3. Typical Raise
0 1 2 3 4 5 6 7 8 9
Valuation
Seed
Round
Angel
Round
Series A
Series B
Series C
Product Market Fit Business Model Fit
Bridge
Round*
4. The Funding Process
Pitch to
Investors
Verbal
Commitment
to Invest
Term Sheet SHA Closure
Legal DD
Fix Issues
Financial DD
Drop
Issues
too
serious?
YN
All Ok?
Y
N
5. Understanding Term Sheets
vManagement typically holds common stocks
vProfessional investors, both angels and
venture capitalists, take preferred stock
ØMore control over decisions
ØBetter economic terms
vInterests of common stocks and preferred
stocks needs to be negotiated in the term
sheet agreement
vEcomonic & Control Interests
7. Economic Interests
vLiquidation Preference
ØIn the event of sale / liquidation, preferred stock
holders are entitled for a pre-determined return
before common stock holders
ØParticipating clause further allows the preferred
stock holders to get further returns on pro-rata
basis
ØIf there is not enough cash, the preferred clause
can take the founders with no returns
8. Example
Liquidation
Preference
Basic Share (CR) Participating Share (CR) Total (CR)
Simple
Prorating 10CR [20% of 50CR] NA 10CR
1x 5CR 9CR [20% of 45CR] 14CR
1.5x 7.5CR 8.5CR [20% of 42.5CR] 16CR
2x 10CR 8CR [20% of 40CR] 18CR
vAmount Invested = 5CR @ 20CR pre-money
vInvestors hold 20% stake
vCompany exited at 50CR
11. Founder Lock-in & Vesting
vRestriction on Founders selling their stake
without investor permission
Ø4 year lock-in is normal
vVesting Curve
ØYou re-earn the shares you own
ØTypical curves are 4 year vesting / 1 year cliff /
quarterly / monthly vesting
ØSome pre-vesting can be negotiated depending
upon the stage of the venture
14. vAnti – Dilution
ØClause comes into play when there is a down-
round and the first round investor has to protect
his interests
ØFull Ratchet & Weighted Average
ØPay-to-play clause can help the founders get
further investments from the original investors
15. vPre-emptive Rights Future Participation in
Financing / Sale
ØRight of First Offer – Preferred Stock holders get
the first right to participate. Can limit the
founders to get investors who can add more
value
vDrag-Along Rights
ØInvestors can force the sale of the company
under certain conditions
vTag-Along Rights
ØManagement agrees not to sell without giving
investors a right for pro-rata participation in sale
17. Convertible Note
vDefer the valuation till next round of
financing
vMany different ways of structuring
vKey Parameters
ØMax Valuation Cap
ØDiscount
ØLower Cap
18. Others
vLegal & Accounting Fees
ØMostly all investors put the burden of the legal
fees on the entrepreneur. Can negotiate some
overall caps
vNo Shop
ØThis prevents entrepreneurs from shopping
around with other investors while the dialogue is
on. Time period can range from a few weeks to
a few months.
vDue Diligence