Valuation Class Term Sheet

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Valuation Class Term Sheet

  1. 1. Negotiating and closing a VC deal [email_address]
  2. 2. Venture Capital Pros and Cons <ul><li>Pros </li></ul><ul><li>New capital </li></ul><ul><li>Capital markets experience </li></ul><ul><li>Business growth experience </li></ul><ul><li>Strategic value-add </li></ul><ul><li>Credibility enhancement </li></ul><ul><li>Cons </li></ul><ul><li>Lose management control </li></ul><ul><li>Heightened operating controls and scrutiny </li></ul><ul><li>Must exit </li></ul><ul><li>Substantial dilution </li></ul>
  3. 3. Investment Process <ul><li>Term Sheet / Letter of Intent / MOU </li></ul><ul><li>Negotiation </li></ul><ul><li>Due Diligence </li></ul><ul><li>Share Purchase Agreement </li></ul><ul><li>Shareholders Agreement </li></ul><ul><ul><li>Investor Rights Agreement / Registration Rights Agreement </li></ul></ul><ul><ul><li>Stock Incentive Plan / Stock Option Plan </li></ul></ul><ul><li>Negotiation </li></ul><ul><li>Disbursement </li></ul>
  4. 4. Due Diligence <ul><li>Be prepared </li></ul><ul><li>Critical issues </li></ul><ul><li>– Intellectual property rights / invention assignment agreements </li></ul><ul><li>– Capitalization </li></ul><ul><li>– Tax returns </li></ul><ul><li>– Financial statements </li></ul><ul><li>– Projections </li></ul><ul><li>– Customer relationships </li></ul>
  5. 5. The Term Sheet <ul><li>The parties </li></ul><ul><li>Securities to be issued </li></ul><ul><li>Amount of financing & disbursement schedule </li></ul><ul><li>Pre-financing valuation </li></ul><ul><li>Option plan & earn-out </li></ul><ul><li>Use of proceeds </li></ul><ul><li>Liquidation Preference </li></ul><ul><li>Protective Provisions, Voting Rights and BoD participation </li></ul><ul><li>Anti-dilution </li></ul><ul><li>Lock-ups </li></ul><ul><li>Tag along and drag along </li></ul><ul><li>Exclusivity </li></ul><ul><li>Reporting </li></ul><ul><li>... </li></ul>
  6. 6. Termsheet <ul><li>Purpose: </li></ul><ul><ul><li>to gain fundamental agreement on the principal terms of the transaction </li></ul></ul><ul><li>Issues: </li></ul><ul><ul><li>Non-binding </li></ul></ul><ul><ul><li>Subject to due diligence </li></ul></ul><ul><ul><li>Subject to required consents and approvals </li></ul></ul><ul><ul><li>Need to be careful on definition of terms and carve-outs </li></ul></ul>
  7. 7. Principles of Negotiation <ul><ul><li>Consider the practical application </li></ul></ul><ul><ul><ul><li>Who is helped; how, and how much </li></ul></ul></ul><ul><ul><ul><li>Who is hurt; how, and how much </li></ul></ul></ul><ul><ul><li>Allocation of potential rewards and risks </li></ul></ul><ul><ul><li>Administrative/management burden and costs </li></ul></ul><ul><ul><li>Flexibility to manage the business </li></ul></ul><ul><ul><li>Flexibility to raise new capital </li></ul></ul><ul><ul><li>Unintended consequences </li></ul></ul><ul><ul><li>Bargaining power </li></ul></ul><ul><ul><li>Negotiation time and cost </li></ul></ul>
  8. 8. Share Purchase Agreement <ul><li>Purpose: to organize overall transaction and provide the terms on which shares are purchased </li></ul><ul><li>Issues: </li></ul><ul><ul><li>Simultaneous sign-and-close or deferred closing </li></ul></ul><ul><ul><li>Closing conditions </li></ul></ul><ul><ul><li>Representations and warranties </li></ul></ul><ul><ul><li>Covenants between signing and closing </li></ul></ul><ul><ul><li>Indemnification </li></ul></ul>
  9. 9. Shareholders Agreement <ul><li>Purpose: to establish the rights as between and among different stockholders of the company </li></ul><ul><li>Issues: </li></ul><ul><ul><li>Types of holders: </li></ul></ul><ul><ul><ul><li>Financial, Strategic, Founders </li></ul></ul></ul><ul><ul><li>Preemptive rights – exclusions </li></ul></ul><ul><ul><li>Transfer restrictions </li></ul></ul><ul><ul><ul><li>Permitted transferees </li></ul></ul></ul><ul><ul><ul><li>ROFO / ROFR </li></ul></ul></ul><ul><ul><ul><li>Tag-Along / Drag-Along </li></ul></ul></ul><ul><ul><ul><li>Other (non-compete) </li></ul></ul></ul>
  10. 10. Shareholders Agreement <ul><li>Board representation </li></ul><ul><li>Negative and affirmative covenants </li></ul><ul><li>Investor Rights </li></ul><ul><li>Stock Incentive Plan or ESOPs </li></ul>
  11. 11. Board Seats and Reserved Matters <ul><li>Corporate boards: </li></ul><ul><ul><ul><li>Not involved in day-to-day operations </li></ul></ul></ul><ul><ul><ul><li>Hold extreme control in major corporate events (sale, mergers, acquisitions, IPOs, bankruptcy) </li></ul></ul></ul><ul><li>Lead VC in each round takes seat(s) </li></ul><ul><li>Reserved matters (veto or approval): </li></ul><ul><ul><ul><li>Any sale, acquisition, merger, liquidation </li></ul></ul></ul><ul><ul><ul><li>Budget approval </li></ul></ul></ul><ul><ul><ul><li>Executive removal/appointment </li></ul></ul></ul><ul><ul><ul><li>Strategic or business plan changes </li></ul></ul></ul>
  12. 12. Other Typical VC Rights <ul><li>Right of first refusal on sale of shares </li></ul><ul><li>Tag-along rights: follow founder sale on pro rata basis </li></ul><ul><li>Drag-along rights: force sale of company </li></ul><ul><li>Liquidation preference: multiple of investment </li></ul><ul><li>No-compete conditions on founders </li></ul><ul><li>Right to participate in subsequent rounds (usually follow-on) </li></ul><ul><li>Later VC rights often supercede earlier </li></ul><ul><li>Anti-Dilution Protection </li></ul><ul><ul><li>Recompute VC shares based on subsequent “down round” so that issuing more shares does not “dilute” the value of VC’s holding </li></ul></ul>

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