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![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](https://image.slidesharecdn.com/termsheets-fundamentals-200514002707/85/Term-Sheets-Fundamentals-8-320.jpg)
![Example
vAmount Invested = 5CR @ 20CR pre-money
vNumber of shares before series A = 1M
Stake 20% [5CR / 25 CR]
Number of Shares Issued 250K
Price / Share 200 INR [5CR / 250K]](https://image.slidesharecdn.com/termsheets-fundamentals-200514002707/85/Term-Sheets-Fundamentals-20-320.jpg)
Uploaded byManish Singhal
Term Sheets Fundamentals
This document discusses key terms in a term sheet for startup funding. It explains typical funding stages from seed to series C and outlines economic and control interests that need to be negotiated between common stockholders and preferred stockholders. Key terms discussed include valuation, liquidation preference, founder lock-in, vesting, anti-dilution, preemptive rights, tag along rights, and exit rights. Economic interests focus on how liquidation preferences work and examples are provided. Founder lock-in and vesting curves are also explained.
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Term Sheets Fundamentals
- 1. Manish Singhal @manish_saarthi 30 Aug AugustFest Understanding Term Sheets
- 2. 30 Aug August Fest TheFunding Curve
- 3. Typical Raise 0 12 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 Pitchto 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 vManagementtypically 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
- 6. Key Terms vValuation vLiquidation Preference vFounderLock-in vFounder Vesting Curve vAnti Dilution vPre-emptive Rights vTag Along Rights vExit Rights / Drag Along
- 7. Economic Interests vLiquidation Preference ØInthe 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
- 9. Liquidation preference vTypical clauses Ø1.xor Investment Amount (higher of the two) Ø1.5x with a cap on time or money
- 10. Key Terms vValuation vLiquidation Preference vFounderLock-in vFounder Vesting Curve vAnti Dilution vPre-emptive Rights vTag Along Rights vExit Rights / Drag Along
- 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
- 12. Founders Agreement vEquity Vesting& Exit Terms vNon-compete vIP assignment
- 13. Key Terms vValuation vLiquidation Preference vFounderLock-in vFounder Vesting Curve vAnti Dilution vPre-emptive Rights vTag Along Rights vExit Rights / Drag Along
- 14. vAnti – Dilution ØClausecomes 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 FutureParticipation 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
- 16. Some more things vTranching vESOP vROFR/ ROFO vClaw Back vReserved Matters
- 17. Convertible Note vDefer thevaluation till next round of financing vMany different ways of structuring vKey Parameters ØMax Valuation Cap ØDiscount ØLower Cap
- 18. Others vLegal & AccountingFees 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
- 19. Thank You! © CopyrightSaarthi Integrated Consulting LLP. All rights @manish_saarthi
- 20. Example vAmount Invested =5CR @ 20CR pre-money vNumber of shares before series A = 1M Stake 20% [5CR / 25 CR] Number of Shares Issued 250K Price / Share 200 INR [5CR / 250K]