Part of the all day Venture Fast Track:
http://www.thecapitalnetwork.org/programs/venture-fast-track/
Angel & Venture Term Sheets and Negotiation with an Investor
As an entrepreneur, understanding the parts of an Angel or Venture Capital term sheet can be a daunting task. The session discusses common practices and pitfalls surrounding the use of term sheets and the current market terms for early-stage angel and venture investments. Some sample term sheets will be reviewed and explained.
Led by a venture capitalist, an entrepreneur, and their attorneys, this program explains the critical common business and legal terms used in these term sheets through a live, mock negotiation.
Experts:
- Justin Borgman – Hadapt
- Yumin Choi – HLM Venture Partners
- Alex Glovsky – Nutter, McClennen & Fish
- Adam Ghander – Nutter, McClennen & Fish
2. Overview
of
a
Term
Sheet
• Two
most
common
early-‐stage
securi8es:
– 1)
Conver8ble
Debt
– 2)
Preferred
Stock
• Conver8ble
preferred
stock
• Redeemable
preferred
stock
2
3. What
is
Preferred
Stock?
• Fairly
standard
in
early-‐stage
investment
• Has
certain
preferences:
– Liquida8on
preference
– Dividends
(maybe)
– Board
representa8on
and
blocking
rights
– An8-‐dilu8on
protec8on
– Redemp8on
rights
3
4. Preferred
Stock
Term
Sheet
• What
is
a
term
sheet?
– Agree
on
fundamentals
before
legal
draOing
• A
term
sheet
is
generally
non-‐binding,
but...
– Confiden8ality
– No-‐shops
– Expense
provisions
4
5. Overview
of
Economics:
Equity
• Price
Terms
– Pre-‐money
valua8on?
– Op8on
Pool
–
size
and
8ming
of
addi8on
• Treatment
of
Dividends
– Cumula8ve
dividends
• Liquida8on
Preferences
– Par8cipa8ng
vs.
Non-‐Par8cipa8ng;
dollar-‐capped
– The
effect
on
“Ownership
Percentage”
• Price
Protec8on
–
An8-‐Dilu8on
– Full
vs.
weighted
average
• Redemp8on
Features
– Timing
and
consequences
5
6. Equity
Pricing:
Terms
to
Understand
• Pre-‐Money
– What
the
investor
believes
the
company
is
worth
prior
to
their
investment
• Post
Money
– Simply
the
pre-‐money
valua8on
plus
the
investment
amount
6
7. Equity
Pricing:
Terms
to
Understand
• Op8on
Pool
– Given
to
incen8vize
employees
– Feel
ownership
in
company
– How
does
it
impact
Founder
economics/ownership?
– Who
benefits?
• Considera8ons
– When
does
it
get
added?
– How
big
should
it
be?
– What
is
the
ves8ng
schedule?
– Is
there
accelera8on
on
a
liquidity
event?
7
8. Equity
:
Liquida8on
Preferences
• Preferred
–
First
out
in
“liquida8on
event”
– Liquida8on
event:
• Merger,
acquisi8on,
change
of
control,
true
liquida8on
– Return
of
investment
before
common
stock
then...
– Is
it
Par8cipa8ng
Preferred
or
Non-‐Par8cipa8ng?
• With
Par8cipa8ng
Preferred,
the
investor
gets
its
liquida8on
preference
and
then
par8cipates
in
all
residual
distribu8ons
on
an
as
converted
basis
• With
Non-‐Par8cipa8ng
Preferred,
the
investor
is
only
en8tled
to
its
liquida8on
preference
8
9. Equity:
Par8cipa8ng
Preferred
vs.
Non
• An
example:
• 10M
shares
of
common
stock
outstanding
(assuming
exercise
of
all
op8ons
in
pool)
• Investors
hold
10M
shares
of
preferred
purchased
for
$1.00
per
share
• Preferred
convert
to
common
on
a
1-‐for-‐1
basis
• Preferred
has
a
1X
liquida8on
preference
9
10. Equity:
Par8cipa8ng
Preferred
vs.
Non
Common Shareholders Share of Sale $
Sale Price Participating
$10M
$0
Non-Participating
$0
$15M
$2.5M
$5.0M
$25M
$7.5M
$12.5M
$50M
$20M
$25M
$100M
$45M
$50M
10
11. An8-‐Dilu8on
• Allows
investors
to
“re-‐price”
• Two
types:
– 1)
Weighted
Average
– 2)
Full
Ratchet
11
12. Governance
• Board
of
Directors
– Who
chooses?
How
chosen?
– Observa8on
rights
–
who,
how
monitored
– Skills
needed
to
fill
out
team
– Audit,
Compensa8on
Commiiees
– Fiduciary
du8es
• Financial
and
Repor8ng
Requirements
– Financial
statements
–
monthly,
quarterly,
annual
–
audited
or
not?
– Who
gets
these?
• Other
Informa8on
Rights?
– What
informa8on
and
who?
– Visita8on
rights?
12
13. Control
– Vo8ng
• Ability
of
board,
stockholders,
or
class
holders
to
block
certain
ac8ons
• Who
elects
the
board?
– Vo8ng
on
“as
if”
Converted
Basis
– Class
Vo8ng
and
Protec8ve
Provisions
– Nega8ve
Covenants
• What
you
can
and
can’t
do
without
investor
approval
13
14. Stockholders
Rights
• Transfer
Rights
– Right
of
First
Refusal
• Par8cipa8on
in
future
financings
• Founder
restric8ons
– Reverse
ves8ng
of
stock
– Non-‐compe88on
– Founder
representa8ons
in
purchase
agreement
14
15. Stockholders
Rights
• Registra8on
Rights
• Drag
along
• Right
of
Co-‐sale
• Redemp8on
15