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.

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

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Term Sheets Term Sheets Presentation Transcript

  • 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 liquidation preferences • Antidilution ratchet • Corporate Reorganizations © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  • 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
  • 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
  • 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
  • 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
  • Typical Seed Stage Deals • • • • Cash Loan Common Stock Convertible Debt Convertible Preferred Stock © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale
  • 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
  • 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
  • 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
  • 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
  • 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