¡  VC	  motivations	  	     §  Driven	  by	  their	  model	     §  Impacts	  their	  terms	  and	  expectations	  	  	 ...
¡  1,000	  companies	  ¡  10	  investments	     §  2	  may	  be	  widely	  successful	  (usually	  1)	     §  6	  “lan...
¡  A	  company	  that	  doubles	  isn’t	  enough…	  ¡  Every	  opportunity	  has	  to	  have	  the	  potential	    to	  ...
¡  You	  Tube	  sold	  to	  Google	  for	  $1.65	  Billion	  ¡  Sequoia	  invested	  $11.5M	  received	  $495M	     §  ...
¡  6-­‐9	  months	  to	  raise	  capital	  ¡  Several	  meetings	     §  Want	  to	  get	  to	  know	  you	  	     §  ...
¡  Personal	  Recommendation:	  	  	      §  Get	  to	  know	  the	  VC	  	        ▪  Process	  (who	  makes	  the	  dec...
¡  Non-­‐binding	  offer	  to	  invest	  ¡  Outlines	  the	  general	  terms	  and	  conditions	  of	     investment	    ...
¡  Non-­‐heart	  ache	  	     §  Company	  name	     §  Investors	     §  Date	  	         	  
¡  Everything	  else	    §  Valuation	  	    §  How	  much	    §  Terms	  and	  conditions	  	    §  Return	  protect...
¡  Founders	  ¡  Employees	  ¡  Consultants	  ¡  Students/universities/research	  organizations	      etc	  	  ¡  Avo...
¡  Non-­‐competition	  ¡  Non-­‐solicitation	    §  Customers	    §  Employees	  	  ¡  IP	  Assignment	  
¡  Ensure	  one	  common	  motivator	  	  ¡  Need	  to	  attract	  talent	  ¡  10%-­‐20%	  	  ¡  New	  CEO	  ¡  New	 ...
¡  Pref	  shares	         §  Accrue	         §  Price	  +	  dividend	  convert	  	  
¡  Protects	  an	  investor	  from	  down	  round	     §  As	  if	  their	  investment	  had	  been	  done	  at	  the	  ...
¡  VC	  can	  ask	  to	  have	  the	  company	  buy	  back	      shares	  ¡  Life	  of	  the	  fund	  ¡  Investors	  in...
¡  Power	  of	  “OPM”	     §  Get	  to	  know	  your	  VC	  	     §  Won’t	  matter	  in	  good	  times	     §  Can’t	...
¡    60-­‐66	  2/3%	        §  Change	  nature	  of	  the	  business	  (acquire/divest)	        §  Change	  capital	  s...
¡  Monthly	  prepared	  financial	  provided	  	     §  20-­‐30	  days	  from	  month	  end	  ¡  Quarterly	  financials	 ...
¡  Founder	  restrictions	  ¡  Drag	  Along	     §  VCs	  need	  exit	  ¡  Tag	  Along	     §  I	  can	  sell	  a	  p...
¡  Friends	  and	  family	  ¡  Move	  to	  5	     §  2	  investor	     §  2	  founder	     §  1	  independent	     §...
¡  Acceptance	  &	  Exclusivity	         §  Deadline	  for	  acceptance	         §  Use	  the	  time	  to	  negotiate	 ...
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
Terms of Investments - Entrepreneurship 101
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Terms of Investments - Entrepreneurship 101

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Many technology ventures are focused on securing funds from venture capitalists (VCs). This lecture focuses on understanding the motivation of private venture capital firms and how it affects the structure of their term sheets and legal agreements. We explore common pitfalls in dealing with VCs, as well as success stories regarding VC investment.

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Terms of Investments - Entrepreneurship 101

  1. 1. ¡  VC  motivations     §  Driven  by  their  model   §  Impacts  their  terms  and  expectations      ¡  Most  companies  aren’t  VC’able     §  Just  don’t  fit  the  “Big  Money”  model   §  May  be  good  companies  and  businesses  ¡  But  if  you  are  than  you’ll  be  better  equipped   than  most  because  of  tonight  
  2. 2. ¡  1,000  companies  ¡  10  investments   §  2  may  be  widely  successful  (usually  1)   §  6  “land  of  the  living  dead”   §  2  fail  horribly  ¡  Winners  to  offset  my  losers    ¡  Start  ups  10-­‐12x  return  in  5-­‐7  years  ¡  Existing  companies  5-­‐7x  in  4-­‐5  years  
  3. 3. ¡  A  company  that  doubles  isn’t  enough…  ¡  Every  opportunity  has  to  have  the  potential   to  be  a  home  run  
  4. 4. ¡  You  Tube  sold  to  Google  for  $1.65  Billion  ¡  Sequoia  invested  $11.5M  received  $495M   §  30%  of  the  company  ¡  43x  return  ¡  Great  deal!  
  5. 5. ¡  6-­‐9  months  to  raise  capital  ¡  Several  meetings   §  Want  to  get  to  know  you     §  Assess  your  “Say/Do”  factor   ▪  Builds  confidence    
  6. 6. ¡  Personal  Recommendation:       §  Get  to  know  the  VC     ▪  Process  (who  makes  the  decision,  when  &  how  often)   ▪  Where  are  they  in  their  fund  life  cycle   ▪  What  was  their  last  deal   ▪  Talk  to  their  existing  CEO   ▪  Cash  available  to  invest/reserves   ▪  No  “Yes”  means  “No”   §  Have  to  be  able  to  live  with  them  “til  exit  do  you   part”  
  7. 7. ¡  Non-­‐binding  offer  to  invest  ¡  Outlines  the  general  terms  and  conditions  of   investment   §  Which  may  change  ¡  Not  the  definitive  agreement  simply  a  place   to  start  ¡  Everyone  uses  it  
  8. 8. ¡  Non-­‐heart  ache     §  Company  name   §  Investors   §  Date      
  9. 9. ¡  Everything  else   §  Valuation     §  How  much   §  Terms  and  conditions     §  Return  protection      
  10. 10. ¡  Founders  ¡  Employees  ¡  Consultants  ¡  Students/universities/research  organizations   etc    ¡  Avoid  convoluted  IP  structures   §  Only  going  to  be  unwound  
  11. 11. ¡  Non-­‐competition  ¡  Non-­‐solicitation   §  Customers   §  Employees    ¡  IP  Assignment  
  12. 12. ¡  Ensure  one  common  motivator    ¡  Need  to  attract  talent  ¡  10%-­‐20%    ¡  New  CEO  ¡  New  executives  ¡  Board  members   §  Non-­‐VC  ¡  Pre-­‐$   §  Dilutive  to  you  
  13. 13. ¡  Pref  shares   §  Accrue   §  Price  +  dividend  convert    
  14. 14. ¡  Protects  an  investor  from  down  round   §  As  if  their  investment  had  been  done  at  the   current  lower  price   §  Keeps  the  investor  whole  in  bad  times   §  Full-­‐ratchet   §  Weighted  average  
  15. 15. ¡  VC  can  ask  to  have  the  company  buy  back   shares  ¡  Life  of  the  fund  ¡  Investors  in  funds  want  their  money  back  ¡  Outcome:   §  Forces  a  sale   §  Get  minimum  investment  back  (P+dividends)    
  16. 16. ¡  Power  of  “OPM”   §  Get  to  know  your  VC     §  Won’t  matter  in  good  times   §  Can’t  tell  you  what  to  do  but  prevent  you  from   doing  things  
  17. 17. ¡  60-­‐66  2/3%   §  Change  nature  of  the  business  (acquire/divest)   §  Change  capital  structure/articles     ▪  Default  approval  over  future  financing   §  Approve  business  plan/operating  plan   §  Change  in  key  employees  (defined  term)   §  Creation  of  ESOP   §  Unbudgeted  expenditure  in  excess  of  $5,000   §  Non-­‐arms  length  transactions   §  ….  
  18. 18. ¡  Monthly  prepared  financial  provided     §  20-­‐30  days  from  month  end  ¡  Quarterly  financials     §  Actual  vs  budgets  ¡  Board  material    ¡  Yearly  operating  plan     §  (30  days  prior  to  beginning  of  fiscal  year)  
  19. 19. ¡  Founder  restrictions  ¡  Drag  Along   §  VCs  need  exit  ¡  Tag  Along   §  I  can  sell  a  portion  if  you  can  
  20. 20. ¡  Friends  and  family  ¡  Move  to  5   §  2  investor   §  2  founder   §  1  independent   §  Expect  material  in  advance  of  meeting   §  Only  a  meeting  if  the  VC  is  there   ▪  Defer  once    
  21. 21. ¡  Acceptance  &  Exclusivity   §  Deadline  for  acceptance   §  Use  the  time  to  negotiate     §  No  “shop”   ▪  Applies  to  company,  depending  on  stage  founders     Be  careful  what  you  ask  for  …don’t  send  the   wrong  message    
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