Lecture 8: Term Sheets & Due Diligence | Intro to Venture Capital-FINAN 6300 | Chad Jardine, University of Utah, 2008–

2. Venture Capital: Financing New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. “In founding a startup, you throw yourself off a cliff, and build an airplane on the way down.” —Reid Hoffman Cofounder of LinkedIn

4. Advanced Venture Capital: FINAN 6310 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Is the company worthy? 1. VC might not be right for you 2. Product risk 3. Market risk 4. All projections show growth and are lies 5. Don’t give conservative projections 6. You need a monopoly and a moat 7. Getting to product/market fit 8. Your magic ratio 9. Profits cover a multitude of sins 10. Culture beats strategy

5. Advanced Venture Capital: FINAN 6310 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Is the company worthy? 11. Your company is more important than your pitch 12. Ultimately you fundamentals will bear out

6. Advanced Venture Capital: FINAN 6310 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Pitching to win 1. VCs are people too 2. Present as you really are 3. Everything runs on trust 4. The steps for getting to pitch 5. FOMO 6. Do YOUR due diligence 7. Warm intros are best 8. Nobody likes a taker 9. Prep for rejection 10. There’s no conspiracy

7. Advanced Venture Capital: FINAN 6310 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Pitching to win 10. Wacky power dynamics 11. Know your pitch cold 12. Know your company cold 13. Your story is more important than the facts 14. Name the enemy 15. VCs talk 16. Deck frameworks and starting with one slide 17. Two must-haves 18. Your CAM 19. Be ruthlessly honest

8. Advanced Venture Capital: FINAN 6310 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Pitching to win 20. Stories in the financial statements 21. Keep the lines open

10. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Hedges and Preferred Stock Preferred stock is a contract

15. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Term Sheets Why Use Term Sheets? • Get the essence of the deal down before you pay attorneys • Not binding—expression of good faith, testing the waters. • Leverage negotiating with other investors. (First guy in creates social proof AND anchors the terms.)

16. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Term Sheet Sections •Preamble/Opening Info (Mini PPM) •New Securities Offered •Total Raised, Number of Shares, Price per Share •Post-financing Capitalization •Dividend Provisions •Rights, Preferences & Privileges of Series [X] Preferred •Liquidation Preference •Redemption •Conversion/Automatic Conversion •Dilution Clauses •Voting Rights •Protective Provisions •Board Composition •Special Board Approval Items •Information Rights •Registration Rights •Right of First Refusal/Pro Rata Rights (Pay to Play) •Conditions Precedent •Purchase Agreement •Employee Matters •Closing Date, Legal Counsel, Expenses/Fees and Finders

17. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. •Preamble/Opening Info (Mini PPM) •New Securities Offered •Total Raised, Number of Shares, Price per Share •Post-financing Capitalization •Dividend Provisions •Rights, Preferences & Privileges of Series [X] Preferred •Liquidation Preference •Redemption •Conversion/Automatic Conversion •Dilution Clauses •Voting Rights •Protective Provisions •Board Composition •Special Board Approval Items •Information Rights •Registration Rights •Right of First Refusal/Pro Rata Rights (Pay to Play) •Conditions Precedent •Purchase Agreement •Employee Matters •Closing Date, Legal Counsel, Expenses/Fees and Finders Term Sheet Sections

18. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Preamble/Opening Optional Basic length of time to put a deal together Exclusivity “No-Shop” clause

20. Venture Capital: Financing New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. New Securities What class and series of equity? How will this impact the cap stack?

22. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Keys of valuation. How much is your company worth?

23. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. “There are only two things that VCs really care about when making investments: economics and control.” —Brad Feld Managing Director, Foundry Group Co-founder, Techstars

26. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Board of Directors Senior Management Shareholders

29. Venture Capital: Financing New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Conditions Precedent What if due diligence uncovers a material problem?

32. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Due Diligence Three Phases of Due Diligence 1. Screening due diligence 2. Business due diligence 3. Legal due diligence

33. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. “If you feel like your VC is a proctologist, run for the hills.” —Brad Feld Managing Director, Foundry Group Co-founder, Techstars

34. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Due Diligence The Due Diligence Binder Executive Summary The Company The Business Sales, Marketing & Distribution Financial Legal

35. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Due Diligence The Due Diligence Binder Executive Summary • 1-3 pg. Idea, 4 components (product, market, execution, financial), Story, KPIs, Burn, ARR/MRR, Growth, highlights (such as GM, turns, customers, etc.) The Company • Entity Organizing Information • Articles (Pref Stamped Copy), EIN Letter, Operating Agreement/Bylaws, Good Standing Certificate, DBAs, Trade Names, Related Entities • Business license(s) • Professional license(s) if any • Entity relationships (if more than one entity) • International filings if any

36. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Due Diligence The Company Con’t • Operating documents (SOPs, manuals, etc.) • Credit ratings, Duns, BBB, etc. • Recent analyst reports if any The Business • Proposed business plan/summary/deck • The people • Management team resumes (LinkedIn) w/ references • Employment agreements • Org chart current and forecasted • Significant employee and departmental compensation, benefits, options, etc. • Notes on employee problems past or present, turnover, etc. The Due Diligence Binder

37. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Due Diligence The Business Con’t • Description of each product sold • Customers & applications • Historical and projected growth • Product development pipeline/roadmap/R&D program • Economics, cost structure, profitability, etc. • Contact info for any customer comprising more than 5% of revenue Sales, Marketing & Dist. • Distribution channels • Positioning • Opportunities/Risks • Current marketing program and materials The Due Diligence Binder

38. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Due Diligence Sales, Marketing & Dist. Con’t • Customer acquisition/buyer journey discussion • CAC, LVC • Discussion of key customers • Sales force breakdown • Compensation • Quotas/averages • Sales cycle • Plan for additional hiring • Anticipated budget to execute strategy • Reference customers and value chain partners • Breakdown of sales/profits by channel • Any significant geographic or seasonal impact on sales The Due Diligence Binder

39. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Due Diligence Sales, Marketing & Dist. Con’t • Competitive market analysis (competitors, threats, market share calculations, 5Ps, etc.) • International issues (exchange rates, tariffs, labor, etc.) Financial Information • Cap table(s) including all shareholder names and any options, warrants, notes, etc. • Schedule of any agreements, securities, etc. that are outstanding and could impact the Cap Table • Pro Forma operating budget including anticipated cap-ex, lines of credit, operating capital issues, etc. • Pro Forma financial statements with assumptions • Financial statements (audited) past 2-3 years The Due Diligence Binder

40. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Due Diligence Financial Information Con’t • Interim financial statements, unaudited • AR/AP aging schedules • List of accountants Legal Information • Copies of any pending or threatened litigation by or against the company • Docs for any previous financing (loans, equity, etc.) • Complete PPM and DD packages from others • Copies of any contracts, agreements, or significant legal documents • IP protection (patents, trademarks, copyrights, NDNCA, etc.) The Due Diligence Binder

41. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Due Diligence Legal Information Con’t • Customer contracts if any • HR documents • Description of any environmental or employee safety liabilities • Copies of insurance policies and coverage. Discussion of risks/exposure. • Regulatory issues (SEC filings—public or RegD, regulator letters, attorney general complaints, etc.) • List of attorneys The Due Diligence Binder

44. Venture Capital: Financing for New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Photo Credit: Business Insider “The best way to predict the future is to create it.” —Peter Drucker Author & Management Consultant

Lecture 8: Term Sheets & Due Diligence | Intro to Venture Capital-FINAN 6300 | Chad Jardine, University of Utah, 2008–

Lecture 8: Term Sheets & Due Diligence | Intro to Venture Capital-FINAN 6300 | Chad Jardine, University of Utah, 2008–

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Lecture 8: Term Sheets & Due Diligence | Intro to Venture Capital-FINAN 6300 | Chad Jardine, University of Utah, 2008–