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![Understanding a termsheet –
case study
• Anything between 2 and 15 pages (if points are
spelt out in fuller legalise)
• Sample phrasing is
– “[XXX fund] proposes to lead a Series A preferred share financing
of €5m at a €8m pre-money valuation. As part of the investment
process an employee option pool of 15% on a post money basis will
be put in place. Typical venture capital terms including
participating liquidation preference, etc. etc …”
• What does it all mean?](https://image.slidesharecdn.com/bhstartupclinic090915104805phpapp01-1255480126836-phpapp02-131115051344-phpapp01/75/FinancementStartupsEDHEC-24-2048.jpg)
Uploaded byWilliam Caly
FinancementStartupsEDHEC
This document provides an overview of startup financing options for entrepreneurs. It discusses self-financing or bootstrapping a business using personal funds. It also covers various types of equity financing including angel investors, venture capital, and private equity. The document outlines when equity financing makes sense versus bootstrapping. It also discusses how venture capitalists and angel investors make returns on their investments. The document provides guidance on attracting investors and the deal structuring process, including typical terms in a venture capital term sheet like liquidation preferences and antidilution provisions.
FinancementStartupsEDHEC
- 1.
- 2. About Index Ventures IndexVentures • Pan European Venture Fund • Over €1.5bn under management • Based London & Geneva • Active investor in web / internet Selected Investments
- 3. Agenda Important reflections beforeyou start What are the financing options? How to attract and engage investors? Deal structure and what to expect during the investment process
- 4. A big undertaking •Starting a business is a big commitment – Energy & Passion – Time – Financial resources (yours and your investors) • Before thinking of financing, is worth taking a deep breath …
- 5. Key questions aboutyou • Why am doing this – Make money – Lifestyle – “Change the world” • How long do you want to commit? • What level of financial risk are you prepared to take?
- 6. Key questions aboutthe business • Be honest with yourself about the risks / unknowns – Do customers want the product / service? – Do you have the competence to build the product and the team – Can you monetise the product / service? – How competitive is / will the space be? – How big can the overall market become?
- 7. Agenda Important reflections beforeyou start What are the financing options? How to attract and engage investors? Deal structure and what to expect during the investment process
- 8. Overview of financingoptions Non-Equity Financing Equity Financing Angel Financing Self Finance / Bootstrapping Venture Capital Debt / Bank Finance Private Equity Public Stock Markets
- 9. Self financing /bootstrapping • Financing growth from previous cashflow and personal funds • Obviously need to have cashflows… • Most good bootstrapped companies emerge from a service or consulting companies that are productising their offering • Pros – Bootstrapped companies almost always spend cash more effectively than equity financed companies – Already being close to existing customers, give excellent ability to understand problems and define good solutions • Cons – Resources for product and market dev constrained by cashflows – May miss a big opportunity if other players raise finance and invest heavily
- 10. Debt / bankfinance • Relatively limited funds will be available ; likely to want security anyway • Banks only lend to predictable businesses they can understand • If your capital requirements are limited and your business is following a well trodden path, can be a useful source of finance • Not particularly useful web or high growth tech industries
- 11. Good reasons toraise equity finance Pre-requisites Unique Product Or Concept Passionate Founding Team Large Potential Market Opportunity Implications… Intense competition likely Need to move rapidly VC funding supports Hiring Rapid Product Development Partnerships Infrastructure Internationalisa tion Commercialisati on
- 12. When NOT toraise VC Application is a feature not a product Market size is too small Motivation is not financial • Risk is not that you waste time unsuccessfully trying to raise finance … • … real danger is that you do succeed in raising VC funds – Lose opportunity for small exit which could be personally lucrative – Lose opportunity to run lifestyle business – Get bound in to 3+ yrs work you may not enjoy
- 13. Equity Financing Seed Early Stage SeriesA, (B) Later Stage (B),C,D… Pre-IPO / Buy-out Investment Size 0 - €1m €2m-€20m €5m-€20m €30m+ Potential Sources of Funds Grant-funding Venture Capital Venture Capital Specialist Late stage tech investment funds University seed funds Friends and family (Wealthy) Angel investors Hedge Funds Angel Investors (Venture Capital) Growth Fund Private Equity
- 14. Agenda Important reflections beforeyou start What are the financing options? How to attract and engage investors? Deal structure and what to expect during the investment process
- 15. Venture Capital –How the VC makes money • Raise fund every 2-4 years – Pension funds, financial institutions and specialist “fund of fund” investors • Invest money over 3-5 years ~ 1/2 of investments lose money ~ 1/3 of investments break even ~ 1/6 of investments make (lots) of money • Very small management fee on funds managed ~ 1-2.5% pa • Carry ~ 20-25%x (Total Return – Total Amount Invested)
- 16. Angels – Howthe Angel investor makes money • Unlike the VC the Angel invests their own money • Much smaller absolute returns can be very meaningful to an angel • The Angel approach is to invest small amounts at a very early stage / low valuation – €50-€250k at valuations of €500k-€4m • Two “exits” for angel – Firm might be sold quickly for €5-10m or less where the Angel can make 2-5x money – Firm raises VC money, after which Angel typically becomes more passive but has built up exposure very cheaply to a venture backed enterprise • The key thing when selecting an Angel therefore is whether they can help you raise VC finance – See which Angel investors have invested with which VCs
- 17. Venture Capital –What a good VC will add • Advice and Strategy • Internationalisation • Hiring • Trusted service provider relationships – – – – – Developers Country Managers Sales CEO / CFO / COO Advisory Board • Partnerships • Profile and PR • Further access to capital – Search / recruiting – Branding / PR – Finance, etc • Exit optimisation – Knowledge / contacts with relevant buyers – Experience with process
- 18. What does aninvestor look for? Team Technology Traction • Can – – – evaluate each as Exceptional Good / credible Mediocre / incomplete • Misconception that being good / credible across the board is what VCs look for – Can always add credible attributes to the mix later • We focus on finding opportunities which rate as exceptional in one attribute
- 19. Identifying relevant VCpartners Has funds to invest • Do create a shortlist • Rifle is a better weapon than a shotgun • Similar process for identifying angels, look at VC funding press releases to identify prior Angel investors Match of Size/Stage/ Geography Excellent track record Shortlist No directly competitive investments Relevant Portfolio
- 20. Getting on radarscreens • Out of the blue email is a longshot • Try to build context – Analyse portfolio companies – are there any links there? – Analyse contact network and advisors – Analyse press coverage – Participate in blog conversations – Attend events and conferences – Relevant PR around product also helps • VCs spend their time looking for businesses with momentum
- 21. Agenda Important reflections beforeyou start What are the financing options? How to attract and engage investors? Deal structure and what to expect during the investment process
- 22. Sharing relevant information Pre- first meeting • 100 page business plan not required • 20 page ppt which clearly answers main questions is best bet – – – – – – – – – Product Market Business Model Team Competition Product Roadmap Technology Overview Business Development Financial Status Pre - termsheet Post - termsheet • Dialogue rather than documentation – expect lots of meetings • Some additional reference calls with partners / customers • Calls with current / prospective customers or partners • Personal reference calls • Meeting broader team • Drafting legal documentation • Brainstorming around strategy • Legal / accounting audit (if relevant) • Identifying key hires post closing • Formal presentation to VC partnership 2-4 weeks 1-2 Months
- 23. Types of investment •Ordinary Share investment – Simplest form, often used by angels – All shareholders have similar rights – Company Board composed according to • Convertible Loan – Sometimes used by both Angels and VCs – Typically when another financing is anticipated soon – Loan will convert (with a discount ~25%) into the next financing round • Preferred Share Investment – Typical Structure used by VCs and occasionally larger Angels investing as a group
- 24. Understanding a termsheet– case study • Anything between 2 and 15 pages (if points are spelt out in fuller legalise) • Sample phrasing is – “[XXX fund] proposes to lead a Series A preferred share financing of €5m at a €8m pre-money valuation. As part of the investment process an employee option pool of 15% on a post money basis will be put in place. Typical venture capital terms including participating liquidation preference, etc. etc …” • What does it all mean?
- 25. Case Study –Cap Table
- 26. Venture Capital –“Typical Deal Terms” • • • • • • • but that’s so Board Representation unfair… Liquidation Preference Participation rights Anti-dilution rights Element of reverse vesting Certain control and veto rights Period of exclusivity to close legals Photo Source: Philip Greenspun, MIT
- 27. Case Study -liquidation preference Types of Liquidation Preference Payout to Series A (€m) 30 25 20 15 10 5 0 0 10 20 30 40 50 60 Valuation of Company at Exit (€m) No Liquidation Preference Non-Participating liquidation preference Participating Liquidation preference Participating Liquidation preference (capped at 3x) 70 80
- 28. Case Study -liquidation preference Types of Liquidation Preference Payout to Series A (€m) 30 25 20 15 10 5 0 0 10 20 30 40 50 Valuation of Company at Exit (€m) No Liquidation Preference 60 70 80
- 29. Case Study -liquidation preference Types of Liquidation Preference Payout to Series A (€m) 30 25 20 15 10 5 0 0 10 20 30 40 50 Valuation of Company at Exit (€m) Non-Participating liquidation preference 60 70 80
- 30. Case Study -liquidation preference Types of Liquidation Preference Payout to Series A (€m) 30 25 20 15 10 5 0 0 10 20 30 40 50 Valuation of Company at Exit (€m) Participating Liquidation preference 60 70 80
- 31. Case Study -liquidation preference Types of Liquidation Preference Payout to Series A (€m) 30 25 20 15 10 5 0 0 10 20 30 40 50 60 Valuation of Company at Exit (€m) Participating Liquidation preference (capped at 3x) 70 80
- 32. Case Study -Antidilution • If a subsequent investment round is done a price lower than the previous investment round then the previous investment round is repriced (more stock issued to Series A) • Two flavours – Broad-based – Series A price ratchets down based on size of Series B relative to Previous post-money valuation – Narrow-based – Series A price ratchets down based on size of Series B relative to Size of Series A • Say €5m Series B done at €0.75 per share – Broad-based – Series A reprices = €1.00–((5/(5+15.3)*€0.25) = €0.93 – Narrow-based – Series A reprices €1.00–((5/(5+5)*€0.25) = €0.875
- 33. Case Study –Reverse Vesting • The value of startup is typically in the promise of future labour from the founders • Investors seek to secure this by reverse vesting founder stock, typically over 3 or 4 years • For startups typically all founder stock is subject to reverse vesting. • For later stage companies perhaps half the stock might be subject to vesting • NB – this also protects founders from each other
- 34. Choosing the rightVC - Valuation should not be the decisive factor • Team quality • Strategic fit with buyer community Well managed exit process Fewest strategic errors made • Hiring (quality & speed) • Partnerships • Product development • % share of business at exit Growth rate • Probability of getting there Revenues / Profitability • Value at exit • • Entrepreneur’s Equation Valuation at initial round • Valuation and dilution at subsequent rounds • Option grants
- 35. Key things toconsider when choosing an investor • Relationship – With key individual(s); and – broader team • References – Speak to other founders • Portfolio – Relevant experience – Non competitive – Community you want to be part of • Valuation and associated deal terms Right partner at a fair price vs. Any partner at best price
- 36. Thank you Ben Holmes Email:benh@indexventures.com Skype: ben_holmes
- 37. Artwork – (TransparentLayers)