Demystifying Term Sheets

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From Foley Hoag, attorneys at law. Useful bullet slides for Term Sheets

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Demystifying Term Sheets

  1. 1. Demystifying Term Sheets February 23, 2011© 2011 Foley Hoag LLP. All Rights Reserved.
  2. 2. Demystifying Term Sheets Convertible Preferred Stock – Why convertible? – Why preferred? Pre-Money Valuation – Treatment of option pool – Relationship to funds raised and ownership percentages – Impact on future rounds of financing© 2011 Foley Hoag LLP. All Rights Reserved. 2
  3. 3. Demystifying Term Sheets Fully Diluted Equity (as converted/common equivalent) – What’s included? Standard Transaction Documents – Certificate of Incorporation • Rights and preferences of equity – Stock Purchase Agreement • Blueprint for transaction • Reps & warranties • Closing conditions© 2011 Foley Hoag LLP. All Rights Reserved. 3
  4. 4. Demystifying Term Sheets – Investor Rights Agreement • Special contractual rights of investors (versus rights inherent in equity) • Registration rights • Information rights • Pre-emptive rights for future equity financings • Other covenants of Company – Right of First Refusal/Co-Sale Agreement • Company/investor right of first refusal on proposed dispositions • Investor right of co-sale on proposed dispositions – Voting Agreement • Board composition and Board designation rights • Drag along rights© 2011 Foley Hoag LLP. All Rights Reserved. 4
  5. 5. Demystifying Term Sheets Contemplated Exits – Sale of the Company: deemed liquidation – Public Offering: conversion – Redemption© 2011 Foley Hoag LLP. All Rights Reserved. 5
  6. 6. Demystifying Term Sheets Liquidation – Preference amount (1x, 2x, etc) – Participation • None • Capped • Full Conversion – Optional – Automatic • “Qualified IPO”: price & amount raised • Supermajority vote of series© 2011 Foley Hoag LLP. All Rights Reserved. 6
  7. 7. Demystifying Term Sheets Redemption – When? – Realistic? Anti-Dilution Adjustments – Weighted average – Full ratchet Other issues – Vesting of founder stock – Protective provisions/special voting rights – Dividends – Pay to play© 2011 Foley Hoag LLP. All Rights Reserved. 7
  8. 8. Demystifying Term Sheets Resources – NVCA Model Venture Capital Financing Documents: www.nvca.org – Foley Hoag Emerging Enterprise Center Website: www.emergingenterprisecenter.com • Ask The StartUp Lawyers • Glossary© 2011 Foley Hoag LLP. All Rights Reserved. 8
  9. 9. David R. Pierson | Partner Seaport West Boston, Massachusetts Emerging Enterprise Center Waltham, Massachusetts 617 832 1146 phone 617 753 1450 direct fax dpierson@foleyhoag.com© 2011 Foley Hoag LLP. All Rights Reserved.

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