Convertible Loan
Indicative Term Sheet (SAMPLE)
Subject to review & final negotiation with investors
Please note this is a sample term sheet only and should not be used without professional advice. No representation is made as to its completeness or suitability for any specific financing. The User accepts sole responsibility for use of this draft Term Sheet
Draft: [DATE]
Items in square brackets should be filled in by you, with assistance from professional advisors.
Page 1 of 11
Item / Suggested terms / Notes /Borrower / [INSERT Company name]
A Company incorporated in [Country] with company number [##] whose address is at [registered address] / Add the Company name of the Borrower & its registered address
Borrower Group / [Please add all relevant group members of the Borrower, if the Borrower has more than one relevant subsidiary that will receive funds under this loan]
All members of the Borrower Group agree to guarantee the Borrower in respect of its performance and obligations under this Loan / The Borrower Group is the entire group of companies that will receive loan funds. This should include your parent company and any relevant subsidiaries (if applicable). The Group should be collectively responsible for repayment of the loan
Loan Amount / [ Specify total commitment of loan ] / Specify the total amount of the loan committed. This may be higher than the total amount that you actually draw.
Currency / The Loan, together with all fees and interest payments, shall be denominated in [ Currency ] / State currency of the loan. The loan should only be in one currency, even if it is later swapped into other currencies within the Borrower Group.
Investors / A group of Social Investors, comprising [foundations / social impact funds / banks / accredited high net worth individuals] [DELETE AS APPLICABLE]
[ LIST INVESTORS ] / List all investors here. If full list of investors are not known, leave this blank until finalisation
Social Mission / The Borrower, being a social purpose company, shall act in consistency with its social mission. The Company’s purpose is to [ add Company Mission ] / It’s worth stating your social mission upfront, so that all investors know that you are a social business
Permitted
Use of funds / Funds advanced under the Loan may be used for Working capital and General Corporate Purposes.
Funds may not be used for: [DELETE IF NOT APPLCABLE]
1. Distributions to shareholders
2. [Repayment of prior debts]
3. [Lending to individuals or other companies]
4. [Purchase of buildings]
5. [Purchase of financial assets]
6. [Purchase of shares in another company] / Loan funds are limited to a specific purpose. The language here (’working capital and general corporate purpose’) is standard and widely accepted.
Loan funds are never permitted for making distributions to shareholders, and usually prohibited from investments into financial assets or into speculative activity unrelated to the core business.
Loan funds may not be used to extinguish prior debts of the company unless this is specifically agreed with Lenders (e.g. if the Loan is refinancing a prior loan).
Financial Close / [ add date on which Loan is expected to be signed ] / This is the date on which the Loan is expected to be signed
First Drawdown Date / [ add date on which Loan is ready to be drawn ] / The First Drawdown date is the first day on which the loan may be drawn (the day you can access the money). The Loan may be drawn in instalment or ’tranches’ over a period known as the Drawdown Period.
Final Maturity Date / [ add final date on which loan must be repaid ] / The Final Maturity Date is the last day on or by which the Loan must be repaid in full, together with all accrued but unpaid interest. If any of the loan is still unpaid after this date, the Loan is in default
Intercreditor Agreement / All current and future lenders under this Loan Agreement shall accede to an Intercreditor Agreement governing Voting Rights and other Intercreditor agreements between the Lenders and the Borrower.
The Intercreditor Agreement shall specify which issues require majority consent of the Lenders (voting pro rata with their share of the Loan) and which issues require super-majority (>[66%]) consent from a quorum of Lenders.
Actions requiring Super Majority Lender Consent will include:
– Any changes to the terms of this Loan Agreement
– Merger with or acquisition of another company
– Transfer of this Loan to another entity
– Release of security under this loan
Decisions which are made which successfully achieve the threshold level of consent from the Lenders shall be deemed binding on all Lenders. / All lenders sign up to an Intercreditor Agreement which governs how they act among themselves. This binds the Lenders to majority decisions made by the Lender group.
66% and 75% are relatively common thresholds for super-majority consent. We have seen thresholds as low as 60% or as high as 90% in some cases, but these are more rare (and may make important decisions either too easy or too difficult to pass).
Lenders’ Represent
ative / The Lenders may appoint one of their members to represent the Lenders in discussions with the Company. The Lenders’ Representative shall take responsibility for liaising with all lenders on matters requiring Lender Consent, and acting as a single point of contact for the Company in dealing with Lenders. The Company undertakes to keep the Lenders’ representative promptly apprised of all material matters that may require Lenders’ consent.
[The Lenders’ Representative may attend board meetings as a non-voting observer] [Add if you would like to offer this]
In the absence of a Lenders’ Representative being appointed, the Chair of the Board shall appoint a Board member to act as the Lenders’ Representative. / A Lenders’ Representative is often appointed as a single point of contact for the Company, to represent the Lenders in any discussions. The Lender’s Representative is usually appointed by the Lender with the greatest exposure to the Company, and may be the Lender.
The Lenders’ Representative sometimes has the right to sit in on board meetings (as a non-voting observer). The Rep does not vote for the Lenders, but polls their opinions and represents their collective vote.
Acceleration / If there has been any breach of any terms under this Loan which has not been remedied within [ 60 days ] or otherwise waived by Lenders under a Lender Vote, the Loan shall immediately become due and payable, together with all accrued but unpaid interest / Acceleration means the Loan becoming immediately due and payable. It is triggered by an event of default (see below). Failure to pay the loan after acceleration enables the Lender to bring insolvency proceedings against the Borrower.
Arrangement Fee / An arrangement fee of [ x ] of the Committed Amount shall be paid to Lenders on the Closing Date / An arranging fee is sometimes charged upfront by the arranger of the Loan (often a bank). The amount is usually up to 2%. It can be paid by drawing under the Loan. Please delete if fee is waived. For social loans, there is often no arrangement fee.
Business Day convention / A Business Day shall be deemed to be any day on which banks are open for business in [please add relevant country] / All payments can only be made on a day in which banks in the relevant country are open.
Commitment Fee / A commitment fee of [ x ] of the committed but undrawn amounts under the Loan shall be paid to the Lenders, commencing on the first Interest Payment Date, and on each Interest Payment Date thereafter, until the end of the Drawdown Period / The Commitment fee is charged on any committed but undrawn amounts that lenders keep open for the Borrower. It is charged on each interest payment date during the Commitment period. It is often priced at half the interest rate margin.
Commitment Period / The Lenders shall keep their Committed amounts open for the Borrower to draw upon on each Interest Payment Date from Financial Close until the Interest Payment Date falling due on [ date ], unless cancelled earlier by either the Borrower or the Lenders / The Commitment Period is the time during which Lenders keep their committed amount open for you to borrow.
Cancellation / Either the Borrower or any lender may at any time, upon written notice to the Borrower and other Lenders, immediately cancel any commitment made but not yet drawn under this Loan.
Upon all parties receiving such notification, the Loan Commitment shall immediately be reduced by the amount of the cancelled commitment.
Any commitments shall be automatically cancelled and no further drawings may be made in the event of any of the following (’Draw Stop Conditions’):
1. Any of [ add key individuals ] leave the Company
2. The Borrower becomes insolvent, petitions for wind-down or liquidation, or announces plans to cease trading
3. The Borrower is bought by another company, or enters discussions to be bought
4. The Borrower acquires or seeks to acquire or merge with another company
5. The Borrower seeks to restructure its group ownership
6. The Borrower announces a material change of business
7. Material litigation commences against the Borrower
8. The Loan enters a Potential Event of Default
9. The Borrower seeks to transfer or amend the terms of the Loan
10. A decision requiring Lender Consent is put to vote and has not yet been confirmed
11. [ add others as applicable ] / Since keeping commitments open is expensive, we recommend that you cancel the Commitment as soon as you have drawn down enough funds.
Commitments may also be automatically cancelled if any of the following conditions on the left occur
Covenants / As standard for a loan of this type, including:
Positive covenants
The Borrower shall:
1. Provide all relevant Information to lenders on a regular basis in a format to be agreed with Lenders;
2. Ensure timely filing of audited accounts;
3. Ensure all commercial transactions are on arms-length terms;
4. Comply with all applicable laws;
5. Co-operate with relevant regulatory authorities;
6. Maintain all material registrations and licenses;
7. Maintain all relevant insurance policies;
8. Promptly pay all relevant taxes;
9. Maintain all relevant company records, including bank statements for the past [7] years;
10. Ensure that all employees and contractors have up-to-date contracts in compliance with relevant employment law;
11. Promptly notify Lenders should a material event occur that could impact the Borrower’s ability to repay the loan on schedule.
Negative covenants
The Borrower shall not, without Lender Consent:
12. Incur additional debt (other than creditors in the ordinary course of business);
13. Merge or acquire another company;
14. Transfer the Loan to another entity;
15. Restructure the Borrower Group;
16. Grant security over assets to other lenders in preference to the Lenders (other than security to trade creditors in the ordinary course of business, or specific assets agreed by Lenders)
17. Sell or seek to divest any material assets of the Borrower Group, including intellectual property and other intangibles, other than on arms-length terms in the ordinary course of business;
18. Make any distributions to Ordinary Shareholders while this Loan is outstanding
19. Engage in any activity that might be deemed to be bribery or a corrupt practice.
[Please add others as applicable and in negotiation with lenders] / Covenants are control provisions put in by Lenders to protect themselves against actions which might threaten loan repayment. The ones listed here are some standard covenants.
Lenders may wish to add more, depending on the specifics of your business and financing.
Conversion Event / The Loan will automatically be converted into equity at the Conversion Price in the event that the Company raises more than [ add threshold amount ] in total in the form of Ordinary or Preferred Shares from third party investors (the ’New Investors’).
Save for the Share Price, any conversion shall be on identical terms to the New Investors. / A ’Conversion Event’ is an event which triggers the conversion of the loan into Equity. In this case, the loan will convert if the company succeeds in raising a new round of equity above a given minimum amount.
It is also possible to have a Conversion Event triggered at the Lender’s option, and (in rarer cases), at the Company’s option (this would be very favourable to the Company). The Lenders will only want to convert if they see the Company doing well (i.e. growing and raising new equity).
Conversion Price / The price at which the Loan investors shall convert their outstanding loan amounts into Ordinary or Preferred Shares in the Company shall be at the same price as the New Investors, less a Conversion discount of [ x%] / This is the price at which the Loan converts into equity. Lenders should be offered a discount to the new equity investors because they invested in the Company earlier on and took more risk. A conversion discount of 20% is quite common.
Cross Default / If the Borrower defaults on any of its senior debt for an amount in excess of [$5,000 – set as applicable] (not including trade credit), then this Loan shall also be deemed to be in Event of Default / A cross default clause ensures that if the Company defaults on its debt to any other creditors, this Loan will also be defaulted. This enables the Lenders to take action against the Borrower, rather than waiting for another creditor to do so (and potentially get paid out ahead of the Lenders)