included Frédéric Court (Advent Venture Partners), Rob James (Prelude Ventures Limited), Roy Merritt (OrCapital), and Jeppe Zink (Amadeus Capital Partners).

Jo Taylor
Chairman, BVCA Technology Committee
May 2004

A Guide to Venture Capital Term Sheets