Terms of Investment with Shirley Speakman - Entrepreneurship 101

  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

  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

  VC is high risk  Winners have to be “BIG”  Example: $100M Fund   20% IRR   6 Years   3x  Target Exit Value: $300M The 2/6/2 Rule  20% Fail $20M = $0  60% Modest $60M = $120M  20% BIG Win $20M = $180M $300M  WINNERS HAVE TO BE at least 9X

  A company that doubles isn’t enough…   Every opportunity has to have the potential to be a home run

  You Tube sold to Google for $1.65 Billion   Sequoia invested $11.5M received $495M   30% of the company   43x return   Great deal!

  6-‐9 months to raise capital   Several meetings   Want to get to know you   Assess your “Say/Do” factor   Close to truth ▪  Builds conﬁdenc

  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”

  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

  Non-‐heart ache   Company name   Investors   How much   Date

  Founders   Employees   Consultants   Students/universities/research organizations etc   Avoid convoluted IP structures   Only going to be unwound

  Non-‐competition   Non-‐solicitation   Customers   Employees   IP Assignment

  Ensure one common motivator   Need to attract talent   15%-‐20% (low as 12%)   New CEO   New executives   Board members   Non-‐VC   Pre-‐$   Dilutive to you

  Pref shares   Accrue   Price + dividend convert

  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

  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)

  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

  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   ….

  Monthly prepared financial provided   20-‐30 days from month end   Quarterly financials   Analysis vs budgets   Board material   Yearly operating plan   (30 days prior to beginning of fiscal year)

  Founder restrictions   Drag Along   VCs need exit   Tag Along   I can sell a portion if you can

  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

  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

Terms of Investment with Shirley Speakman - Entrepreneurship 101

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