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

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