0
Venture Fast Track
October 24, 2013
Overview	
  of	
  a	
  Term	
  Sheet	
  
•  Two	
  most	
  common	
  early-­‐stage	
  securi8es:	
  
–  1)	
  Conver8ble	
...
What	
  is	
  Preferred	
  Stock?	
  
•  Fairly	
  standard	
  in	
  early-­‐stage	
  investment	
  
•  Has	
  certain	
  ...
Preferred	
  Stock	
  Term	
  Sheet	
  

•  What	
  is	
  a	
  term	
  sheet?	
  
–  Agree	
  on	
  fundamentals	
  before...
Overview	
  of	
  Economics:	
  Equity	
  
•  Price	
  Terms	
  
–  Pre-­‐money	
  valua8on?	
  	
  	
  
–  Op8on	
  Pool	...
Equity	
  Pricing:	
  Terms	
  to	
  
Understand	
  
•  Pre-­‐Money	
  	
  
–  What	
  the	
  investor	
  believes	
  the	...
Equity	
  Pricing:	
  Terms	
  to	
  
Understand	
  
•  Op8on	
  Pool	
  
–  Given	
  to	
  incen8vize	
  employees	
  
– ...
Equity	
  :	
  Liquida8on	
  Preferences	
  
•  Preferred	
  –	
  First	
  out	
  in	
  “liquida8on	
  event”	
  
–  Liqui...
Equity:	
  Par8cipa8ng	
  Preferred	
  vs.	
  
Non	
  
•  An	
  example:	
  
•  10M	
  shares	
  of	
  common	
  stock	
  ...
Equity:	
  Par8cipa8ng	
  Preferred	
  vs.	
  Non	
  
Common Shareholders Share of Sale $
Sale Price Participating
$10M
$0...
An8-­‐Dilu8on 	
  	
  

•  Allows	
  investors	
  to	
  “re-­‐price”	
  
•  Two	
  types:	
  
–  1)	
  Weighted	
  Average...
Governance	
  
•  Board	
  of	
  Directors	
  
–  Who	
  chooses?	
  	
  How	
  chosen?	
  
–  Observa8on	
  rights	
  –	
...
Control	
  
–  Vo8ng	
  	
  
•  Ability	
  of	
  board,	
  stockholders,	
  or	
  class	
  holders	
  to	
  block	
  
cert...
Stockholders	
  Rights	
  	
  
•  Transfer	
  Rights	
  	
  
–  Right	
  of	
  First	
  Refusal	
  

•  Par8cipa8on	
  in	...
Stockholders	
  Rights	
  
•  Registra8on	
  Rights	
  
•  Drag	
  along	
  
•  Right	
  of	
  Co-­‐sale	
  
•  Redemp8on	...
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Negotiating Term sheets (Venture Fast Track)

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Part of the all day Venture Fast Track:
http://www.thecapitalnetwork.org/programs/venture-fast-track/

Angel & Venture Term Sheets and Negotiation with an Investor

As an entrepreneur, understanding the parts of an Angel or Venture Capital term sheet can be a daunting task. The session discusses common practices and pitfalls surrounding the use of term sheets and the current market terms for early-stage angel and venture investments. Some sample term sheets will be reviewed and explained.

Led by a venture capitalist, an entrepreneur, and their attorneys, this program explains the critical common business and legal terms used in these term sheets through a live, mock negotiation.

Experts:

- Justin Borgman – Hadapt

- Yumin Choi – HLM Venture Partners

- Alex Glovsky – Nutter, McClennen & Fish

- Adam Ghander – Nutter, McClennen & Fish

Published in: Economy & Finance, Business
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Transcript of "Negotiating Term sheets (Venture Fast Track)"

  1. 1. Venture Fast Track October 24, 2013
  2. 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. 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. 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. 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. 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. 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. 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. 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. 10. Equity:  Par8cipa8ng  Preferred  vs.  Non   Common Shareholders Share of Sale $ Sale Price Participating $10M $0 Non-Participating $0 $15M $2.5M $5.0M $25M $7.5M $12.5M $50M $20M $25M $100M $45M $50M 10  
  11. 11. An8-­‐Dilu8on     •  Allows  investors  to  “re-­‐price”   •  Two  types:   –  1)  Weighted  Average   –  2)  Full  Ratchet   11  
  12. 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. 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. 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. 15. Stockholders  Rights   •  Registra8on  Rights   •  Drag  along   •  Right  of  Co-­‐sale   •  Redemp8on     15  
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