Term Sheets
Michael D. Bain, WilmerHale
iNNOVATOR EVENING

Attorney Advertising
Financing Trends
• Down-rounds
• Multiple Return Liquidation Preferences and
subsequent rounds are senior to the existing
...
Sources of Money
•
•
•
•
•
•
•

Self-Funding
Friends and Family
Angels
Organized Angels
Venture Capitalists
Strategic Part...
Angels and Important to an Angel very differently
What’s VCs rank their priorities in a deal

Business Attributes

Angel V...
Why Angels vs. VCs
•
•
•
•
•
•
•

Need cash quickly
Proactive mentoring and counseling
Avoid valuation of the Company
Majo...
Goals in Early Rounds
•
•
•
•
•
•
•

Seek VC-friendly terms and conditions
Receive quality, critical early-stage advice
Mo...
Typical Seed Stage Deals
•
•
•
•

Cash Loan
Common Stock
Convertible Debt
Convertible Preferred Stock

© 2014 Wilmer Cutle...
Cash Loan
• Requires repayment in cash along with periodic
interest payments
• Typically less sophisticated investors
• Of...
Common Stock
• Affects Option and Restricted Stock Pricing
• Often combined with additional VC rights
o
o
o
o

Registratio...
Convertible Debt
•
•
•
•
•
•
•
•

Most desirable
Minimum transaction costs
Very quick
Minimizes problems with VCs
Minimum ...
Convertible Preferred Stock
•
•
•
•
•

Full set of rights typically associated with VCs
Too much control for too little mo...
Venture Capital Terms to Know and
Understand
• Liquidation Preferences
• Participating preferred
stock
• Super liquidation...
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Term Sheets

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Explores financing trends, money sources, comparison of Angels and VCs, early round goals, typical seed stage deals, and key VC terms to know.

Published in: Business, Economy & Finance
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Transcript of "Term Sheets"

  1. 1. Term Sheets Michael D. Bain, WilmerHale iNNOVATOR EVENING Attorney Advertising
  2. 2. Financing Trends • Down-rounds • Multiple Return Liquidation Preferences and subsequent rounds are senior to the existing liquidation preferences • Antidilution ratchet • Corporate Reorganizations © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  3. 3. Sources of Money • • • • • • • Self-Funding Friends and Family Angels Organized Angels Venture Capitalists Strategic Partnerships Government Grants © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  4. 4. Angels and Important to an Angel very differently What’s VCs rank their priorities in a deal Business Attributes Angel VC Investor's possible involvement 1 3 Investor's strengths filling gaps in business 2 5 Geographically close 3 6 Potential exit routes (liquidity) 4 1 Investor's understanding of business or industry 4 2 Presence of (potential) co-investors 6 4 Source: Angel Investing: Matching Startup Funds with Startup Companies -- A Guide for Entrepreneurs, Individual Investors, and Venture Capitalists (Jossey-Bass, 2000). © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  5. 5. Why Angels vs. VCs • • • • • • • Need cash quickly Proactive mentoring and counseling Avoid valuation of the Company Major milestone in reach Business Plan not complete Stealth mode/Avoid scrutiny Lack of VC interest © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  6. 6. Goals in Early Rounds • • • • • • • Seek VC-friendly terms and conditions Receive quality, critical early-stage advice Move quickly Minimize transaction costs Improve Company’s prospects/reputation Minimize number of stockholders Avoid future legal problems © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  7. 7. Typical Seed Stage Deals • • • • Cash Loan Common Stock Convertible Debt Convertible Preferred Stock © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  8. 8. Cash Loan • Requires repayment in cash along with periodic interest payments • Typically less sophisticated investors • Often changes form • Unfavorable Use of Proceeds • Quick and easy • Seek to delay principal and interest payments until Series A Round • No dilution © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  9. 9. Common Stock • Affects Option and Restricted Stock Pricing • Often combined with additional VC rights o o o o Registration Rights Board Seat Information Rights Right of First Refusal • Valuation • Control • Probably least desirable © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  10. 10. Convertible Debt • • • • • • • • Most desirable Minimum transaction costs Very quick Minimizes problems with VCs Minimum additional rights Postpones valuation analysis Better than Common Stock for the Investor Typically convertible at holder’s option © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  11. 11. Convertible Preferred Stock • • • • • Full set of rights typically associated with VCs Too much control for too little money Uses up “Series A” Significant transaction costs Requires valuation © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  12. 12. Venture Capital Terms to Know and Understand • Liquidation Preferences • Participating preferred stock • Super liquidation preferences • • • • Dividends Anti-dilution adjustments Weighted average Full ratchet • Drag along rights • Extraordinary put rights • Redemption rights • Board control • Fair market value redemption • Increase in conversion price • Pay to play Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/codeof-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
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