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Top 10 Term Sheet Hacks
Aug 28 2008
What is Venture Hacks? It!s just Game Theory applied to raising Venture Capital.
Looking a few moves ahead. Realizing the consequences of Series A decisions, and
knowing how it!ll affect future series, the management of the company, and the exit.
Apologize in advance to the VCs. :-)
Institutional Knowledge Read a blog post
“It’s Standard” “If Slide is worth $550M...”
Why cover it?
- VCs know a lot more than you do - Average partner invests in 2-3 deals, many trade
away. A VC firm puts out 30-50 termsheets per year, negotiates a dozen.
- The first round is the most important - most dilutive, template for later. Experience is
the worst teacher - exam comes before the lesson.
• Two + termsheets
• Credible investors
• Create a market for
Otherwise, you have no leverage!
I!ll touch on how to raise, briefly - we do cover some of this on the blog too.
“Raising venture capital is the art of younger
men seducing older men”
Or women, as the case might be.
The Timeless Art
• Social Proof - “We’re meeting Sequoia next
• Authority - “Marc Andreesen is an angel”
• Scarcity - “Only room for one investor in
Again, not meant to be a “how do I raise money”.
Five Quick Tips
• Great team (check the mirror)
• Pick a big market (now!)
• Even angels don’t fund niche plays
• Do something hard
• Have a plan for distribution
• Stay close to the money
Keynesian beauty contest.
Your 50-page business plan doesn’t matter
• One-liner; executive summary
• 10 slides
• Financials; micro-economics
...to the Partner...
...from someone they respect...
...at roughly the same time.
Timing is important - exploding termsheets notwithstanding, deals have a way of
Synonyms for “NO”
“We’ll follow a credible
“Come back when you have more progress”
“It’s not you, it’s me”
“We need to see a CEO”
Yes means a termsheet!
• Wisdom, not Intelligence and Energy
• Most likely to trumpet value add
Unbundle control, advice, and money -
advisors are a bargain!
Let!s assume you get the termsheet... now for the real hacks.
1. The Board of
Valuation is temporary
Control is forever
Classic mistake entrepreneurs make is to fixate on valuation. Control matters much
more, and most control derives from the board.
You can!t divorce your investors. You can!t recover control!
“The line between good and evil is permeable
and almost anyone can be induced to cross it
when pressured by situational forces.”
Stanford Prison Experiment
Intentions don!t matter!
Contracts are made for worst-case scenarios.
Partners come and go. Funds come and go.
Rules of Thumb
• Make the Board Composition Proportional
• Independents usually aren’t
• Create a new seat for a new CEO
• Control is a one way street, from Common
Learn to signal gracefully
Purely supply and demand
Money has karma too!
It!s an art, not a science, even though people try and calculate or justify it.
Investors in Ning and Slide aren!t saying those companies are worth hundreds of
millions - rather that Marc and Max are.
Down rounds kill you. High valuations seal the exits.
3. The Option
Take the post-money option
shares out of the pre-money
25% post-money pool
This one IS simple.
Convert by taking the post-money option pool percentage out of your pre-money.
With board control, it’s a
4 years, some credit, single
trigger, double trigger
Subtleties - do you vest just by being on the board? Definition of triggers. Cliff ?
Sweetener to bring on a CEO?
Without board control, it!s very important.
5. Liquidation and Anti-
• “Standard” is 1x, Broad-Based Weighted
• Designed to protect investors from quick ﬂips
and overpriced rounds
• Can change the terms dramatically!
• Great potential for mischief in private-private
AKA The Fine Print
Protect minority shareholders
Hack 1: Sale ok above a certain
Hack 2: Fundraising ok above a
“We made a commitment to the
other investors to give them
time to do their diligence”
Either the termsheet is binding
or it’s not...
...but it’s very bad form to shop
Get your own advocate
There are “entrepreneur
friendly” ones available
Draft the docs
Cap the fees
We can recommend you entrepreneur-friendly counsel.
9. The New, New Thing
• RoFR - Spend now, pay later
• Super Pro-Rata - Huge option value,
• One-sided conﬁdentiality
• One-sided binding termsheet (pending
diligence!) - placeholder
• Stock repurchase at FMV
In general, pro-rata is all you want. Otherwise, signaling.
Right to transfer / diversify
• Line up your options
• Keep control
• Friendly investors don’t deliver hostile
• Raising money is the easy part. Returning