Understanding term sheets in SE Asia Part 2 | Risks and returns

October 28, 2020

Southeast Asia venture investments and the Singapore VIMA initiative

Venture investments in Southeast Asia nearly doubled since last year despite the global pandemic. Singapore, as the regional VC financing hub, closed deals worth over US$4 billion in 2019 - a 30X increase since 2012.

In response to the sharp increase in demand, Singapore launched the VIMA initiative in 2018 providing a suite of Series A investment agreement templates with the aim of reducing transaction costs for venture investments in the region.

As a member of the VIMA 2.0 working group, Martini shares its views with the community and is proud to do its part in shaping the future of venture investments in Southeast Asia.

Singapore VIMA vs. US NVCA, Canada CVCA, and UK BVCA

This is part of a series of blog posts where we compare the Singapore VIMA deal terms with their US, Canadian and British counterparts made available by the following associations: 

Last access dated 13 October 2020. 

It's all about risks and returns

We previously covered different anti-dilution provisions. In this post, we will cover the following provisions in the term sheets that help investors to diversify risks:

  • Tranched investment;
  • Redemption rights;
  • Monitoring fees; and
  • Dividends.

1. Tranched investment

The tranched investment provision allows investors to split up their investments in tranches.

This is usually how it works:

  • Only a portion of the investment amount goes to the company on completion (the First Tranche).
  • The investor has the right, but not the obligation, to invest the remaining amount at the same price as the First Tranche in subsequent tranches. 
  • The participation in subsequent tranches is dependent on the company achieving certain milestones, such as obtaining regulatory approvals for its products.

Only the UK BVCA and Canada CVCA templates provide such structure as an option.

Tranched investment structures are investor-friendly, as they allow the investor to spread the risks into tranches while leaving the company with a (potentially) shorter runway.

This might not be in the interest of the founders. Fundraising is a very time-consuming exercise. It is often a 6-month full-time job for the CEO of an already short-staffed early-stage company. Hence, start-ups aim to raise enough money so that they can focus on building the business to reach their next milestone.

One should not confuse tranched investments with “top-up” rounds. The US NVCA templates allow the company to make an initial closing and then continue to raise capital over an agreed period on the same terms. This term is founder-friendly.

2. Redemption rights

Redemption rights give the investor an option to require the company to buy her shares back, usually at the original purchase price plus a pre-agreed rate of return.

As noted in the US NVCA drafting notes “redemption provisions are rare and even more rarely exercised.” According to statistics released by the NVCA, this term appears in around 5% of the Seed round documents and 11% of the Series A round documents.

Singapore VIMA does not include this provision at all, while others include this provision as an option. 

This term provides additional rights to the investor and is investor-friendly.

3. Monitoring fees

Monitoring fees are the fees charged by an investor to its portfolio company for ongoing advisory and management services. 

The UK BVCA templates provide an option to include an “annual, index-linked monitoring fee”.  All the others do not contain this provision at all. 

It is noted in the UK BVCA drafting notes that “it is increasingly common for investors not to charge such fees...or otherwise, preferring that cash to remain within the Company.”

Preqin and Dechert released a report in 2011 looking at the practice of monitoring fees in private equity transactions in the aftermath of the 2009 financial crisis. On average, each portfolio company pays US$1.08 million in monitoring fees every year. 

However, is such a term appropriate for early-stage VC investments? 

4. Dividends

A dividend is a distribution of profits by a company to its shareholders. 

Investors usually own preference shares. One of the benefits of preference shares is the ability to receive dividends in priority to the ordinary shares (usually owned by the founders and employees).

A cumulative dividend is more investor-friendly than a non-cumulative one. The most founder-friendly one is the equal sharing option, so that dividend is only paid on preference shares if and when they are paid on the ordinary shares. 

Singapore, US, and Canada templates provide all three types of dividend structure as options. The UK BVCA templates, however, do not provide for a non-cumulative dividend structure.

You can refer to this Pitchbook article for some numerical illustrations. 

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This post is part of a series of blog posts where we compare venture deal terms across different jurisdictions and provide insights on Southeast Asia deal terms. Please sign up for our Olive blog below and watch this space! 

Please note these are the individual author’s personal views and do not constitute legal advice.

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Flora Suen-Krujatz

A lawyer turned entrepreneur. Flora enjoys applying her legal skills with a brand new perspective. Formerly an M&A lawyer at Linklaters London, Hong Kong & Shanghai.