2. Panel & Agenda
Panel
• Tom Pincince – CEO, Digital Lumens
• Jeff Arnold – Member, Boston Harbor Angels
• Jeremy Halpern –Nutter McClennen and Fish
• Adam Ghander –Nutter McClennen and Fish
Moderator:
• Michael Young – ConnectPay
Agenda
• Term Sheet Overview (Dictionary Handout)
• Negotiation (Term Sheet Handout)
• Valuation Thoughts
• Q&A
2
3. Term Sheet
• What is a term sheet?
– Agree on fundamentals before legal drafting
• Type of security
• Economic Terms
• Control Terms
• Distribution upon liquidity (the “exit”)
• Conditions to doing the deal
• Mechanics and timing of deal
– Sales document to investors
– A term sheet is generally non-binding, but...
• Confidentiality / No-shops / Expense provisions
3
5. What is Preferred Stock?
• Default in high growth/high risk investments
• Preferences over the Common Stock (this means you!)
– Liquidation preference: Last In = First Out
– Dividends (maybe)
• Special rights to protect investment
– Board representation and blocking rights
– Anti-dilution price protection
– Redemption rights
– ROFRs / Preemptive Rights / Drags / Tags / Registration
5
6. Overview of Economics: Equity
• Price Terms
– Pre-money valuation?
– Option Pool: size and pre vs. post
• Treatment of Dividends
– Cumulative dividends
• Liquidation Preferences
– Participating
– Non-Participating
– Capped
• Price Protection – Anti-Dilution
– Full Ratchet vs. Weighted Average
• Redemption Features
– Timing and consequences
6
7. Terms to Understand
• Pre-Money
– What the investor believes the company is worth
prior to their investment
• Post Money
– The pre-money valuation plus the new investment
amount
7
8. Equity Pricing: Terms to
• Option Pool
Understand
– Given to incentivize employees
– Feel ownership in company
– How does it impact Founder economics/ownership?
– Who benefits?
• Considerations
– When does it get added?
– How big should it be? Does it match investment duration?
– What is the vesting schedule?
– Is there acceleration on a liquidity event?
8
9. Equity : Liquidation Preferences
• Preferred – First out in a “liquidation event”
– Liquidation event:
• Merger, acquisition, change of control, true liquidation
– Return of investment before common stock then...
– Participating Preferred or Non-Participating?
• Participating Preferred - the investor gets its liquidation
preference + pro rata share (the “double dip”)
• Non-Participating Preferred, the investor get either
liquidation preference OR pro rata share
9
10. Anti-Dilution
• Allows investors to “re-price” and protect
“value” not “percentage” dilution
• Two types:
– 1) Weighted Average
• Factors (i) spread between old and new prices,
multiplied by (ii) quantity of new shares
– 2) Full Ratchet
• Reprices old investment to new lower price
10
11. Governance
• Board of Directors
– Who chooses? How chosen?
– Observation rights – who, how monitored
– Skills needed to fill out team
– Audit, Compensation Committees
– Fiduciary duties
• Financial and Reporting Requirements
– Financial statements – monthly, quarterly, annual – audited or
not?
– Who gets these?
• Other Information Rights?
– What information and who?
– Visitation rights?
11
12. Control
– Voting
• Ability of board, stockholders, or class holders to block
certain actions
• Who elects the board?
– Voting on “as if” Converted Basis
– Class Voting and Protective Provisions
– Negative Covenants
• What you can and can’t do without investor approval
12
13. Stockholders Rights
• Transfer Rights
– Right of First Refusal
• Participation in future financings
• Founder restrictions
– Reverse vesting of stock
– Non-competition
– Founder representations in purchase agreement
13
14. Stockholders Rights
• Registration Rights
– Theoretical right to force public offerings
• Drag Along
– Right of majority to force minority to sell
• Right of Co-Sale (“Tag-Alongs”)
– Pro rata liquidity for all stockholders in a proposed
transfer by 1 stockholder
• Redemption (“Gun to the Head”)
– Right to force the company to buy back the shares
14
15. Valuation Issues
• Market Test
• Leverage
• Power of Auction
• Terms vs. Price
• Price less important than relationship
• Positioning for future
• Impact of Convertible Debt from F&F
16. Methodologies
• Venture Capital Method (used also by many angels)
– Future revenue x industry multiple x pro rata percentage x IRR = current value
• Discounted Cash Flow / Net Present Value
– Based on fiction
• Chicago (DCF x probability tiers)
– Same issue as above
• Berkus (finger in the air)
– Maximums per attribute (max $2.5m)
• OTA/Payne – Comparison to average x weight
– Helpful for biotech/cleantech
• Risk Factor Method
– Highly subjective – a more detailed version of Berkus Method
• Opportunity Cost / Contribution Model
– Based on sweat and lost alternative revenue
• 1/3 Max rule
– Treats angels like co-founders and weight cash versus sweat
• Transaction Comparables
– Hard to find like deals; general market trends may apply
• P/E P/R Multiples
– Assumes mature companies
17. Panel of Experts
Tom Pincince – CEO, Digital Lumens,
@DigitalLumens
Jeff Arnold – Member, Boston Harbor Angels
Jeremy Halpern –Nutter McClennen and Fish,
@StartupBoston
Adam Ghander –Nutter McClennen and Fish
@AdamGhander
Moderator:
Michael Young – ConnectPay
