Clever lawyer words - and what they mean.

See Indirect Losses.

Any agreement where someone lends a company money and will be repaid either by cash or by shares in the company. It takes lots of different forms (see SAFE, KISS and GYFT) and can be a true loan that uses shares as a backup in case the company can’t repay, or it can be a way of promising someone shares, but giving them the option to get some cash back if the company goes insolvent.

Covenants are promises to do something or not do something in future. Like “The Company will not issue any additional shares without the approval in writing of the Bank” or “I won’t watch the next episode of Suits until you get back from your work trip.” They are especially common in bank finance documents (like loan agreements).

The money you can do whatever you want with as a company. The only money you can use to buy-back the Company’s shares, or pay dividends. It is specifically your net profit, less foreseeable working capital required for the financial year.

If I ask a friend to buy me a ticket to an exclusive event and agree to go together, then I pull out at the last minute, it is pretty reasonable to say I should pay him back for the ticket, right? That’s direct loss.

Indirect loss (also called consequential losses) means I would also have to pay him for his ticket, because he didn’t want to go alone, and his therapy sessions because he is worried he doesn’t have enough friends, and then he gets so depressed that he stops showing up for work and gets fired, so now I have to pay him for his lost salary for the next 40 years. You can see how this could quickly get out of control!

Like bankrupt, but for businesses. It means a business can’t pay its debts, and owes more than it owns. There are all sorts of legal requirements on how directors have to run a company that is at risk of insolvency, so if you think it is a possibility then speak to a lawyer or Dr Google (search “transactions at an undervalue” and “insolvency offences” and “directors duties insolvency” and you should get a ton of information) to find out what your obligations are. See also receivership, scheme of arrangement anf 

Responsibility at law, especially for any costs, expenses of losses suffered by someone else as the result of your actions (or failure to act). See Indirect Losses and Loss of Opportunity for the scary reasons you should never sign a contract without a limitation of liability clause.

A form of convertible loan note which intends to issue shares to an investor, but also provides some of the benefits of a loan like the first right to be repaid if the company enters insolvency. Unlike a traditional convertible it does not have a maturity date or interest payments. Valuation is typically still judged on market value at the time of conversion less a discount, and sometimes includes a cap on valuation. 

A Seed Round is the first time a founder goes to external investors (rather than family and friends) to raise money. This is usually between $250k and $500k. and may be from an angel network like Angel Central, Keiretsu Forum or BANSEA, or it might be from the early stage VCs like Seed Plus.

A Series A Round is a round of startup fundraising which is usually between $500k and $5m in Singapore. In our experience $2m is average at the moment. 

In a convertible loan or its variants like a SAFE and a KISS cash invested into the company will turn into shares when specific things happen and the number of shares the investor gets is based on market value, less a discount. The trouble is, if you invest in a company on Day 1 when you reckon the valuation is $1m and then your money doesn’t convert for 3 years, when the company is worth $100m, you REALLY aren’t going to be happy about taking all the risk, then only getting a couple of shares because the value has shot up so much.  So you cap the valuation. 

The valuation cap should be equivalent to the assumed valuation at the time of investment plus anything from 20-75% – so in effect, the investor ends up paying roughly the right amount once the discount (market is around 20%) takes effect. Let’s use our example.

Invests on Day 1 with an imagined valuation of about $1m in his head, so agrees a $1.5m valuation cap (perceived value + 50%) and a 20% discount

Converts in Year 3 when the Series A valuation is $15m

Investor only pays $1.2m ($1.5 less 20%). 

So the Investor has paid a little more than they thought the company was worth at the time, but the company has done better than expected, so his original valuation was actually a bit low. In the end, everyone should be happy with this result.

Does that sort of make sense?  

Warranties are promises a person or a company makes about themselves at the time the relevant contract is being signed.  They only relate to past or current issues and cannot be promises for the future (those are called Covenants). Like “The Company has no pending court cases” or “I definitely did not eat the last pizza slice when you weren’t looking”. Warranties are especially detailed when a buyer or investor is buying shares in a company that has been in business for more than 3 years, as this is the timeframe in which you might have racked up tax liabilties, employee disputes or other risks a buyer will want to know about. If you breach an indemnity (i.e. lie or fail to tell them something relevant) then the other party can sue for any losses they have made as a result of that breach.

An indemnity is a promise to pay someone either a specific amount if a general problem occurs (like $30,000 if your office lease is not renewed) or a general amount (whatever the actual cost is at the time) if something very specific occurs (like, you will pay the total amount of tax owed by the Company for FYE 2017). Indemnities are a bit like an insurance policy. You examine the most likely, or biggest risks, and then specifically set out who will pay and how much, if they happen.