The document summarizes the key terms that would be negotiated in an early stage financing deal between a venture capitalist and entrepreneur. It discusses the typical terms negotiated, including: 1) Valuation - discussing pre-money and post-money valuation and how percentages are calculated. 2) Liquidation preferences - specifying who gets paid first in an exit event, including details on liquidation preferences and participation rights. 3) Antidilution - protecting investors from dilution in future rounds at lower valuations, discussing full ratchet and weighted average approaches. 4) Managers' stock vesting - vesting of founders' shares over a period of time, such as 4 years, to reduce risk of

1. SETTING THE DEAL
29th October 2015

2. AN EVENT OF

3. Setting the Deal
WHAT IS SETTING THE DEAL?
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An experienced Venture Capitalist
Vs
a successful entrepreneur and his
legal advisor
negotiating the terms of an early stage
financing deal.

4. Setting the Deal
THE TERMS
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5. Setting the Deal
2 types of shares.
Preference shares and
common shares.
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6. Setting the Deal
Negotiation on 5 basic terms
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7. Setting the Deal
#1VALUATION
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8. Setting the Deal
2 types of valuations. pre-
money and post-money
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9. Setting the Deal
Postmoney = premoney +
amount of cash invested
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10. Setting the Deal
Investors get:
Cash invested
Post money valuation
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11. Setting the Deal
Example:
Company is worth €1 million pre and raises
€500K.
• How much is post-money valuation?
• What % do investors own?
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12. Setting the Deal
Example:
Company is worth €1 million pre and raises
€500K.
• How much is post-money valuation?
€1m + € 500K = €1,5 million
• What % do investors own?
€ 500K /€1,5million = 33.3%
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13. Setting the Deal
#2LIQUIDATION PREFERENCES
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Specify who gets paid first
in event of liquidation (like
sale of company)

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2 important things. The actual
preference and participation

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Preference: A certain multiple of
the original investment is returned
to the investor before the common
stock receives any payment.

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Example:
• Investor has invested 1M for 30% with a
liquidation preference 3X.
• Company is sold for 4M.

18. Setting the Deal 19
Example:
• Investor has invested 1M for 30% with a
liquidation preference 3X.
• Company is sold for 4M.
Without preference he would get 30%*4M
= 1,2M

19. Setting the Deal 20
Example:
• Investor has invested 1M for 30% with a
liquidation preference 3X.
• Company is sold for 4M.
Without preference he would get 30%*4M
= 1,2M
With 3X preference he gets 3X1M = 3M

20. Setting the Deal 21
Participation: three varieties of
participation:
• full participation
• capped participation
• non-participating

21. Setting the Deal 22
Participation: three varieties of
participation:
• full participation [more investor
friendly]
• capped participation
• non-participating [more entrepreneur
friendly]

22. Setting the Deal
#3ANTIDILUTION
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Protects an investor if at the
next round you raise money at
a lower valuation than the one
you currently have

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2 main formulas.
- Full ratchet
- Weighted average

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- Full ratchet
- Investor does not dilute at all
- More investor friendly,
-Weighted average
- Investor dilutes (not as much as entrepreneur) based on the
amount of money raised in the past and being raised now.
- More entrepreneur friendly

26. Setting the Deal
#4MANAGERS’ STOCK VESTING
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Vesting means that instead of
founders getting their %
immediately, they get it
regularly over some period

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If founders have 50% of
company with a 4 year vesting,
this means that after 1st year
they have 50%/4 = 12,5%, after
2nd year 25% etc…

29. Setting the Deal
#5PROTECTIVE PROVISIONS
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Protective provisions grant the
investors the right to veto or block
certain corporate actions.
Examples: strategy, sale of
company, change of CEO

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The rationale for these
provisions is to protect the
investors (minority
shareholders) from the
majority stockholders.

32. Setting the Deal
heartVALVE
An imaginary company presentation created by…

33. Setting the Deal 34
THE PLAYERS

34. Setting the Deal
MODERATORS
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Patrick Gabriëls Broos Bakens

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ENTREPRENEUR
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Martijn Rutten

36. Setting the Deal
LEGAL ADVISOR OF THE ENTREPRENEUR
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Marc van Rijnsoever

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VENTURE CAPITALIST
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Casper Bruens Kim de Boer

38. Setting the Deal
START NEGOTIATION
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START NEGOTIATION

39. Setting the Deal
VALUATION
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Pre-Money Valuation: The Original Purchase Price is based upon a fully-diluted
pre-money valuation of €5,000,000 and a fully-diluted
post-money valuation of €7,692,000 (including an
employee pool representing 10% of the fully-diluted post-
money capitalization).
Investors: InvestorVentures. Shares 35%, €2,692,000

40. Setting the Deal
LIQUIDATION PREFERENCES
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Liquidation Preference:
In the event of any liquidation, dissolution or winding up of
the Company, the proceeds shall be paid as follows:
(full participating Preferred Stock): First pay two times the
Original Purchase Price plus accrued dividends on each share
of Series A Preferred. Thereafter, the Series A Preferred
participates with the Common Stock pro rata on an as-
converted basis.

41. Setting the Deal
ANTIDILUTION
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Anti-dilution Provisions: In the event that the Company issues additional securities at
a purchase price less than the current Series A Preferred
conversion price, then the conversion price will be reduced
to the price at which the new shares are issued.

42. Setting the Deal
MANAGERS’ STOCK VESTING
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Vesting of Managers’Shares: 100% of the shares directly or indirectly held by a Founder
shall be subject to a: reverse quarterly vesting over a period of
four years with a one year cliff, with a compensation in the
amount of the unvested shares; nominal value in case of a bad
leaver event and in the amount of the portion of the minimum
of either the most recent financing round or current market
price in case of a good leaver event.
"Good Leaver" means any employee shareholder who ceases
to be employed as a result of death or permanent incapacity,
summary dismissal when the dismissal is found to have been
wrongful or constructive, or whose contract of employment is
terminated in circumstances where he is not in breach of his
contract. "Bad Leaver" means any employee shareholder who
is not a Good Leaver.

43. Setting the Deal
PROTECTIVE PROVISIONS AND
VETO RIGHTS
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In addition to any other vote or approval required under the
Company’s Charter or Bylaws, the Company will not, without the
written consent of the holders of at least 75% of the Company’s
Series A Preferred, either directly or by amendment, merger,
consolidation, or otherwise:
…
Protective Provisions:
Matters Requiring
Investor Director
Approval:
The prior written approval of both the Series A
Directors will be required to:
…

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Questions?

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Thank You