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Term Sheets

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  • 1. Venture Boot Camp – Term SheetsJune 18, 2013
  • 2. Overview  of  a  Term  Sheet  •  Two  most  common  early-­‐stage  securi8es:  – 1)  Conver8ble  Debt  – 2)  Preferred  Stock  •  Conver8ble  preferred  stock  •  Redeemable  preferred  stock  2  
  • 3. What  is  Preferred  Stock?  •  Fairly  standard  in  early-­‐stage  investment  •  Has  certain  preferences:  – Liquida8on  preference  – Dividends  (maybe)  – Board  representa8on  and  blocking  rights  – An8-­‐dilu8on  protec8on  – Redemp8on  rights  3  
  • 4. Preferred  Stock  Term  Sheet  •  What  is  a  term  sheet?  – Agree  on  fundamentals  before  legal  draOing  •  A  term  sheet  is  generally  non-­‐binding,  but...  – Confiden8ality  – No-­‐shops  – Expense  provisions  4  
  • 5. Overview  of  Economics:  Equity  •  Price  Terms  –  Pre-­‐money  valua8on?      –  Op8on  Pool  –  size  and  8ming  of  addi8on  •  Treatment  of  Dividends  –  Cumula8ve  dividends  •  Liquida8on  Preferences  –  Par8cipa8ng  vs.  Non-­‐Par8cipa8ng;  dollar-­‐capped  –  The  effect  on  “Ownership  Percentage”  •  Price  Protec8on  –  An8-­‐Dilu8on  –  Full  vs.  weighted  average  •  Redemp8on  Features  –  Timing  and  consequences  5  
  • 6. Equity  Pricing:  Terms  to  Understand  •  Pre-­‐Money    – What  the  investor  believes  the  company  is  worth  prior  to  their  investment  •  Post  Money  – Simply  the  pre-­‐money  valua8on  plus  the  investment  amount  6  
  • 7. Equity  Pricing:  Terms  to  Understand  •  Op8on  Pool  –  Given  to  incen8vize  employees  –  Feel  ownership  in  company  –  How  does  it  impact  Founder  economics/ownership?    –  Who  benefits?  •  Considera8ons  –  When  does  it  get  added?  –  How  big  should  it  be?  –  What  is  the  ves8ng  schedule?    –  Is  there  accelera8on  on  a  liquidity  event?  7  
  • 8. Equity  :  Liquida8on  Preferences  •  Preferred  –  First  out  in  “liquida8on  event”  – Liquida8on  event:  •  Merger,  acquisi8on,  change  of  control,  true  liquida8on  – Return  of  investment  before  common  stock  then...  – Is  it  Par8cipa8ng  Preferred  or  Non-­‐Par8cipa8ng?  •  With  Par8cipa8ng  Preferred,  the  investor  gets  its  liquida8on  preference  and  then  par8cipates  in  all  residual  distribu8ons  on  an  as  converted  basis  •  With  Non-­‐Par8cipa8ng  Preferred,  the  investor  is  only  en8tled  to  its  liquida8on  preference  8  
  • 9. Equity:  Par8cipa8ng  Preferred  vs.  Non  •  An  example:  •  10M  shares  of  common  stock  outstanding  (assuming  exercise  of  all  op8ons  in  pool)  •  Investors  hold  10M  shares  of  preferred  purchased  for  $1.00  per  share    •  Preferred  convert  to  common  on  a  1-­‐for-­‐1  basis  •  Preferred  has  a  1X  liquida8on  preference  9  
  • 10. Equity:  Par8cipa8ng  Preferred  vs.  Non  10  Common Shareholders Share of Sale $Sale Price Participating Non-Participating$10M $0 $0$15M $2.5M $5.0M$25M $7.5M $12.5M$50M $20M $25M$100M $45M $50M
  • 11. An8-­‐Dilu8on    •  Allows  investors  to  “re-­‐price”  •  Two  types:  – 1)  Weighted  Average  – 2)  Full  Ratchet  11  
  • 12. Governance  •  Board  of  Directors  –  Who  chooses?    How  chosen?  –  Observa8on  rights  –  who,  how  monitored  –  Skills  needed  to  fill  out  team    –  Audit,  Compensa8on  Commiiees  –  Fiduciary  du8es    •  Financial  and  Repor8ng  Requirements  –  Financial  statements  –  monthly,  quarterly,  annual  –  audited  or  not?  –  Who  gets  these?  •  Other  Informa8on  Rights?    –  What  informa8on  and  who?  –  Visita8on  rights?  12  
  • 13. Control  – Vo8ng    •  Ability  of  board,  stockholders,  or  class  holders  to  block  certain  ac8ons  •  Who  elects  the  board?  – Vo8ng  on  “as  if”  Converted  Basis    – Class  Vo8ng  and  Protec8ve  Provisions  – Nega8ve  Covenants  •  What  you  can  and  can’t  do  without  investor  approval  13  
  • 14. Stockholders  Rights    •  Transfer  Rights    – Right  of  First  Refusal  •  Par8cipa8on  in  future  financings  •  Founder  restric8ons  – Reverse  ves8ng  of  stock  – Non-­‐compe88on  – Founder  representa8ons  in  purchase  agreement  14  
  • 15. Stockholders  Rights  •  Registra8on  Rights  •  Drag  along  •  Right  of  Co-­‐sale  •  Redemp8on    15