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1. Corporate Venture Capital –
Terms and Strategic Considerations
Michelle M. Gourley
Mark Dittrich

2. <Presentation Title/Client Name>
What is Corporate Venture Capital (“CVC”)?
• Corporation acting in an investor capacity
• Two primary rationales
• Strategic - learn/expand into new areas, leverage outside
R&D
• Financial
• Other benefits
• Enabling new potential partners
• Getting exposure to new business models
• Gaining market knowledge
• Establishing relationships with innovative entrepreneurs
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3. <Presentation Title/Client Name>
Most Active CVCs in 2016
1. Intel Capital
2. Google Ventures
3. Salesforce Ventures
4. Comcast Ventures
5. Qualcomm Ventures
6. Cisco Investments
7. GE Ventures
8. Bloomberg Data
9. Samsung Ventures
10. Microsoft Ventures
11. CyberAgent Ventures
12. Johnson & Johnson Innovation
13. Pfizer Venture Investments
14. SBI Investment
15. Slack Fund
16. Siemens Venture Capital
17. AXA Strategic Ventures
18. Ping An Ventures
19. Swisscom Ventures
20. In-Q-Tel
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21. Telstra Ventures
22. Brand Capital
23. Verizon Ventures
24. SR One
25. Legend Capital
26. Roche Venture Fund
27. Nokia Growth Partners
28. SMBC Venture Capital
29. Citi Ventures
30. Novartis Venture Funds
31. MAIF Avenir
32. WuXi Venture Fund
33. Lilly Asia Ventures
34. NTT DoCoMo Ventures
35. American Express Ventures
36. Bertelsmann Digital Media
Invetments
37. Robert Bosch Venture Capital
38. Fosun Kinzon Capital
39. Orange Digital Ventures
40. Boehringer Ingelheim Venture
Fund
*Source: The Most Active Corporate VC Firms Globally (see: https://www.cbinsights.com/blog/corporate-venture-capital-active-2014/)

4. <Presentation Title/Client Name>
CVC Investors are Major Sources of Venture
Funding
• 2016: CVCs participated in nearly 20% of all venture deals
– CVCs participated in $24.9B of funding across 1,352 deals
• Larger average deal size
– H2’16: $22M average CVC deal vs. $13M for typical VC
• The two biggest areas for CVC investment are software and biotech
(including medical devices)
– Sources: PwC/NVCA MoneyTree™ Report, Data: Thomson Reuters; CBC Insights Corporate Venture Capital
Webinar 2016-2017
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5. <Presentation Title/Client Name>
Why Consider Partnering With a CVC Investor?
Large potential for value add from a CVC investor partner:
•Strategic and tactical advice
•Credibility and validation in the eyes of the public
– Investments by household names are newsworthy
– Validation and publicity can lead to more users and more investors
•Access to corporation’s information technology talent
•Potential for sales of products to corporation
•Gives other VCs confidence
•Potential exit path
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6. <Presentation Title/Client Name>
VC vs. CVC Terms
With examples from NVCA Model Term Sheet
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7. <Presentation Title/Client Name>
CVC Investors vs. Typical VC Terms
• Size of Investment
• Participation for Preferred Stock
• Board Composition
• Approval Rights
• Other Special Rights
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8. <Presentation Title/Client Name>
Size of Investment
Compared to traditional VC, CVC investors have greater competing interests
regarding the size of their investments:
•Influence over the target company
•Maintain “dry powder” to allow for follow-on investments
•Typically want to avoid crossing the 20% voting control threshold:
– Owners of greater than 20% of the outstanding voting securities of the
company are presumed to be minority, active investors
• Results in CVC investor having to recognize revenue/expenses of
their share of the income/loss of the target company
• Presumption can be overcome
• Work-arounds include non-voting stock, warrants or convertible
debt financing
– Owning greater than 50% transforms the target company into a
subsidiary and requires consolidation of financial statements.
•Upshot: CVC investors less likely to be lead investors
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9. <Presentation Title/Client Name>
Price
• Pre-money vs. Post-money
– Both VCs and CVC investors will talk about valuations in terms of pre-
money and post-money
• Pre-money is the value of the company before the investment being
discussed
• Post-money is the value of the company after the investment
• Fully diluted
– Assumes that all options and other rights to purchase equity have been
exercised
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10. <Presentation Title/Client Name>
Liquidation Preference
• Both CVC investors and VCs want preferred stock with a liquidation
preference
• Defines how much the holder will receive for each share of preferred stock
on the occurrence of certain liquidation events
• Liquidation events usually include a sale, liquidation, dissolution or
winding up of the company:
[…]
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11. <Presentation Title/Client Name>
Liquidation Preference
Size of preference
•Most often, deals provide for a 1x liquidation preference
– This means investors will receive 1x their investment on the
occurrence of a liquidation event before other shareholders are paid
[…]
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12. <Presentation Title/Client Name>
Liquidation Preference
Participating vs. non-participating
•The vast majority of CVC deals involve some level of participation
•The holder of a share of participating preferred stock will share in the
proceeds of the liquidation as well as receiving the preference
•There are three levels of participation:
1.Full participation: Shares in liquidation proceeds as though the
preferred stock were converted to common stock
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13. <Presentation Title/Client Name>
Liquidation Preference
Participating vs. non-participating
2. Capped participation: Same as full participation, but with a cap
based on a multiple of the preference
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14. <Presentation Title/Client Name>
Liquidation Preference
Participating vs. non-participating
3. Non-participating: Entitled to nothing but the preference in a
liquidation event
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15. <Presentation Title/Client Name>
Antidilution
Both CVC and VC investors will insist on antidilution protection
•Weighted average antidilution accounts for the lower price by weighting the
conversion price across rounds according to a formula:
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16. <Presentation Title/Client Name>
Antidilution
• But CVC investors are more likely to push for full-ratchet antidilution
because they may be reluctant to push for a low valuation
• Full-ratchet antidilution effectively reprices prior investments at the new
valuation:
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17. <Presentation Title/Client Name>
Board Seat/Board Observer
• CVC investors typically prefer a board observer to a board seat
– Lessens potential conflicts
– Lowers liability risk to CVC investor
• Confidentiality provisions heavily negotiated in board observer agreement
• Duties to target company can complicate CVC’s role
– Consider when a conflict exists and the board observer is to be
excluded
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18. <Presentation Title/Client Name>
Confidentiality
• Important consideration though not often in term sheet
• Founders want to prevent CVC taking a strategic approach from using
target’s information
– If the CVC investor is separate from the R&D arm of the corporation,
concerns may be lessened
• CVC investors of all types have a major incentive to be careful with
confidential information
– CVC investors are repeat players; an assertion by a portfolio company
of a violation will harm the CVC’s reputation
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19. <Presentation Title/Client Name>
Special Rights
• Prohibitions on certain transactions with competitors
– Sales of equity
– Joint ventures
– Sales of assets
– Mergers
– Licensing of intellectual property
• Rights of first negotiation
• Rights of first refusal
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20. <Presentation Title/Client Name>
Purchase Options
• CVC investors may invest with the intent to purchase
• May condition investment on grant of option to purchase remainder of
outstanding shares
• Purchase options may be triggered by:
– Milestones (e.g., sales, regulatory approvals)
– Passage of Time (x years since grant of option)
• Considerations for founders:
– Value at time of grant potentially much lower
– CVC investor holding option likely to use more resources to help target
– May make potential conflicts less likely
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21. <Presentation Title/Client Name>
Approval Rights
• Approval Rights
– Approve or reject major company actions:
• Selling the company
• Changing stock rights
• Authorizing creation and issuance of new classes of stock
• Repurchasing stock
• Amending the certificate or bylaws
• Changing the size of the board
– Rights tied either to (1) CVC-appointed director’s approval or (2)
approval of the majority of the class of shares held by CVC
• Risk of CVC investor acting strategically
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