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Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
Valuation Class  Term Sheet
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Valuation Class Term Sheet

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  • 1. Negotiating and closing a VC deal [email_address]
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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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