Terms of Investments: Working with VCs

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We know what you want: money.

Now, you probably think that a VC will give you money and leave you alone. Sorry, it’s not that simple. In this lecture we look at:

* How VCs make money
* What they want in return for their money
* How they structure deal

Part of the CIBC Presents Entrepreneurship 101 Lecture Series: http://www.marsdd.com/ent101

Published in: Business, Economy & Finance
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Terms of Investments: Working with VCs

  1. 1. Follow or Tweet: #ent101
  2. 2.   VC motivations   Driven by their model   Impacts their terms and expectations   Most companies aren’t VC’able   Just don’t fit the “Big Money” model   May be good companies and businesses   But if you are than you’ll be better equipped than most because of tonight
  3. 3.   1,000 companies   10 investments   2 may be widely successful (usually 1)   6 “land of the living dead”   2 fail horribly   Winners to offset my losers   Start ups 10-12x return in 5-7 years   Existing companies 5-7x in 4-5 years
  4. 4.   A company that doubles isn’t enough…   Every opportunity has to have the potential to be a home run
  5. 5.   YouTube sold to Google for $1.65 Billion   Sequoia invested $11.5M received $495M   30% of the company   43xreturn   Great deal!
  6. 6.   6-9 months to raise capital   Several meetings   Want to get to know you   Assess your “Say/Do” factor   Close to truth ▪  Builds confidence
  7. 7.   Personal Recommendation:   Get to know the VC ▪  Process (who makes the decision, when & how often) ▪  Where are they in their fund life cycle ▪  What was their last deal ▪  Talk to their existing CEO ▪  Cash available to invest/reserves ▪  No “Yes” means “No”   Have to be able to live with them “til exit do you part”
  8. 8.   Non-binding offer to invest   Outlines the general terms and conditions of investment   Which may change   Not the definitive agreement, simply a place to start   Everyone uses it
  9. 9.   Non-heartache   Company name   Investors   How much   Date
  10. 10.   Founders   Employees   Consultants   Students/universities/research organizations etc   Avoid convoluted IP structures   Only going to be unwound
  11. 11.   Non-competition   Non-solicitation   Customers   Employees   IP Assignment
  12. 12.   Ensure one common motivator   Need to attract talent   15%-20% (low as 12%)   New CEO   New executives   Board members   Non-VC   Pre-$   Dilutive to you
  13. 13.   Preferred shares   Accrue   Price + dividend convert
  14. 14.   Protects an investor from down round   As if their investment had been done at the current lower price   Keeps the investor whole in bad times   Full-ratchet   Weighted average
  15. 15.   VC can ask to have the company buy back shares   Life of the fund   Investors in funds want their money back   Outcome:   Forces a sale   Get minimum investment back (P+dividends)
  16. 16.   Power of “OPM”   Get to know your VC   Won’t matter in good times   Can’t tell you what to do but prevent you from doing things
  17. 17.   60-66 2/3%   Change nature of the business (acquire/divest)   Change capital structure/articles ▪  Default approval over future financing   Approve business plan/operating plan   Change in key employees (defined term)   Creation of ESOP   Unbudgeted expenditure in excess of $5,000   Non-arms length transactions   ….
  18. 18.   Monthly prepared financial provided   20-30 days from month end   Quarterly financials   Analysis vs budgets   Board material   Yearly operating plan   (30 days prior to beginning of fiscal year)
  19. 19.   Founder restrictions   Drag Along   VCs need exit   Tag Along   I can sell a portion if you can
  20. 20.   Friends and family   Move to 5   2 investor   2 founder   1 independent   Expect material in advance of meeting   Only a meeting if the VC is there ▪  Defer once
  21. 21.   Acceptance & Exclusivity   Deadline for acceptance   Use the time to negotiate   No “shop” ▪  Applies to company, depending on stage founders Be careful what you ask for …don’t send the wrong message

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