2.1. Exclusivity period

Every term sheet should include an exclusivity period as a binding term. This protects the interests of the investors as it ensures that the founders do not “shop” for competing offers once they have signed the term sheet. The exclusivity period should be long enough to enable the investors to complete their due diligence on the company and, thereafter, prepare and present a firm offer to the founders. During that period, it is common across all model agreements to have basic restrictions on the company’s ability to (a) solicit other investors and (b) provide information to or respond to requests from third parties relating to any proposed investment in the company.

The VIMA, BVCA and NVCA term sheets all have similar restrictions on the company and the founders against solicitation of offers and provision of information regarding investments, as well as notification requirements to the investors of any unsolicited offers.

The exclusivity obligations set out in the AVCAL term sheet are the most limited in scope and therefore provide the least protection to investors. In particular, the term sheet does not provide for obligations on the company or the founders to notify the investors of any unsolicited offers. Further, as the AVCAL term sheet does not provide for the founders to execute the term sheet, the term sheet does not impose exclusivity obligations on the founders personally. It only provides for a general obligation on the company not to solicit or respond to enquiries relating to other investments or shop for competing offers.

The exclusivity provisions proposed in the BVCA and NVCA term sheets offer a relatively more investor-friendly approach compared to the VIMA and AVCAL term sheets. First, the BVCA and NVCA term sheets further extend these obligations to not only cover offers in relation to the company’s shares, but also in relation to any material assets of the company.

Second, the BVCA and NVCA term sheets propose break fees to be paid to the investors should there be a breach of the exclusivity provisions by the company and/or the founders[6]. As noted by the NVCA term sheet, the imposition of such break fees for a breach of exclusivity obligations may not be required in an early stage financing round where there is low probability that the company may enter into other competing transactions prior to closing.

2.2. Confidentiality

Similarly, parties should include a binding confidentiality term from the initial negotiation stages, either in the term sheet or in a separate nondisclosure agreement[7]. Both investors and founders may value confidentiality, as the investors may not wish to disclose their interest publicly in the initial stages and the company/founders may not wish to disclose a potential change of shareholding structure early on to its suppliers and customers.

Both the VIMA and BVCA term sheets provide for mutual confidentiality obligations subject to consent from the nondisclosing party. Based on our experience, for deals in Southeast Asia, it is more common for confidentiality obligations to be mutual.

Conversely, the AVCAL and NVCA term sheets give the investors greater freedom to disclose confidential information. The AVCAL term sheet proposes that the confidentiality obligations apply only to the company, while the NVCA term sheet achieves effectively the same aim by requiring only the investors’ consent for disclosure of confidential information (notwithstanding that all parties are bound by confidentiality obligations).

3.1. Representations and warranties and limitations on liability

Typically, one of the most heavily negotiated sections in a subscription agreement will be the representations and warranties[8] given by the company and/or the founders. Representations and warranties are given to disclose material information and serve as a mechanism to allocate risk between the parties.

All the model documents provide for customary representations and warranties to be given by the company. These include representations and warranties as to the accuracy of the company’s share capital, capacity and authority, disclosed information, financial statements and management accounts, tax liability, litigation, assets, intellectual property rights, compliance with law and material contracts.

The NVCA documents also provide for industry-specific warranties for life sciences and technology companies. They further provide for the option of the founders giving certain warranties. In the United States, founder warranties are only given in a minority of deals. They are more likely to appear if founders are receiving liquidity from the transaction, if there is heightened concern over intellectual property or in a very early stage financing round where the founders bear greater risk, rather than in a later round.

In Singapore, the United Kingdom and Australia, it is far more common for both the founders and the company to give warranties, although such warranties may either be given on a several and not joint[9] or a joint and several basis[10]. Having the warranties given on a joint and several basis is most preferable for the investors as this would require the founders to stand behind the company’s warranties and accordingly provides the investors with an alternative recourse other than against the company in which they have invested.

It is common for the founders and the company to negotiate some form of limitation on their liability for any breach of warranty claim brought by the investors[11]. The VIMA, BVCA and AVCAL documents propose setting a maximum amount, which caps the warrantor’s liability (typically pegged to the aggregate subscription amount in the case of a warranting subscriber). Conversely, the NVCA documents do not limit the maximum liability for a warranty claim, and in that way are more pro-investor than the VIMA, BVCA and ACVAL documents.

Another way to limit liability is to allow for breach of warranty claims to only be brought within a certain period, as proposed by the ACVAL and BVCA documents. The NVCA documents adopt a similar approach by recommending a time limit of the earlier of two years from the date of signing or an initial public offering (IPO) for a breach of founder warranties, but contemplates an unlimited liability period for breach of company warranties. Similarly, there are provisions stipulating different liability periods for fundamental and nonfundamental warranties in the VIMA documents.

3.2. Tranched investing

Tranched investing involves the investors subscribing for shares in stages, which are conditional on the company reaching certain milestone events. These events can either be reaching financial targets, acquiring certain regulatory approvals or making technological advances to the company’s product (as is common in the life sciences and technology industries).

Tranched investing is a pro-investor provision as it allows the investors to spread their risk over time and gives them the flexibility not to invest if the company does not meet its milestone events. Further, investors get all their shares in a company at a lower pre-money valuation when they make their initial investment.

For very early stage investments, a company’s milestones often change as they grow, which means these milestone events will need to be renegotiated. This could result in an increase in transaction costs. If the milestones are not renegotiated, there is a risk that companies will aim to reach now-inappropriate milestones just to be able to access the additional cash, which is not in the best interest of either the founders or the investors.

The VIMA and ACVAL documents do not include tranched investing clauses, whereas the NVCA and BVCA documents propose this as an option. If this structure is being considered, it is important to keep three considerations in mind: (a) milestone events should be decided keeping in mind the long-term trajectory of the company; (b) renegotiation of such milestone events should be allowed if certain conditions are met; and (c) investors who do not subscribe for shares if the company meets its milestones should be penalised, possibly in the form of a mandatory conversion price penalty as proposed by the NVCA and BVCA documents.

Furthermore, whilst the NVCA and BVCA documents propose a tranched investing structure, both model documents recognise that the company may need to secure additional rounds of funding in the future but may not have identified those investors at the closing of the first tranche. Therefore, the documents also include optional wording allowing the company to secure further rounds of investor funding, subject to approval by the lead investor(s).

3.3. Terms of the preference shares

An early stage funding round involving the issuance of shares (as opposed to a funding by way of a convertible debt or an agreement for future equity) will typically result in a new class of preference shares created and held by the investors in addition to the ordinary shares. These shares may have different terms in relation to voting rights, dividends, liquidity preference, anti-dilution and redemption rights. The topic of voting rights are covered in the discussions on the shareholders’ agreement (see paragraph 4.2) while the other matters specific to preference shares are discussed in this section.

3.3.1. Dividends

Depending on the form of dividends on such preference shares (see below), such dividends may increase the total return to the investors and decrease the total return to the common shareholders, which include the founders and any employees who hold ordinary shares. While investors can negotiate receiving dividends from an early stage, in the context of early stage investments this is generally less common as there is a greater interest in reinvesting any profits into growing the business. Instead, investors may consider receiving dividends upon a liquidity event[12]. Therefore, the amount of dividends the investors are entitled to receive and whether they are to receive it in preference to or on a pro-rata basis with the ordinary shareholders becomes an important consideration when there are additional investors brought in at later rounds.

There are three options for dividends to be structured: (a) cumulative dividends, (b) noncumulative dividends and (c) dividends on preference shares only when paid on the common shares.

Cumulative dividends[13]

Cumulative dividends are the most beneficial to the investors and the most burdensome on the founders, as they accrue as a fixed percentage on the original subscription price and are distributed from time to time or when a liquidity event occurs, depending on the terms of the preference shares. This type of dividend effectively requires the company to pay out the investors a larger amount of the dividends, which reduces the amount available for the founders.

In the VIMA documents, preferred shareholders are entitled to receive cumulative dividends on an annual basis without any requirement for the board to actually declare such dividends. In the NVCA documents, cumulative dividends are only required to be paid out when declared by the company, notwithstanding that they accrue year on year. The BVCA documents provide optionality, whereby cumulative dividends are either (i) only required to be paid out when approved by the board, notwithstanding that they accrue year on year, or (ii) required to be paid on a stated date without any need for board approval[14]. In the ACVAL documents, it is not clear when the preferred shareholders are entitled to receive cumulative dividends, however, across all jurisdictions, the pay out of dividends is generally only legally permissible when the company has profits. This means that a company that does not have profits will be unable to declare or pay out any dividends (notwithstanding that cumulative dividends continue to accrue). If the company has profits and dividends are declared, dividends must be paid to the preferred shareholders before the ordinary shareholders.

Upon a liquidity event, the VIMA and NVCA documents characterise all accrued and unpaid cumulative dividends, whether or not actually declared, as a preferential payment from the proceeds of the liquidity event before distributions to other shareholders. In contrast, the BVCA documents provides the option for cumulative dividends to be paid upon a number of liquidity events (such as a sale of the company’s assets, a conversion of shares or the winding up of the company), amongst others[15], and if not paid upon such event, for such payment obligations to convert into interest-bearing debt. We note that the ability for a company to take on debt in an insolvent state may be limited by local laws on the giving of preferences. Subject to such local laws, recognising dividends payable as debt is generally more advantageous to investors in the event of a winding-up of the company (as they will be recognized as creditors (who stand in priority over shareholders) in respect of such debt). The AVCAL documents do not propose language for cumulative dividends.

As an example, an investor invests S$100,000 in Company A and receives 100,000 preferred shares (at S$1 per share) and agrees to an annual rate of 8% cumulative dividend. The annual rate of 8% cumulative dividend is calculated on the original share price of S$1 per share. Accordingly, the investor has accrued S$8,000 in cumulative dividends for each year (regardless of whether the board of Company A declared dividends). These cumulative dividends will accrue and be carried forward until they are paid or until the right is terminated. Therefore, even if Company A only declares and pays dividends to its shareholders in the second year, the investor is entitled to receive S$16,000 (comprising dividends for the first and second years). This applies equally to the case of a liquidity event. If Company A is sold after five years and assuming no dividends were ever declared and paid, the investor is entitled to receive S$40,000 upon the sale (comprising dividends for the previous five unpaid years), in preference to the other shareholders of the company.

Noncumulative dividends

Noncumulative dividends are paid to the preferred shareholders only if the board of directors declares them. They are owed in preference to ordinary shares dividends. The standard accounting practice is for companies to record declared but unpaid dividends as a liability owed to the shareholder, which may persist and accumulate if multiple declarations without payment are made. Conversely, if dividends are not declared, they do not accumulate and do not result in a future obligation to the investors.

Using the same example as above, assume that the preferred shareholders of Company A agreed to a noncumulative dividend of 8% on the original share price of S$1 per share, which is equal to a dividend of S$8,000 per year. If the board of Company A declared dividends in the first three years but not in the fourth and fifth years, the investor would only be entitled to dividends for the years where dividends were declared (i.e. for the first three years only, amounting to an aggregate of S$24,000). The relevant amounts may be paid at the end of each year, or if not paid, may be recorded on the books of the company as a liability owing to the investor.

Dividends on preference shares only when paid on the common shares

The third option is to have dividends pegged to the ordinary shares on an as-converted basis. This means that dividends are only paid on the preference shares if they are paid on the ordinary shares as declared by the board. In this scenario, the preference shares are treated as being converted to ordinary shares and both shareholders split the dividend as if all the shares were ordinary. This is the most founder-friendly of the three options.

As an example, we can assume the preference shareholders of Company A agreed to this option and the conversion ratio[16] is 1.25. This means that 100,000 preference shares would have dividends equal to 125,000 ordinary shares. Each investor would receive the dividend amounts (only if declared by the board of Company A) as though the investor held 125,000 ordinary shares.

All four model documents propose these three options, except for the BVCA documents, which only propose the option of having dividends paid on a cumulative basis or when dividends are paid on ordinary shares. The NVCA documents further propose an alternative of giving the company the option to pay accrued and unpaid dividends in cash or in ordinary shares valued at fair market value.

3.3.2. Liquidity preference

Liquidity preference provisions are an essential feature of preference shares. They determine how much the investors would receive from the available proceeds upon the occurrence of a liquidity event. The amount of the liquidity preference can vary. In Southeast Asia, it is common that preference shares receive a liquidity preference of one to one and a half times the amount of their initial investment with the remaining cash distributed to ordinary shareholders based on their ownership percentage. There are two types of liquidity preference provisions: nonparticipating preferred and participating preferred.

Nonparticipating preferred liquidity preference

Investors with nonparticipating preferred shares have the option to (a) receive only the liquidity preference without further partaking in the remaining cash as ordinary shareholders or (b) convert their preferred shares into ordinary shares and being paid a proportion of the proceeds based on their equity shareholding.

For example, an investor invests S$1 million in Company B for a 20% ownership stake. Company B is then sold for S$2 million. The investor in this case has a nonparticipating liquidation preference of their investment amount times one. The investor will have two options available. The investor can either chose to (a) exercise its liquidity preference and receive S$1 million, or (b) receive S$400,000 (20% ownership multiplied by S$2 million). In this case, the investor would gain more from exercising its liquidation preference option, but the opposite may be true if Company B manages to sell for a much higher sum.

Participating preferred liquidity preference

On the other hand, investors with participating preferred shares receive the liquidity preference applicable to those shares and further receive a portion of the remainder of the sale proceeds on an as-converted basis. Participating preferred shareholders receive more than their share of the company on an as-converted basis, which leaves the ordinary shareholders with less. Therefore, participating preferred liquidity preference provisions are more investor-friendly.

Using the same example as above, if the investor in Company B had instead a participating preferred option when the investor has been paid back its initial liquidation preference (i.e. S$1 million), it will receive an additional share of the remaining proceeds in proportion to their ownership. Therefore, the investor would receive (a) S$1 million and (b) an additional 20% of the remaining proceeds, i.e. S$200,000 (20% of the remaining S$1 million). This would give the investor a total payout of S$1.2 million.

Each of the model documents propose both options and highlight the abovementioned differences, save for the AVCAL documents, which only propose a nonparticipating liquidity preference.

Cap on the preferred share participation rights

The NVCA documents include a third option: a cap on the preferred share participation rights in the subsequent pro rata distribution among all shareholders. This is aimed at counterbalancing the effect of a participation preferred right, which can often result in a substantial reduction in the share of the proceeds that the founders will receive.

For example, an investor who invested S$1 million with times one liquidation preference and a times two cap will only be able to receive up to S$2 million as a total pay-out (i.e. S$1 million liquidation preference and S$1 million in participation) if the investor choses to exercise its liquidation preference. To receive an amount higher than S$2 million, an investor must choose to convert their preferred shares fully to ordinary shares.

3.3.3. Anti-dilution

Anti-dilution rights protect investors when more shares are subscribed for at a lower price than the preferred share issue price, i.e. a down round. These provisions protect against a down round by adjusting the price at which the preference shares will convert into ordinary shares.

The three most common formulas to calculate the new conversion prices are a broad-based weighted average, narrow-based weighed average and a full ratchet provision. While the model documents mention all three options as possibilities, the proposed language in the VIMA, NVCA and AVCAL documents is in respect of the broad-based weighted average formula while the BVCA documents provide drafting language in respect of all three options.

The simplest formula is the full ratchet, whereby the conversion price for the original preferred shareholders is reduced to whatever the new issuance price is at a later round. This favours investors.

A more balanced approach, advocated for by the VIMA documents, is the broad-based weighted average approach, wherein more factors are considered in determining the new price. This is the most commonly used anti-dilution option in Southeast Asia. This formula takes into account all outstanding ordinary shares in the company, together with all preference shares, options and other securities on an as-converted basis.

A narrow-based weighted average approach operates in the same manner as the broad-based weighted average approach, except that it does not consider reserved but unissued shares like treasury shares. This approach is not used as often as the broad-based weighted average approach, but is slightly more favourable to the investors as it results in the investors obtaining a more favourable conversion price.

A detailed explanation of the formulas used to calculate the above three options, with worked examples, have been prepared as a lexicon included in the VIMA documents. The relevant extract of the lexicon is reproduced in the appendix of this article below.

3.3.4. Redemption rights

Redemption rights function as a put option. They are essentially an opportunity for investors to recoup their investment by selling their shares back to the company at cost (plus accrued dividends). Although investors will look to make a profit from their investment, which is likely to occur only during an IPO or share/asset acquisition, there are situations in which investors may look to cut their losses and redeem their shares at cost. This could include a situation where the company’s growth has stagnated or, as contemplated by the BVCA documents, where the company does not pay dividends by a certain date or there is a proposed winding-up.

The ACVAL and VIMA documents do not include these provisions, in contrast to the NVCA and BVCA documents which provide investors with this flexibility. In that respect, the NVCA and BVCA documents are more investor-friendly.

It is important that any proposed redemption is in compliance with applicable laws on share buybacks or capital reductions. In the Singapore context, this would include compliance with Section 70 of the Companies Act (Chapter 50) of Singapore which sets out the requirements for a company buying back its shares (for example, having the directors issue a solvency statement and the shares being required to be fully paid up).

4.1. Board composition and management/information rights

4.1.1. Board composition

Depending on the goals of the founders and investors, the extent to which the investors’ investment in the company should entitle them to a management position on the board of the company may be a contentious issue. The investors may wish to influence or dictate the day-to-day business activities of the company and have better access to the company’s records. On the other hand, the founders may wish to retain the same operational flexibility that enabled their success in the first place.

In general, unless investment amounts are small, it is the norm for the investors to have at least some form of board representation. At the minimum, provisions on board representation should state the number of directors (if any) that the investors and the founders can appoint (either jointly, or each investor/founder to have a right).

The various model agreements suggest further mechanisms to the above default provisions to balance the interests of the founders and the investors, such as:

1. any of the investors’ right to appoint one or more directors to be subject to them holding a minimum negotiated level of shareholding (VIMA and BVCA documents) (founder-friendly);
2. any of the founders’ right to appoint one or more directors to be subject to them holding a minimum negotiated level of shareholding (AVCAL documents) (investor-friendly);
3. any of the investors’ right to appoint one or more directors to be subject to them holding preference shares (AVCAL documents) (founder-friendly); and
4. each committee of the directors requiring at least one investor-appointed director to be on such committee (NVCA documents) (investor-friendly).

4.1.2. Access to information

An important reason why investors will typically wish to appoint a director is to ensure that the investors have access to the latest information on the company. Generally, directors are entitled by law to have greater access to information than shareholders, and directors would be notified and have the opportunity to attend board meetings during which the business of the company is discussed.

If there are a number of investors in a transaction and only one director is appointed by the investors, there may be unequal access to information amongst the investors. The VIMA, BVCA and NVCA documents further address the investors’ concerns by proposing that (a) investors may have the right to appoint observers to board meetings (possibly only reserved to investors above a certain level of shareholding) and (b) that all investors are entitled to specific information rights, as well as general information rights on a reasonable basis[17].

4.2. Voting rights

The shareholders’ agreement (or in the case of NVCA documents, the voting agreement) typically sets out specific provisions on voting rights attached to the preference shares[18].

In relation to preference shares, the approach taken by the VIMA and NVCA documents is that the votes of preference shares are equivalent to the votes of an ordinary share on an as-converted basis.

The BVCA and AVCAL documents grant each preference share one vote per share and do not consider such votes to be on an as-converted basis. This means that if there are further issuances of shares or share splits in relation to the ordinary shares, this may result in a situation where each preference share would continue to be worth one vote only when it would have been worth more votes had it been converted to ordinary shares. Generally, as it is more likely that the ordinary share capital of the company increases rather than decreases, it is beneficial for the investors (if they are to have voting rights) to ensure that the preference shares will be entitled to voting rights on an as-converted basis.

4.3 Reserved matters

Another means to ensure that the interests of the minority directors or shareholders are protected is through a list of reserved matters. Reserved matters are a way of giving the minority stakeholders (in particular, the investors) assurance that major matters will require their approval. Reserved matters may also act as a concession when negotiating for a party to have a minority stake or voting right.

Reserved matters can be divided into shareholders’ and directors’ reserved matters.

Shareholders’ reserved matters are usually matters that affect the wider interests of the shareholders, such as an IPO, changes in the number of directors, a sale or winding-up of the company, dividends or matters affecting the share capital or the constitution of the company.

Directors’ reserved matters typically relate to important operational decisions such as entering into large financing transactions, changing the executives of the company or making changes to the budget and business plan of the company.

The various model agreements vary in terms of (a) the way that matters are “reserved” and (b) the suggested reserve matters.

4.3.1. Forms of reservation

Broadly, matters can be “reserved” by (a) requiring a supermajority or unanimous vote among the voting parties (either shareholders or directors) and/or (b) requiring a specific person’s approval (such as a particular shareholder or a particular director).

The VIMA, BVCA and NVCA documents contemplate for shareholders’ reserved matters to require the approval of the majority of the investors before they are passed and for director’s reserved matters to require the approval of an investor-appointed director.

The AVCAL documents contemplates for shareholders’ reserved matters to require a supermajority of all the shareholders (the proposed default is a 75% majority vote) before it is passed and for director’s reserved matters to require a supermajority of the board in addition to the approval of an investor-appointed director.

The manner in which reserved matters are structured is often a negotiated point. While having provisions that require a specific investor or investor-appointed director’s approval offers the greatest protection to investors, parties should be aware of the potential issues with having a single party hold a veto right on certain matters, and the specific reserved matters should be scoped appropriately such that the company is not, as much as possible, negatively impacted in its operations even if a reserved matter is vetoed.

4.3.2. Types of reserved matters

Generally, reserved matters are highly negotiated, taking into account the scale, type and common practice of the business, the degree of operational control to be given to the management and the nature of the investors.

The reserved matters suggested by the VIMA documents broadly cover the following areas:

Shareholders’ reserved matters

1. IPOs and mergers/consolidations
2. Disposal of the company’s undertaking or winding-up
3. Changes in the maximum and minimum directors
4. Amendments to the constitution of the company
5. Transactions with related entities
6. Changes to the share capital of the company
7. Issuance of digital tokens

Directors’ reserved matters

1. Appointment of key executives
2. Entering into significant or unbudgeted expenditures, or borrowings and the creation of encumbrances
3. Change of business plan and budget
4. Establishment of share option plans

Other reserved matters suggested by the rest of the model agreements include the following[19]:

Shareholders’ reserved matters

1. Issuance of dividends (BVCA documents)
2. Dealings with intellectual property (BVCA documents)
3. Holding of shares in any company that is not a wholly owned subsidiary (NVCA documents)

Directors’ reserved matters

1. Engaging any consultant or employees of a remuneration above a certain threshold (BVCA documents)
2. Conducting any litigation (BVCA documents)
3. Purchasing any directors’ and officers’ liability insurance in respect of the company’s senior management (AVCAL documents)
4. The company’s subsidiary making any loans (NVCA documents)
5. Making any investment inconsistent with the company’s investment policy (NVCA documents)

The founders may seek to reduce the scope of the reserved matters by negotiating for the inclusion of materiality thresholds (for example, only borrowings above a certain financial threshold will constitute a reserved matter) or excluding matters which are preapproved in an agreed business plan of the company[20].

4.4. Preemption rights on issuances

In the event of a proposed new issuance of shares by the company, it may be beneficial for the existing shareholders (including the investors) to not add new shareholders to preserve the dynamics of the working relationship between the existing shareholders. Therefore, it is typical for companies to build in preemption rights on new issuances of shares wherein the party with the preemption right has the first right to subscribe for some or all of the new shares prior to them being issued to other parties. This can take the following forms:

1. a specific investor or a specific group of investors (such as investors above a certain level of shareholding) to have preemption rights (on a pro-rata basis, as applicable) (the NVCA documents[21]);
2. the investors to have preemption rights (on a pro-rata basis) (the VIMA and BVCA documents); and
3. all shareholders to have preemption rights (on a pro-rata basis) (the AVCAL documents).

Options (a) and (b) above are generally more investor-friendly as they give the investor(s) the first right to make further investment in the company and increase its shareholding. Moreover, having fewer parties entitled to preemption rights may also facilitate future investments in the company by third parties.

In addition, the BVCA and NVCA documents contain proposed language for pay-to-play provisions. “Pay to play” refers to the incentive for a shareholder with preemption rights to exercise such rights to a certain minimum degree, failing which the investors will lose some or all of their preferential rights (such as anti-dilution and future preemption rights). The NVCA also suggests that the pay-to-play provisions can operate not as a removal of specific rights attached to the investor’s preference shares, but by the mandatory conversion of such preference shares to ordinary shares.

4.5. Rights of first refusal (ROFR)

An ROFR provides a party (typically the nonselling shareholder, or in the case of the NVCA documents, the company as well) with the right to take up an offer by a selling shareholder after the selling shareholder has obtained an offer for its shares from a third-party buyer. The nonselling shareholders have a first right to purchase the selling shareholder’s shares on the same terms as the the offer from the third-party buyer, and the selling shareholder is only able to sell to the third-party buyer if the nonselling shareholders do not exercise such right.

While the model agreements differ slightly in the nature of the rights, all of them provide for an ROFR.

The VIMA documents propose that the ROFR be given to the investors only, and the ROFR can be in respect of either transfers by all shareholders or limited to transfers by noninvestor shareholders. The VIMA documents also propose an “all-or-nothing” approach where all the shares proposed to be transferred have to be taken up by existing shareholders, and if not completely taken up, all such shares can be transferred to the intended third party.

The BVCA documents propose that the ROFR may be given to all shareholders in respect of transfers of ordinary shares. Instead of an all-or-nothing approach, the BVCA documents propose that the transferor can stipulate that the transfer is conditional upon a minimum amount of the transferred shares being taken up by the existing shareholders.

The AVCAL documents provide ROFR provisions that apply to all shareholders in respect of transfers of any of the company’s shares and do not include a threshold requirement concept or an all or nothing approach.

The NVCA documents contemplate that the company will be granted the first right to purchase shares proposed to be transferred by certain identified groups of persons (being suggested by the NVCA documents to include major holders of ordinary shares as well as the founders of the company), while the investors will be entitled to purchase the remainder not taken up by the company. We note that giving the company a right to buy its own shares may be subject to applicable laws on share buybacks or capital reductions.

Generally, whether all shareholders (as opposed to only certain shareholders) are entitled to an ROFR is a matter to be negotiated amongst the shareholders. We do, however, observe that having more parties being entitled to an ROFR, while benefiting such parties, may complicate future transfers of shares to third parties.

4.6. Drag-along rights

Drag-along rights allow for a shareholder (usually the majority shareholder(s)) intending to sell its shares to force the remaining minority shareholders to sell all or some of their shares on the same terms to a third-party purchaser[22]. A drag-along right is typically given to the investors, who may want such right to ensure that the company is able to be bought out in full by a prospective future buyer who may only be interested in the company if it can acquire 100% of it.

Broadly, the model agreements have similar provisions in this regard. The VIMA and BVCA documents contemplate that drag-along rights are granted only on the event of an offer for all the shares of the company, while the AVCAL documents grant the drag-along rights in the event a certain threshold of shareholders intend to sell all their shares. The NVCA documents contemplate for the drag-along rights to be granted on lower thresholds (such as a proposed sale of more than 50% of the company). In terms of the approval thresholds required in all the model agreements, the sale must have been agreed by a certain minimum percentage of all the investors and/or shareholders.

4.7. Tag-along rights

Tag-along rights, or “co-sale rights”, are the inverse of drag-along rights. They allow a nonselling shareholder (usually the minority shareholder) to participate in a sale of their shares on the same terms when another shareholder is selling its shares to prevent being “left behind” in a sale of the company.

The VIMA documents contemplate for the investors to be given a tag-along right to sell a proportionate amount of their shares in respect of a sale of any shares by either the founders or any shareholder above a certain level of shareholding (other than an investor).

The BVCA and AVCAL documents provide for either the investors or all shareholders to have the tag-along right, and also contemplate that the tag-along right is only triggered upon a minimum size of transfer (i.e. a percentage number of shares of the company must be transferred for the tag-along right to be triggered).

4.8. Restrictions on transfers and permitted transferees

There may be specific restrictions on transfers that are not otherwise covered by the reserved matters. These restrictions are intended to preserve the current shareholding of the company or to ensure compliance with law.

The VIMA documents suggest that the founders can be restricted for a lock-in period or have a maximum amount of shares that they are entitled to transfer. This is beneficial to investors and such provisions ensure the founders’ continued commitment to the company.

The BVCA documents propose a wider restriction that all transfers of shares would require the consent of the investors.

The NVCA documents highlight that transfers may be restricted in order to comply with securities law (for example, if there are any lock-up periods during an IPO process). Similar compliance requirements should apply to all relevant jurisdictions with any statutory restrictions on transfers, even if not specifically set out in the respective model agreements.

The above restrictions and other rights in relation to transfers of shares given to nontransferring shareholders (such as a right of first refusal, tag-along or drag-along rights) would not apply in relation to transfers to certain specific types of persons, termed as “permitted transferees”. These would typically be the family or related corporate entities of the shareholder. The investors should ensure that its affiliates are considered a permitted transferee to avoid difficulties with transferring shares within its corporate group, especially if the investor is structured in the form of a special-purpose vehicle.

All the model agreements have a similar proposed scope of what constitutes a permitted transferee, except that the NVCA documents further widen the scope of the types of transfers that are permitted. Specifically, the NVCA documents propose that pledges that create security interests in the shares would also not be subject to restrictions if made to a permitted transferee and also that any transfer by the lead investor up to a specific amount of shares would be a permitted transfer.

The VIMA and AVCAL documents further stipulate that if the party who has been transferred shares ceases to be a permitted transferee, the original shareholder must procure a return of such shares. Depending on which party is more likely to make transfers of shares to its affiliates, a more restricted range of permitted transferees or a more conditional approach to the permission would be less beneficial to that party.

4.9. Compulsory transfers

On the flip side to permitted transfers, the VIMA documents also propose that a shareholder other than the investors may be required to compulsorily transfer its shares to the other shareholders in the event that it undergoes a change of control. While this suggested provision is to the benefit of the investors, it is only appropriate to introduce this provision when there is another corporate shareholder (other than the investors) who is not actively involved in the company. This could be the case in a subsequent financing round.

In addition, the BVCA and AVCAL documents also propose the pro-investor condition of tying the requirement to compulsorily transfer shares with any “bad-leaver” provisions in the employment/services agreements of the founders with the company (more details below in section 4.10).

4.10. Employee share option plans

Employee share option plans may be entered into (or be maintained) further to the investors’ investment as a means to align the interests of the key employees (which would typically include the founders) and the company.

To further ensure the continued commitment of the key employees of the company, the BVCA and AVCAL documents also contemplate subjecting their right to the company shares to “good leaver/bad leaver” provisions. When the employee is dismissed for cause or resigns without valid reason during a lock-in period of time, some or all of the employee’s shares (the shares already held by the employee and/or obtained/entitled to pursuant to the share option plan) may have to be offered to the other shareholders at a (usually discounted) price.

While the VIMA and NVCA documents do not include good leaver/bad leaver provisions, such provisions may also be integrated into the employee share option plan or performance share plan, or otherwise in the employment contract. In practice, good leaver/bad leaver provisions are typically extensively negotiated if the investors wish to include them, as the employees would be wary of the possibility of the company subsequently using the bad leaver provisions to claw back shares they have obtained in the company.

4.11. Restrictive covenants

In the interests of the company (and the investors’ investments), it is typical for noncompetition and nonsolicitation provisions to be stipulated in relation to the persons involved in the operations of the company. We note that noncompetition and nonsolicitation provisions constitute a restraint of trade under Singapore laws and should only be used so far as necessary to protect the legitimate interest of the company, lest the restrictions be regarded as unenforceable.

The VIMA and BVCA documents propose for the restrictive covenants to apply to the founders for a period of time within specific jurisdiction(s). The AVCAL documents are potentially broader in scope as they cover all shareholders other than the investors[23]. The NVCA documents offer the widest protection to the investors by expanding the coverage to not just the founders but also certain specific key employees, as well as proposing that the current and former key employees and founders enter into a nondisclosure and proprietary rights assignment agreement.

We note that while these restrictive covenants may be included in the employment agreements of the relevant persons, the advantage of also including them in the shareholders’ agreement is to entitle the shareholders to have a direct right against the relevant employee for any breach (assuming such employee is or has been added as a party to the shareholders’ agreement), instead of requiring the company to commence an action against such employee.

4.12. Other undertakings

The shareholders’ agreement may stipulate certain other undertakings in relation to the shareholders of the company.

The VIMA and BVCA documents suggest that shareholders should undertake that all business opportunities relevant to the company should only be taken up by the company or a wholly owned subsidiary of the company. This can protect either the interest of the founders or the investors, depending on which party holds other competing interests.

All the model agreements also suggest an additional undertaking that the company procure appropriate life and officer liability insurance on the directors naming the company as beneficiary in a form satisfactory to the investors.

The AVCAL and NVCA documents further suggest that the company should also enter into indemnification agreements in favour of the investor-appointed directors. The NVCA documents further specify that such indemnities should persist even in the event of a merger involving the company.

5.1. Costs

From the outset (i.e. at the term sheet stage), parties should decide how the transaction fees are to be borne.

Notwithstanding that certain transaction costs may be agreed to be borne by the investors, the investors can always factor these costs into the consideration amounts. Typically, costs are predominantly incurred by the investors, mainly during (a) the legal and financial due diligence process, where lawyers and accountants may be engaged, and (b) the transaction documents drafting and negotiation process (both of the transaction documents and all other ancillary documents such as financing agreements or employment/services agreements). The model agreements suggest various mechanisms parties can consider to apportion costs, such as a capped basis for one party or specifying the types of costs to be borne by one party.

The VIMA and NVCA documents provide for the typical options for costs arrangement: one party to bear the full transaction costs (possibly subject to a reasonableness qualifier and/or a fixed fee cap) or both parties to bear their own costs. If the company is the party bearing the full transaction costs, such obligation should only be contingent on the completion of the transaction. The NVCA documents take the further position that the company should still be required to bear the full transactions costs even if the transaction is not completed in the event such noncompletion is not due to the investors withdrawing their commitment without cause[24].

The BVCA and AVCAL documents also contain suggestions for investor-friendly costs arrangements. While the BVCA documents adopt the default position of the parties bearing their own costs, they also suggest more investor-friendly proposals, i.e. (a) the company to contribute a fixed sum in respect of defraying the investment appraisal and legal costs of the investors and/or (b) a pre-agreed transaction fee can be paid to the investors upon completion. The AVCAL documents adopt the default position that the company shall bear all third-party expenses of the investors incurred as a result of the transaction.

5.2. Governing law and dispute resolution

It is important for the transaction documents to state clearly the governing law and dispute resolution mechanism. The governing law and dispute resolution mechanism are generally consistent across the transaction documents, unless specifically negotiated.

The governing law of the transaction documents may be a negotiated point if the investors and the founders/company are from different jurisdictions. Critically, investors should be mindful to ensure that the governing law and dispute resolution mechanisms are enforceable in the jurisdiction(s) in which the company’s and founder’s assets are primarily located. While this can be done by choosing the governing law of the company’s jurisdiction, foreign investors are often concerned that they would not be treated fairly in the local jurisdiction or that the local jurisdiction’s laws are not as clear and established as those in more traditional financial centres. Accordingly, investors typically prefer to use the governing law and dispute resolution of a financial centre that has reciprocal enforcement of foreign court judgments and/or arbitral awards with the company’s home jurisdiction.

The VIMA documents, in keeping with Singapore’s promotion of meditation as a first-step dispute resolution mechanism, propose for disputes relating to the term sheet and the transaction documents to first be mediated, followed by resolution via either litigation or arbitration.

The BVCA documents propose, for all the transaction documents, that disputes be litigated.

The AVCAL documents propose litigation for the term sheet and the shareholders’ agreement and a multitiered approach in the subscription agreement with initial discussions, followed by mediation, before litigation.

The NVCA documents, interestingly, do not specify a dispute resolution mechanism in the term sheet, but provide for disputes in the subscription agreement and shareholders’ agreement to be either litigated or arbitrated.

Ultimately, the dispute resolution mechanism is a matter of commercial choice, but given the collaborative nature of the ongoing working relationship between the parties (which is common in an early stage investment), it may be worthwhile to consider having a multitiered dispute resolution mechanism with generally less “aggressive” initial approaches, such as discussions between parties or meditation as the first step.

Preference shares, such as those that may be issued during an investment round, can either be classified as equity, financial liability (i.e. debt) or a combination of the two in the accounting records of the company, according to the International Accounting Standard 32 and the Singapore Financial Reporting Standards (International) 32.

In determining whether a preference share is a financial liability or an equity instrument, one should consider the particular rights attaching to the share to determine whether it exhibits the fundamental characteristic of a financial liability.

For example, a preference share that provides for redemption on a specific date or at the option of the holder is likely to be classified as a financial liability because the company has an obligation to transfer funds to the holder of the share to redeem such share. The potential inability of the company to satisfy an obligation to redeem a preference share when contractually required to do so, whether because of a lack of funds, a statutory restriction or insufficient profits or reserves, does not negate the obligation.

Conversely, when distributions to holders of the preference shares, whether cumulative or noncumulative, are at the discretion of the company, the shares are more likely to be classified as equity instruments.

Ultimately, the accounting treatment of preference shares, as well as the various forms of dividends payable on such shares, should be something to be determined in consultation with the company’s advisers.

The VIMA documents are designed to “serve as a balanced, well-informed starting point that can be customised to suit each investment”[25], thereby cutting down on transaction costs and reducing friction during the negotiation process.

We have used the VIMA documents to advise founders of local startups during their early stage funding rounds. In our experience, the VIMA documents have been a useful starting point for us in our preparation of the necessary transaction documents, allowing our clients to reap the following benefits:

1. the VIMA documents are comprehensive in their coverage of key legal terms typically found in the definitive agreements of early stage investments. This enables parties to enter into negotiations with a mutual understanding as to the general structure of the definitive agreements so that they can focus their efforts on negotiating deal specific legal and commercial terms (such as the terms of the various classes of shares and the governance rights); and
2. there was a net reduction in time taken to prepare the definitive agreements and thereby a net reduction in legal costs incurred by clients.

While the VIMA documents are certainly a valuable resource, we emphasise that these documents function as a starting point and the provisions therein are only suggestions. With a comparative review across the similar model agreements in Australia, the United Kingdom and the United States, we hope that a greater understanding of the provisions in the VIMA documents can be achieved, particularly with reference to the practices adopted in overseas jurisdictions. In addition, we hope that this article has raised various other possible arrangements and mechanisms investors and founders may wish to consider incorporating in the VIMA documents (either through the addition of new clauses or amendment of existing clauses). Investors and founders should always seek legal advice when negotiating and amending the VIMA documents to ensure their intentions have been accurately captured and their interests adequately protected within the legal documentation.

Extract of the venture capital lexicon (VIMA documents)

Anti-dilution protection (also known as anti-dilution provisions) 

In the event of a down-round financing (i.e. when new convertible preference shares are issued at a lower price than an earlier round), existing preferred shareholders with anti-dilution protection are compensated through the adjustment of the conversion ratio from preference to ordinary shares. Common formulae used are:

1. Broad-based weighted average anti-dilution

CP₂ = CP₁ * (A+B) / (A+C)

CP₂ = Series A conversion price in effect immediately after new issue

CP₁ = Series A conversion price in effect immediately prior to new issue

A = Number of ordinary shares outstanding immediately prior to new issue (includes outstanding ordinary shares, all shares of outstanding preference shares on an as-converted basis and all outstanding options on an as-exercised basis; and does not include any convertible securities converting into this round of financing)

B = Aggregate investment in new round of financing divided by CP₁

C = Number of shares of stock issued in the new round

2. Narrow-based weighted average anti-dilution

Uses the same formula as broad-based weighted average anti-dilution except for variable A which is redefined more narrowly:

A = Number of ordinary shares outstanding immediately prior to new issue (only includes all preference shares on an as-converted basis for the series being adjusted)

Example

Post Series B Investment (Series A with Narrow-Based Anti-Dilution):

 

3. Full ratchet anti-dilution

The conversion price will be reduced to the price at which the new shares are issued.

Example

Post Series B Investment (Series A with Full Ratchet Anti-Dilution):

The number of Series A shares does not change. Only the conversion price and hence the conversion ratio (preference A to common) changes.

Summary of comparative anaylsis of key terms

A. Key terms in the term sheet

Key terms	VIMA (Singapore)	BVCA (UK)	AVCAL (Australia)	NVCA (USA)
Exclusivity period	Exclusivity period as a binding term provided. Restriction against solicitation of new investments, subject to written consent of investors (Solicitation Restriction). Obligation for founders and company to notify investors if they receive any offer for shares in the company (Notification Requirement).	Exclusivity period as a binding term provided. Both the Solicitation Restriction and Notification Requirement extend to include offers for any material part of the business, not just the company’s shares. Liquidated damages payable to the investors if exclusivity obligation is breached. More investor-friendly than the VIMA documents.	Exclusivity period as a binding term provided. Only Solicitation Restriction provided; no Notification Requirement. As the term sheet is not executed by the founders, the exclusivity provisions do not apply to the founders. More founder-friendly than the VIMA documents.	Exclusivity period as a binding term provided. Both the Solicitation Restriction and Notification Requirement extend to include offers for any material part of the business, not just the company’s shares. Break fees payable to the investors if exclusivity obligation is breached. More investor-friendly than the VIMA documents.
Confidentiality	Mutual confidentiality obligations subject to consent from the nondisclosing party.	Mutual confidentiality obligations subject to consent from the nondisclosing party. Investors and the company agree to enter into a nondisclosure agreement before the due diligence exercise commences.	Confidentiality obligations only apply to the Company and not to other parties. More investor-friendly than the VIMA documents.	Only investors’ consent required for disclosure of confidential information. More investor-friendly than the VIMA documents.

B. Key terms in the subscription agreement

Key terms	VIMA (Singapore)	BVCA (UK)	AVCAL (Australia)	NVCA (USA)
Representations and warranties	Customary. Warranties can be given on a several (pro-founder), or joint and several basis (pro-investor). Warranties given by both founders and company.	Customary. Contemplates for warranties to be given only on a several basis (pro-founder). Warranties given by both founders and company.	Similar to VIMA.	Customary, with some industry specific suggestions for deals in the life sciences and technology industries. Warranties can be given on a several (pro-founder), or joint and several basis (pro-investor). Warranties given by company only. Founder warranties are included however it is noted that they are only given in a minority of deals (pro-founder).
Limitation on warranty claims	Time limits and cap on liability suggested (pro-founder).	Similar to VIMA.	Similar to VIMA.	No cap on liability and time limit of the earlier of 2 years from the date of signing or an IPO is suggested (pro-investor).
Tranched investing	Not included.	Tranched-investing structure contemplated (pro-investor). Investors who do not subscribe for shares if the company meets the agreed milestones may be penalised, possibly in the form of a mandatory conversion price penalty.	Not included.	Similar to BVCA.
Terms of preference shares (Series A)
Dividends	Dividends can be pegged to ordinary shares on an as-converted basis (pro-founder), or a fixed cumulative (pro-investor) or noncumulative (less investor friendly compared to cumulative) dividend as a percentage of initial subscription price. Right to receive dividends may be pari passu (pro-founder) or senior (pro-investor) to other shares/ordinary shares.	Similar to VIMA, but does not consider noncumulative dividend in proposed language.	Dividends pegged to ordinary shares on an as-converted basis (pro-founder), but drafting notes consider the possibility of fixed cumulative/noncumulative dividend (more pro-investor compared to pegging to ordinary shares). Pari-passu right to receive dividends (pro-founder) but drafting notes consider the possibility of a right senior to ordinary shares.	Similar to VIMA. Additional alternative suggested whereby the company has the option to pay accrued and unpaid dividends in cash or in common shares valued at fair market value.
Liquidity preference	Both participating preferred (pro-investor) and nonparticipating preferred (pro-founder) liquidity preference provided.	Similar to VIMA.	Nonparticipating preferred (pro-founder) liquidity preference, but drafting notes consider participating preferred (pro-investor).	Similar to VIMA, but includes the concept of a cap of preferred share participation rights in the subsequent pro rata distribution among all shareholders (more founder friendly compared to a typical participating preferred liquidity preference).
Anti-dilution	Proposed language is for the broad-based weighted average basis (most founder-friendly anti-dilution mechanism).	Proposed language provided for each of broad-based weighted average (most founder-friendly), narrow-based weighted average, and full ratchet basis (most investor-friendly).	Similar to VIMA.	Proposed language is for the broad-based weighted average basis (most founder-friendly anti-dilution mechanism).
Redemption rights	Not included.	Subject to applicable law, investor majority may require the company to redeem some or all of the Series A preference shares if there is (i) nonpayment of dividends by a certain date, (ii) proposed winding up of the company (pro-investor).	Not included.	Series A preference shares are redeemable at a price equivalent to original purchase price plus all accrued and unpaid dividends (pro-investor).

C. Key terms in the shareholders’ agreement

Item	VIMA	BVCA (UK)	AVCAL (Australia)	NVCA (USA)
Governance
Board composition, meetings and management information and observer rights	Right of investor to appoint an investor director (pro-investor). However such right may be subject to minimum percentage shareholding requirement (pro-founder). Investors may have a further right to appoint a representative to attend as observer (pro-investor). Quorum may have to include an investor director (pro-investor). Investors to have certain information rights (pro-investor).	Similar to VIMA.	Right of founder to hold board seat (pro-founder). However such right may be subject to minimum percentage shareholding requirement (pro-investor). Investor may appoint an investor director while they own Series A preference shares (pro-investor).	Each committee of the directors shall include at least one investor director (pro-investor). Observer rights granted to Investors holding a set percentage of Series A preference shares (pro-investor). Investors (who are not competitors) to have certain information rights (pro-investor).
Reserved matters	Reserved matters can require the approval of the (i) majority of the Series A shareholders, or (ii) with board approval (which includes approval from an investor director) (pro-investor).	Similar to VIMA.	Reserved matters can require the approval of the (i) [75%] majority of the shareholders or (ii) with [75%] board approval (which includes approval from an investor director). Main difference from VIMA that they do not contemplate for reserved matters requiring approval from Series A majority (pro-founder).	Similar to VIMA.
Variation in shareholding
Preemption rights (issuances)	Investors can either have a preemption right on new issuances (pro-investor) or participate equally with holders of ordinary shares (pro-founder).	Similar to VIMA.	All shareholders to have a pro-rata preemption right on new issuances (pro-founder).	Investors can have a preemption right on new issuances (pro-investor).
Pay-to-play	Not included.	If a party/the investors do not exercise up to a set percentage of their preemption rights on new issuances, they can lose the right to anti-dilution and future preemption rights (pro-founder).	Not included.	Series A shareholders are penalized if they fail to invest to a specified extent in certain future rounds of financing. The penalty is the conversion into ordinary shares of some or all of the Series A shares held by nonparticipating Series A shareholders (pro-founder).
Right of first refusal (ROFR)	Holders of Series A preference shares can have a pro-rata ROFR on transfers of shares to third parties by (i) other shareholders who are not Series A shareholders or (ii) all other shareholders (pro-investor).	Non-Series A shareholders may also enjoy an ROFR right in respect of transfers of ordinary shares (pro-founder).	All shareholders have a pro-rata ROFR on transfers of shares to third parties by any shareholder (pro-founder).	The company first and investors second will have an ROFR with respect to any shares proposed to be transferred by the founders (pro-investor).
Tag-along right	Holders of Series A shares can have a tag-along right in respect of any sale of securities by (i) founders; and/or (ii) shareholders holding more than a set percentage of the issued share capital of the company other than the investors (pro-investor).	Holders of Series A shares/all shareholders have a tag-along right in the case where the total amount of shares to be sold to a third party exceed a set percentage of total shares. (More founder-friendly if tag-along right is available to all shareholders).	All shareholders have a tag-along right in the case where the amount of shares to be sold to a third party exceed a set percentage of total shares (pro-founder).	Investors have a right of tag-along right in respect of any sale of securities by certain key persons if the company (pro-investor).
Drag-along right	In the event of a bona fide offer from a third party purchaser for all the shares of the company agreed by a majority of all/ Series A shareholders, the majority shall be able to require the other shareholders to sell their shares to the third party purchaser on the same terms (pro-investor).	Similar to VIMA.	Similar to VIMA except that the drag-along right is applicable to all shareholders (pro-founder).	Similar to VIMA.
Restriction of transfers	Founders can be restricted from transferring/disposing their shares.   Restriction can be a limit of a set percentage of shares, or a lock-in period (pro-investor).	Both transfers of shares and issuances of shares would require investor’s approval (pro-investor). Transfers subject to preemptive rights on transfers (pro-founder).	No restrictions, but transfers subject to preemptive rights on transfers (pro-founder).	Restriction on transfers only for compliance with securities law (pro-founder).
Compulsory transfers	Shareholders (other than the investors) may be required to compulsorily transfer their shares in the event that they have a change in control (pro-investor).	Possible compulsory transfers for bad leavers (see ESOP below) (pro-investor).	Possible compulsory transfers for bad leavers (see ESOP below) (pro-investor).	Not included.
Permitted transferees	Affiliates are permitted transferees.	Affiliates are permitted transferees.	Affiliates are permitted transferees.	Affiliates of identified key persons are permitted transferees. Also proposes that pledges that create security interests in the shares would also not be subject to restrictions if made to a permitted transferee, and also that any transfer by the lead investor up to a specific amount of shares would be a permitted transfer (pro-investor).
General/others
Employee share option plan (ESOP)	An ESOP may be established on terms reasonably acceptable to the majority of the Series A shareholders (pro-investor).	ESOP may be established. Shares held by founders and employees may be subject to vesting rights and good leaver/bad leaver provisions (pro-investor). Example: If founder/employee ceases to be an employee within a period of time, he may have to offer all shares, or all unvested shares for sale to the other members of the company, possibly at a discount.	ESOP may be established for an issue of up to a set percentage of the fully diluted share capital of the company. Shares held by founders and employees may be subject to vesting rights and good leaver/bad leaver provisions (pro-investor). Example: If founder/employee ceases to be an employee within a period of time, he may have to offer all shares and all unvested shares for sale to the company or other persons nominated by company, at a discount (for issued shares) and at nominal value (for unvested shares), subject to applicable law.	ESOP may be established for an issue of up to a set percentage of the fully diluted share capital of the company.
Restrictive covenants on founders	Customary noncompetition and non-solicitation provisions for founders for a period of time within specific jurisdiction(s) (pro-investor).	Similar to VIMA.	Similar to VIMA.	Similar to VIMA, but covers founders and certain other key persons. Each current and former founder, employee and consultant will enter into a nondisclosure and proprietary rights assignment agreement (pro-investor).
Undertakings	All business opportunities relevant to the company should only be taken up by the company or a wholly owned subsidiary of the company. Company to take out life and officer liability insurance on the directors naming the company as beneficiary, in a form satisfactory to the investors (pro-investor).	Similar to VIMA.	Drafting notes suggest company to take out life and officer liability insurance on the directors naming the company as beneficiary, in a form satisfactory to the investors, and for company to enter into indemnification agreements with investor directors (pro-investor).	Company to take out life and officer liability insurance on the directors naming the company as beneficiary, in a form satisfactory to the investors. Company to enter into indemnification agreements with investor directors (pro-investor).

D. Other key terms

Key terms	VIMA (Singapore)	BVCA (UK)	AVCAL (Australia)	NVCA (USA)
Costs	Either each party bears own costs (pro-founder), or one party (typically the company) bears the costs (all costs or on a reasonable basis, or subject to a cap, and subject to completion of the transaction) (pro-investor).	Each party to bear their own costs, save that the company may also provide a certain sum to the investors for appraisal and legal costs (pro-investor).	Company to bear investors’ third party expenses, up to a cap (pro-investor).	Company to pay all legal and administrative costs of the financing, including fees of investors’ counsel subject to a cap. However, if the transaction is not completed because the investors withdraws their commitment without cause, the company shall not be liable for investors’ counsel fees (pro-investor).
Dispute resolution	Mediation plus litigation or arbitration (consistent across term sheet, subscription agreement, shareholders’ agreement).	Litigation (consistent across the term sheet, subscription agreement, shareholders’ agreement).	Term sheet and shareholders’ agreement: Litigation Subscription agreement: 20 days of discussions, followed by mediation, followed by litigation.	Term sheet: Not stated Subscription agreement/shareholders’ agreement: Litigation or arbitration