Raising Venture CapitalWorkshopUnderstanding Term Sheets

What are They?What are term sheets used for?8 October, 20092www.ltaylorsolutions.com

Term Sheet PurposesShows the Investor’s view of the businessClearly defines the investor’s expectationsThe ultimate potential value of the businessIdentifies the areas of possible negotiation8 October, 2009www.ltaylorsolutions.com3

VocabularyLet’s look at the essential vocabulary on a term sheet8 October, 2009www.ltaylorsolutions.com4

Essential VocabularyInstrumentType of Shares (Convertible, Preference etc)Terms & Conditions placed on sharesVesting ProvisionsHow total investment will be paidDefines management stock options if anyDecision RightsPower of veto8 October, 2009www.ltaylorsolutions.com5

Other Essential VocabularyConversion TermsIn what way are the preferred shares to be convertedOption PoolTotal amount of common shares to be put in place for stock option remunerationAnti-DilutionAn ability to have investment ‘re-priced’ if the company misses targets and subsequently has a lower valuation8 October, 2009www.ltaylorsolutions.com6

ExamplesLet’s look at some typical examples8 October, 2009www.ltaylorsolutions.com7

What does this tell us?The VC fund believes:Company will reach more than €100m valuation within 2 yearsCompany will make it to an IPOWell-known management will come to work there for stock optionsVC fund does not request anti-dilution as the warrant or option for an extra 25% reduces this risk.8 October, 2009www.ltaylorsolutions.com8

Company will reach more than €100m valuation within 2 years

Company will make it to an IPO

Well-known management will come to work there for stock options

VC fund does not request anti-dilution as the warrant or option for an extra 25% reduces this risk.

What does this tell us?The small VC fund believes:VC is not sure that the company will reach a future higher valuationVC will feel assured by an ability to negotiate a preferential deal via Anti-dilution clause should the company miss their targetsPower of Veto will help VC to manage the future of the business from the insideThe primary concern for this VC is an ability to follow his investment in future rounds 8 October, 2009www.ltaylorsolutions.com9

VC is not sure that the company will reach a future higher valuation

VC will feel assured by an ability to negotiate a preferential deal via Anti-dilution clause should the company miss their targets

Power of Veto will help VC to manage the future of the business from the inside

The primary concern for this VC is an ability to follow his investment in future rounds

ExercisesLet’s look at the deal8 October, 2009www.ltaylorsolutions.com10

The taskLook at the following table of ‘three offers’Decide what each VC…Believes about the company’s futureWhat they believe the risks areWhat are they trying to achieve from the dealWhat would they be willing to negotiate onDecide which is the best offer for the company’s future & explain why8 October, 2009www.ltaylorsolutions.com11

Three offers8 October, 2009www.ltaylorsolutions.com12

8 October, 2009www.ltaylorsolutions.com13Please see www.ltaylorsolutions.com for further information