Terms of Investment with Shirley Speakman - Entrepreneurship 101
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Terms of Investment with Shirley Speakman - 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 ...

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.

Part of Entrepreneurship 101

http://www.marsdd.com/events/details.html?uuid=aed97387-fb20-4779-a111-17fb9c5428d0

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Terms of Investment with Shirley Speakman - Entrepreneurship 101 Terms of Investment with Shirley Speakman - Entrepreneurship 101 Presentation Transcript

  •   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