Understanding term sheets in SE Asia | Top 4 differences about dilution

October 16, 2020

Southeast Asia venture investments and the Singapore VIMA initiative

Southeast Asia is developing a vibrant venture capital ecosystem, and start-up investments in the region doubled this year despite the global pandemic. 

Singapore, the regional VC financing hub, launched the VIMA (Venture Capital Investment Model Agreements) initiative in 2018 providing a suite of Series A investment agreement templates with the aim to reduce transaction costs and time for venture investments in the region.

The Martini team is excited to be part of the VIMA 2.0 working group to provide our views and do our part in shaping the future of venture investments in Southeast Asia.

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

In this post, 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 dilution

Founders and VCs often ask about dilution, and what protections they can add to the term sheets to prevent or minimise such dilution.

In this post, we cover the following anti-dilution provisions, and also refer you to the resources that we find helpful:

  • Right to participate pro rata in future rounds / pre-emption rights;
  • Liquidation preference;
  • Anti-dilution provision during a down round; and
  • Pay-to-play.


1. Right to participate pro rata in future rounds / pre-emption rights

You are an investor in a company. If you do not participate in the next round of financing, you will be diluted. 

The right to participate pro rata gives you a right, not an obligation, to participate in any future fundraising by the company, so that you can maintain your percentage ownership.

In the US NVCA and Canadian CVCA templates, only selected investors are entitled to such rights. The rationale provided was “to avoid unduly complicating subsequent financing rounds.” Singapore VIMA and UK BVCA templates, however, provide options to give such rights to either all investors or all shareholders. 

Series A financing is often regarded as the first serious money going into a start-up. The company is still at an early stage, just reached product-market fit, and often is experiencing exponential growth. In start-up terminology, this means: nothing goes as planned on any day!

At this stage, efficiency in fundraising trumps everything, so that more resources go to the rocket ship fast.

2. Liquidation preference

Investors often hold preference shares, as opposed to ordinary shares. A liquidation preference allows the preference shareholders to receive their money back before the ordinary shareholders (usually the founders and employees).

One key feature of the liquidation preference is whether it is participating or not. 

A participating liquidation preference means the investor first receives her preference multiple(s), and is still entitled to participate in the distribution of the remaining proceeds with the ordinary shareholders, as if she had converted her preference shares into ordinary shares. 

A participating liquidation preference is more investor-friendly than a non-participating one.

Singapore VIMA is the only among the four templates that opts for a non-participating liquidation preference as the default option. This is slightly surprising given Southeast Asia is generally considered as an investor-friendly environment.

3. Anti-dilution provision during a down round

A down round happens when a company issues shares at a price that is less than the price in an earlier financing round. Investors will be diluted as a result. 

Anti-dilution provisions allow the investor to gain a larger percentage of the company’s shareholding to prevent such dilution. This is done by increasing the number of ordinary shares the investor is entitled to upon conversion of her preference shares, often expressed in a conversion formula like this: CP2 = CP1 * (A+B) / (A+C).

Here we compare different conversion formulas across jurisdictions.

A broad-based weighted average structure is the default position for both Singapore VIMA and US NVCA templates. It is generally considered to be more founder-friendly than a narrow-based anti-dilution structure. A full ratchet, which is more investor-friendly, is also included in the NVCA long-form document as an option.

Cooley Go further explains how these formulas work here.

4. Pay-to-play

Pay-to-play provision means if a company needs to raise money from existing investors, those investors who can’t or don’t want to contribute their pro rata share will lose some or all of their preferential rights. For example, the liquidation preference treatment mentioned above. 

This provision is designed to incentivise the investors to participate in future fundraising rounds. However, it is often regarded as very founder-friendly. 

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

TechCrunch wrote about pay-to-play back in 2015 describing how investors might get burned by such provision.

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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.