Key takeaways
- The share price is just one line in a term sheet. Rights on payment order, ratio adjustments and forced sales can matter more.
- In the example, on a business sale of THB 1,000 m the founders receive THB 750 m or THB 450 m depending on the type of liquidation preference, even though the entry price is the same.
- A term sheet is usually non-binding on commercial matters, but it sets a framework that is hard to change in the final agreement. A lawyer and someone who reads the numbers should review it together.
An investor submits a term sheet with a higher valuation than expected. The founding team is so pleased that they read only the price line. Years later the company sells at a good price, but the money reaching the founders is far less than they expected, because a few lines decide who is paid first and by how many times their money. A term sheet is like a house lease: the rent is easy to read, but the painful issues are usually in the fine print.
Read the price correctly first
Post-money = Pre-money + new investment
Investor's stake = new investment ÷ post-money
Ask whether the figure is pre-money or post-money, and whether it is calculated on a fully diluted share count. If shares reserved for employees are included in the base before the money comes in, the resulting dilution falls entirely on the existing shareholders.
Liquidation preference: who gets paid first
Hypothetical example An investor puts in THB 200 million for 25% (post-money THB 800 million). The company has no debt. The sale proceeds are shared among shareholders only. Figures in THB million.
| Selling price | 1x Non-Participating | 1x Participating | 2x Participating |
|---|---|---|---|
| 1,000: investor receives | 250 | 400 | 550 |
| 1,000: founders receive | 750 | 600 | 450 |
| 600: investor receives | 200 | 300 | 450 |
| 600: founders receive | 400 | 300 | 150 |
| 300: investor receives | 200 | 225 | 300 |
| 300: founders receive | 100 | 75 | 0 |
Under non-participating, the investor chooses either to take its money back or to convert into ordinary shares pro rata. Under participating, the investor takes its money back first and still shares in the remainder pro rata. The difference grows larger when the sale price is poor.
Anti-dilution: when the next round is priced lower
Hypothetical example The founders hold 6 million shares and the investor holds 2 million shares, entered at THB 100. A new round issues 1 million shares at THB 50.
| Type | Existing investor's shares after adjustment (million) | Founders | Existing investor | New investor |
|---|---|---|---|---|
| No adjustment | 2.00 | 66.67% | 22.22% | 11.11% |
| Broad-Based Weighted Average (conversion price THB 94.44) | 2.12 | 65.81% | 23.23% | 10.97% |
| Full Ratchet (conversion price THB 50) | 4.00 | 54.55% | 36.36% | 9.09% |
Full Ratchet costs the founders 11.26 percentage points more of their stake than Weighted Average, from a single share issue.
Clauses to read word by word
| Clause | Meaning | What to check |
|---|---|---|
| Drag-Along | Majority shareholders can force others to join a sale (drag-along) | Voting threshold, minimum price, period before the right can be exercised |
| Tag-Along | Minority shareholders can join a sale on the same terms (tag-along) | Who gets this right, and whether it applies to partial sales |
| ROFR and ROFO | Right to buy first, or to be offered shares first, before other parties | Duration, as it may deter outside buyers from bidding |
| Reserved Matters | Matters the investor can veto | Separate protection of the investment from day-to-day management |
| Redemption or put option | Forced buyback of shares at a set price | Whether it works like debt, and whether there is a real source of funds |
| Founder vesting and leaver provisions | Founder shares that may be bought back when the founder leaves | Definitions of good leaver and bad leaver |
| Exclusivity and no-shop | Prohibition on talking to other investors | The period should be short and should end if the price changes |
Additional points under Thai law
Several terms come from overseas practice. When applied to a Thai limited company, check whether they are workable. For example, shares cannot be issued below par value, the rights of preference shares must be set out and registered as required by law, and some forms of anti-dilution need a redesigned mechanism. If the investor is foreign, check the Foreign Business Act and the restrictions on land ownership as well. A Thai lawyer should confirm the structure before signing.
Negotiation priorities
Founders do not need to negotiate every clause equally. Start with the matters that most affect money and control: the type of liquidation preference, anti-dilution, reserved matters and drag-along, and then look at the other details. Accepting a slightly lower price in exchange for cleaner terms may yield more net cash, because the table above shows that terms can change the amount founders receive substantially even when the entry price is unchanged. Compare offers by the cash the founders actually receive, not by a single valuation line.
Next steps
- Build a fully diluted cap table before and after the money comes in
- Simulate what the founders receive at no fewer than three sale prices
- Simulate a lower-priced funding round to see the effect of anti-dilution
- Draw the line on unacceptable clauses before negotiating
- Check which term sheet clauses are legally binding
- Have a Thai lawyer and someone who reads the numbers review it together
- Consider how each clause will work when the next-round investors arrive