Hacking Term Sheets       ap
                                                      res
                                   ...
Just to make sure you’re in the right room...




                                     Today, we’re talking term sheets fo...
Before we begin...here’s a little bit about myself.

                                                                   Pr...
Pitch to friendly investors as early as possible.




                   Raise financing as late as possible; preferably on...
The money you raise should be just enough - with some
                    buffer - to get you to your next key milestones;...
Understand how the venture capital industry works.




                           Are you a lifestyle business, or a ventu...
Raising $ from investors can be especially daunting and
                                 stressful for entrepreneurs.




...
Naughty investors use your lack of expertise with term
                                     sheets against you.


        ...
The entire process can be really quick, but can also
                            drag on. It’s hard to find one size that fi...
Voting Rights
                                                      Liquidation
                                          ...
Drown out the noise, and focus on what matters most.




                                                       Control
  ...
The term sheet is a preliminary, non-binding agreement.




                             Word-smiths are not welcomed.


F...
Voting Rights
                                                      Liquidation
                                          ...
Liquidation
                                           Preference    Board of
                                            ...
Common
                                        Shares

                          Investment   Preference
                 ...
This is what matters.

                                                                       Amounted
                   ...
Liquidation   Not so nice, no matter
                                                  Preference    regardless of the for...
Board of
                                          Directors
                          Founder(s)         Board Representa...
Veto rights that
                                                          investors have on certain
        Typically cov...
Middle ground

                          Bad                                                Entrepreneur-friendly
        ...
Good lawyers are really hard to find. If you meet one,
                      hang on as tightly as you would to your soul m...
Questions? I’ll do my best with them.




                                      Thank you!


Friday, October 1, 2010
Voting Rights
                                                      Liquidation
                                          ...
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Hacking Term Sheets

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Slides I used at my "Hacking Term Sheets" session at SingTel Accelerate 2010 (Singapore) and The New Context Conference 2010 (Tokyo).

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Hacking Term Sheets

  1. 1. Hacking Term Sheets ap res en tat Day 2 - Oct 1, 2010 ion by Jam es Ch an Friday, October 1, 2010
  2. 2. Just to make sure you’re in the right room... Today, we’re talking term sheets for early-stage investments Friday, October 1, 2010
  3. 3. Before we begin...here’s a little bit about myself. Professional VC x 20+ term sheets + & = x 8 investments (from 2006 - 2010) Me! If you’re more experienced, please join me up in front! Friday, October 1, 2010
  4. 4. Pitch to friendly investors as early as possible. Raise financing as late as possible; preferably only after you’ve got users and/or data to support your hypothesis. Friday, October 1, 2010
  5. 5. The money you raise should be just enough - with some buffer - to get you to your next key milestones; faster & quicker than your competition. Raise financing as late as possible, preferably only after you’ve got data to support your hypothesis. Friday, October 1, 2010
  6. 6. Understand how the venture capital industry works. Are you a lifestyle business, or a venture business? Make sure you’re barking up the right tree. Friday, October 1, 2010
  7. 7. Raising $ from investors can be especially daunting and stressful for entrepreneurs. VCs issue term sheets for a living. Entrepreneurs don’t, and aren’t always as experienced at it. Friday, October 1, 2010
  8. 8. Naughty investors use your lack of expertise with term sheets against you. Nice! Naughty? www.displaycostume.com Nice investors leave nothing to your imagination and always explain their term sheets thoroughly to you. Friday, October 1, 2010
  9. 9. The entire process can be really quick, but can also drag on. It’s hard to find one size that fits all. Investment syndicate Definitive Documents Pitch Negotiations Term Sheet Completion Due Diligence No-shop kicks in Investment Committee 3Fs, sophisticated angels, institutional investors? Or a blend? There’s trade-offs to be had. YMMV, but above all, GIWYEO. Friday, October 1, 2010
  10. 10. Voting Rights Liquidation Preference Board of Pay-to-play Directors Redemption Conditions Price ??? Rights Precedent Protective Investment Provisions Right of First Instrument Refusal Tag-along & Conversion Drag-along Anti-dilution Founders activities Information Dividends ESOP Rights Confidentiality & No-Shop Registration Co-Sale Indemnification Rights Restriction on Agreement & Assignment Sales Friday, October 1, 2010
  11. 11. Drown out the noise, and focus on what matters most. Control Economics Investor-entrepreneur trust is paramount. Friday, October 1, 2010
  12. 12. The term sheet is a preliminary, non-binding agreement. Word-smiths are not welcomed. Friday, October 1, 2010
  13. 13. Voting Rights Liquidation Preference Board of Pay-to-play Directors Redemption Conditions Price ??? Rights Precedent Protective Investment Provisions Right of First Instrument Refusal Tag-along & Conversion Drag-along Anti-dilution Founders activities Information Dividends ESOP Rights Confidentiality & No-Shop Registration Co-Sale Indemnification Rights Restriction on Agreement & Assignment Sales Friday, October 1, 2010
  14. 14. Liquidation Preference Board of Directors Price !!! Protective Investment Provisions Instrument Anti-dilution Friday, October 1, 2010
  15. 15. Common Shares Investment Preference Instrument Shares Convertible Notes +Warrants Friday, October 1, 2010
  16. 16. This is what matters. Amounted Price raised Price: $______ per share (the Original Purchase Price). The Original Purchase Price represents a fully-diluted pre- Price per share, money valuation of $ __ million and a fully-diluted post money valuation of Conversion price $__ million. For purposes of the above calculation and any other reference to fully-diluted in this term sheet, fully- diluted assumes the conversion of all Pre-, post-money outstanding preferred stock of the Company, the exercise of all authorized and currently existing stock options and warrants of the Company, and the Price modifiers: increase of the Company’s existing option pool by [ ] shares prior to this warrants & ESOPs financing. Not this! Friday, October 1, 2010
  17. 17. Liquidation Not so nice, no matter Preference regardless of the form. Participation Liquidation Preference: In the Participation: After the payment of event of any liquidation or winding the Liquidation Preference to the up of the Company, the holders of holders of the Series A Preferred, the Series A Preferred shall be the remaining assets shall be entitled to receive in preference to distributed ratably to the holders of the holders of the Common Stock a the Common Stock and the Series per share amount equal to [x] the A Preferred on a common Original Purchase Price plus any equivalent basis. declared but unpaid dividends (the Liquidation Preference) OR ;provided that the holders of Series A Preferred will stop participating once they have received a total liquidation amount per share equal to [X] times the ypically 1x Original Purchase Price, plus any T declared but unpaid dividends. Thereafter, the remaining assets shall be distributed ratably to the holders of the Common Stock. Friday, October 1, 2010
  18. 18. Board of Directors Founder(s) Board Representation: The holders of Series A Preferred will Investor have the right to elect one representative to the Company’s “Bored” composition Board of Directors, based on a three member Board of Directors. The holders of the Series A will Independent have the right to have observers attend all meetings of the Board of Directors. Best Practices Friday, October 1, 2010
  19. 19. Veto rights that investors have on certain Typically covers actions that: actions of the company (i) changes rights, preferences or privileges of the class of stock that investors are holding (ii) changes authorized number of shares Protective of Common and/or Preferred (iii) fund-raising veto of any instrument Provisions type, possibly with an amount cap (iv) changes or waivers to the company’s articles/by-laws Though some are just out of this world... (v) changes to board size and (i) investments by the company which composition is deemed by NRF Holdings to be (vi) payment or declaration of dividends illegal, criminal or which affects the (vii) capital expenditures in excess of interests, integrity or public security $35,000 or national security of Singapore or (viii) issuance of debt in excess of $100,000 the Singapore Government (ix) mergers, corporate reorganization, sale of control or any transaction that results in sale of assets of company Friday, October 1, 2010
  20. 20. Middle ground Bad Entrepreneur-friendly Narrow-based WA Full ratchet Broad-based WA Entrepreneur bears 100% of For Weighted Average, investor(s) and dilutive effects in a downround; entrepreneur share the dilutive effect. Investor(s)’ shareholding % is maintained. CP2 = CP1 × (A+B) ÷ (A+C) where CP2 = New Conversion Price CP1 = Prior Conversion Price A = # of shares outstanding prior to Anti-dilution current round B = ($ raised in current round ÷ CP1) = # of shares issued as if raised at Prior Conversion Price C = # of shares issued in current round Friday, October 1, 2010
  21. 21. Good lawyers are really hard to find. If you meet one, hang on as tightly as you would to your soul mate. For the rest of us, manage your lawyer well, lest he or she manages you. Your investor is watching. Friday, October 1, 2010
  22. 22. Questions? I’ll do my best with them. Thank you! Friday, October 1, 2010
  23. 23. Voting Rights Liquidation Preference Board of Pay-to-play Directors Redemption Conditions Price !!! Rights Precedent Protective Investment Provisions Right of First Instrument Refusal Tag-along & Conversion Drag-along Anti-dilution Founders activities Information Dividends ESOP Rights Confidentiality & No-Shop Registration Co-Sale Indemnification Rights Restriction on Agreement & Assignment Sales Friday, October 1, 2010

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