Here we define the scope of the document: covering the company that we’re investing in and the founder, or founders, to whom the term sheet is addressed.

Kindred typically operates as a lead investor in seed and pre-seed investment rounds.  If you have received a term sheet from us, we are leading the investment. If someone else is leading, then you should receive a term sheet from them. Typically, Kindred does not invest 100% of a round, and we will bring in other institutional investors or angel investors alongside. We work collaboratively with you - the founders - to work out who would be best suited to invest alongside us to build the best syndicate of investors for the company at the seed stage.

The maths around valuation is quite simple. Using the 'Investment Round' figure given in Clause 2, and the fully diluted ownership percentage given in Clause 3, the pre-money valuation can be inferred. For example, if the total round size is £2M, and the Investors will receive a total of 20% of the company, this will mean that the pre-money valuation is £8M ((£10M / 20%) - £2M = £8M).

It is important to note that the Term Sheet refers to a pre-money valuation, which refers to the value of the company immediately prior to the Investment Round taking place (i.e. ignoring any new capital put into the company as a result of the Term Sheet). Continuing on from the example above, at a pre-money valuation of £8M, the post-money valuation of the proposed investment would be £10M (£8M pre-money + £2M capital invested).

The term sheet also refers to fully-diluted ownership. As can be seen in the asterisk below Clause 3.1, this refers to all outstanding shares, options and warrants, or any other issued instrument which could convert into equity of the company in the future.

This Clause relates to Kindred's desired minimum ownership stake in the company and is a function of the pre-money valuation (Clause 3.1), Kindred's investment amount (Clause 2.1) and the total size of the Investment Round (Clause 2.1).

Typically at the pre-seed/seed stage companies will be comprised of a founder, or founders, and perhaps 1-2 other staff members. As the team is built out, an ESOP gives the company the firepower to hire and retain high-quality team members to take you through this next stage of growth and beyond. As such, we like to see an ESOP in place in order to provide capacity for allocation to future senior hires. Typically, we would want to see a 10-15% ESOP at the seed stage.

One thing to note is that an ESOP can be put in place prior to an Investment Round, or post an investment round, and the configuration of this will impact the ownership stakes of the founder(s) and investor(s) differently.

In terms of the vesting period of the share options, we ask that all options are vested over a 4-year period, which means that option holders’ incentives are aligned for creating value over the long term. This protects the Company, you as founders, and us as investors.

Each Investment Round that a Company undertakes will typically have a different class of shares issued at that Investment Round, each of which will have different rights associated with them. The rights attached to the newly issued Seed Stage shares in this Term Sheet are discussed in the 'Investor Rights' section of this Term Sheet.

The price per share is calculated by taking the pre-money valuation (Clause 3.1), divided by the number of issued shares, options and warrants already issued prior to the round taking place.

Continuing with the example that we started in Clause 3.1, if there were two founders each with 500,000 shares (so 1M shares in total), and a pre-money valuation of £8M, this would equate to a price per share of £8 (£8M / 1M = £8)

Note that the price per share is calculated on a fully-diluted basis, so takes into account options and warrants as well as shares

The four week timeline outlined in the Term Sheet is based on using Kindred's template legal documents, which keeps the process straightforward and costs low. This timeline also relies on us working together to agree the long-form documents; one of the reasons that we're so transparent with our term sheet is that we don't want any surprises for you, the Founder. Kindred's documents are based on the BVCA template documents so you don't have to recreate them in future fundraising rounds - getting things right at this stage will save you time and money in the future.

This timeline also allows time for any further legal and technical due diligence necessary on the company, such as DD on the Company’s product and tech, AML checks, and references on the Founder(s). We hope that this can be done quickly but it can take longer if you haven’t got some of the required documents. Typically we run our DD process on the Company and Founders in parallel with our Investment Process.

AML checks are standard procedure during any Investment Round. The Founder Questionnaire is a form of diligence and asks questions around areas such as education, employment history and historic and outstanding litigation/proceedings.

Any new Investment Round into a Company will require entry into new legal documents, which are typically drafted by our legal counsel. The Articles of Association govern the internal affairs of a company, and act as a contract between each of the company’s shareholders, and between the shareholders and the company itself. The Subscription and Shareholders’ Agreement (SSA) Shareholders’ agreements establish additional obligations between the shareholders themselves, and supplement the Articles by further organising the relationship between the shareholders.

It is important that the Founders and Company have agreements in place around employment ('Founder Service Agreements) and intellectual property ('IP Assignment'). This is to ensure that the assets remain a part of the company if for any reason in the future the Founders and Company part ways.

A Founder Service Agreement is a contract between the Company and Founder and covers areas such as remuneration, IP and restrictive covenants (a form of 'non-compete' clause). An IP Assignment assigns all intellectual property present in the Company to the Company, as opposed to the Founder.

Warranties, or representations, are effectively assurances or promises that you have disclosed everything in your knowledge about the Company and yourselves to the Investors, and if anything later comes out in the wash that was not disclosed, then the Investors have a right to recover any loss incurred due to this fact not being disclosed, from both the Company and the Founders, up to an agreed upon cap. In this case, the cap is the value of the investment in the Company (to be recovered from the Company), and the annual salary of the Founders (from the Founders). So long as what you have told us or what is stated in the warranties is not inaccurate or misleading you won't have anything to worry about. 

Similar to the restrictive covenants mentioned in the Founder Service Agreement, we ask that if Founders leave the Company, they commit to not competing for a period of 12 months. This is to protect the Company from a Founder starting/joining/investing in a business in direct competition with the Company. This could potentially negatively impact the Company, any remaining Founder(s) and our investment.

At first glance, reverse vesting seems like a scary prospect for Founders. In essence, the Founder's equity in the Company will vest back to them across a three year period and if they leave prior to the three-year mark they will have to give up any unvested shares. The reason for this is to align incentives. Imagine a Company with two Founders (let's say they each own 40% of the company, with Kindred owning the remaining 20% of equity), and for whatever reason one of those Founders leaves six months after the Seed Round. With no reverse vesting in place, the remaining Founder and the departing Founder will both continue to own the same stake in the Company, despite one playing no further role in the development of the fledgling Company. With reverse vesting, any unvested portion of the departing Founder's stake will convert into deferred shares, effectively being returned to the company. In this way, reverse vesting aligns Founders' interests with those of the investing VC, and gives Founders 'skin in the game'. Secondly, if a Founder does depart for whatever reason and gives back a portion of their equity, this can be used to incentivise future hires.

If the Company is sold for a lower price than the valuation we agreed for the Seed round, then preference shareholders will receive their invested capital back in priority to Ordinary shareholders. This will be the higher amount of the original investment or the ownership percentage of the sale or liquidation value (on a pro-rata basis).

If the Company does issue new shares at a price lower than what we have paid (a 'down round'), then to protect our investment you will also need to issue us new shares in accordance with the broad-based weighted average formula. This would be done in line with the industry best practice guidelines.

Investor Rights are rights granted to investors in relation to owning a certain class of shares in the company (in this case, Seed Shares). These are split into two types, on-going rights (which are relevant throughout the time the Investor owns that class of share) and exit rights (which are  relevant upon an exit event). The full list of Investor Rights is listed in the 'Investor Rights' section of this Term Sheet.

Consent Matters are changes to the Company which require the consent of a pre-determined % of the Seed Shares, including Kindred. The reason that we include this percentage is to ensure that it does not require the consent of all the shareholders to consent to changes to the Company, as this would be extremely bureaucratic. The % threshold is to be agreed between Kindred and the Founder(s) based on the Company's cap table.

We want to work closely with you to ensure the success of the business, and to put in place the kind of governance structure and alignment which will allow you to scale. For this reason, we typically ask for a Board Seat; in some instances we will also ask for a Board Observer Seat. We also recommend that the Board remains small early on in order to minimise bureaucracy and improve the speed of decision making.

Kindred has a unique model of Equitable Venture which means we share 20% of our profits with the Kindred community (the founders we back, our advisers, and our team). This aligns interests between all Kindred stakeholders, and means that founders have an economic incentive to share best knowledge and practices with other Kindred companies; we also hope that you'll also introduce us to other great founders that we might invest in. That allocation of profits (otherwise known as carry or performance fees) has a vesting schedule attached to it. 

Separately, we also have a wide range of resources, tools, and events to support our community of founders and their wider teams. This includes, but is not limited to: mentoring, functional support groups, Kindred resource website and Kindred job board and Founder Forums

We encourage our Founders to take on an executive coach, and for the first year Kindred will pay for this. 

We try to keep costs low by using our suite of document templates (based on the BVCA and NVCA model documents) and by minimising back and forth between lawyers. Where possible, we want to ensure that all the commercial negotiations are agreed between Kindred and you, the founders, rather than negotiating through our lawyers. If you don't have a lawyer when we issue you a term sheet we have a list of excellent, independent lawyers who we can recommend.

When we issue a term sheet, our absolute intention is to proceed with an investment. Generally speaking, we do conduct further due diligence on the company post-term sheet and while it’s exceedingly rare, if material detrimental information comes to light, we do reserve the right to renegotiate terms.  

Read our Seed Stage Term Sheet