Emerging Trends in Venture Capital Term Sheets: Insights from HSBC’s 2023 Report
1 November 2024Introduction to the Report
HSBC recently released a comprehensive report analysing current trends in venture capital (VC) term sheet clauses. This study, based on anonymized data from 426 finalised Venture Capital term sheets across various investment stages (seed to Series C) in 2023, reflects input from 21 UK and international law firms specialising in venture deals. Notably, 95% of the analysed transactions involved UK-headquartered companies, with 5% from the EU. The report aims to provide a practical overview of the key contents and latest trends within VC deals in the UK and EU markets for 2023.
Key Trends in Venture Capital Term Sheets
Sectoral Focus on Climate Tech and AI: Investments in Climate Tech and AI have surged, now making up 20% of the total term sheets in 2023, a notable rise from 9% in 2022. Together, these sectors comprised 40% of total European VC investments in 2023, underlining a strong shift towards innovative, sustainable, and AI-driven technologies.
Seed Investment Growth: There has been a significant increase in seed investment term sheets, especially dominated by UK-based investors. Later-stage UK companies, however, continue to attract interest from international investors, particularly from the US and EU, with US investors showing keen interest in these later-stage rounds.
2024 Investment Outlook
Recovery and Valuation Trends: The report anticipates steady recovery in EU VC investments as investor confidence returns. The early-stage and late-stage markets may see a valuation bifurcation, with high-performing companies benefiting from public market benchmarks, while others may face recaps and down rounds.
Increasing Cross-Border Investment: The study expects cross-border investments to rise, with greater participation from US investors in UK and EU companies, alongside a growing interest among UK and EU firms in expanding into the US market.
Key Term Sheet Trends for 2023 and 2024
Liquidation Preferences and Preference Shares: Liquidation preferences continue to favour 1x non-participating structures, with 89% of preference shares being non-participating. In liquidity events, non-participating investors have the option to either recoup their initial investment (multiplied by the liquidation multiple and any unpaid dividends) or convert shares and participate as ordinary shareholders. Participating preferred shares allow investors to receive their investment multiple before ordinary shareholders receive distributions, followed by their pro-rata distribution of any remaining proceeds.
Board Control and Representation: Investor board appointments remain crucial, with 79% of term sheets including this clause. Board control and representation will likely continue as a priority in 2024.
Warranties and Anti-Dilution Clauses: There is a growing trend towards company-only warranties, excluding founder warranties. Anti-dilution provisions are becoming less common, particularly at the seed stage, as they are typically reserved for later-stage investments.
Additional Term Sheet Insights
Ordinary vs. Preference Shares: Preference shares appeared in 83% of 2023’s term sheets, up from 71% in 2022. VC investors received preferred shares in 91% of cases, while angel investors received them in 12%. Preference shares were prevalent in 65% of seed-stage investments, increasing to 87%-97% in Series A to C rounds.
Founder Vesting and Investor Consent: Founder vesting is included in 61% of term sheets, while investor consent clauses appear in 78%.
Top 10 VC-Backed Industries in 2023
Health tech, Climate tech, Fintech, AI, Enterprise software, Retail & Consumer, Data analytics, Digital, Cybersecurity, and Non-enterprise software were the most active sectors, with Health tech leading at 13% and Climate tech at 10%.
Term Sheet Features by Stage
- Seed stage preference shares: 65%, Series A to C: around 90%
- Seed stage anti-dilution clauses: 27%, Series A to C: around 70%
- Board representation clauses: ~85% across all stages
- Founder vesting: Seed stage – 75%; later stages – 30%
- Founder departure provisions: Seed stage – 59%, later stages – 13%
- Drag-along provisions: Seed stage – 83%, later stages – 77%
- Investor consent rights: ~80% at all stages
- Founder warranties: Seed stage – 60%, later stages – 13%
- Company warranties: Seed stage – 87%, later stages – 70%
NBLO’s Expertise in VC Legal Advisory
With substantial experience advising UK and EU venture capital funds and start-ups, NBLO is committed to helping clients navigate the complex VC investment landscape. Our team offers customised legal solutions to help funds and start-ups achieve their objectives and maximise investment potential. Whether you’re seeking guidance on compliance or securing funding, we’re here to support your journey.
For more information or tailored advice, please contact us.