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Hacking Term Sheets Day 2 - Oct 1, 2010
a presentation by James Chan
Friday, October 1, 2010
Just to make sure you’re in the right room...
Today, we’re talking term sheets for early-stage investments
Friday, October 1, 2010
Before we begin...here’s a little bit about myself.
+
x 20+ term sheets
(from 2006 - 2010)
=
Professional VC
Me!
x 8 investments
&
If you’re more experienced, please join me up in front!
Friday, October 1, 2010
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
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
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
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
Naughty investors use your lack of expertise with term sheets against you.
Nice investors leave nothing to your imagination and always explain their term sheets thoroughly to you.
Naughty?
Nice!
www.displaycostume.com
Friday, October 1, 2010
Pitch Negotiations Term SheetDefinitive Documents
Due DiligenceCompletion
The entire process can be really quick, but can also drag on. It’s hard to find one size that fits all.
No-shop kicks in
3Fs, sophisticated angels, institutional investors? Or a blend? There’s trade-offs to be had. YMMV, but above
all, GIWYEO.
Investment syndicate
Investment Committee
Friday, October 1, 2010
???Price
Liquidation Preference
Investment Instrument
Board of Directors
Protective Provisions
Tag-along & Drag-along
Anti-dilution
Pay-to-play
Dividends
Redemption Rights
Conversion
Conditions Precedent
Information Rights
Registration Rights
Right of First Refusal
Voting Rights
ESOP
Restriction on Sales
Co-Sale Agreement
Founders activities
Confidentiality & No-Shop
Indemnification & Assignment
Friday, October 1, 2010
EconomicsControl
Drown out the noise, and focus on what matters most.
Investor-entrepreneur trust is paramount.
Friday, October 1, 2010
The term sheet is a preliminary, non-binding agreement.
Word-smiths are not welcomed.
Friday, October 1, 2010
???Price
Liquidation Preference
Investment Instrument
Board of Directors
Protective Provisions
Tag-along & Drag-along
Anti-dilution
Pay-to-play
Dividends
Redemption Rights
Conversion
Conditions Precedent
Information Rights
Registration Rights
Right of First Refusal
Voting Rights
ESOP
Restriction on Sales
Co-Sale Agreement
Founders activities
Confidentiality & No-Shop
Indemnification & Assignment
Friday, October 1, 2010
!!!Price
Liquidation Preference
Investment Instrument
Board of Directors
Protective Provisions
Anti-dilution
Friday, October 1, 2010
Investment Instrument
Preference Shares
Convertible Notes
+Warrants
Common Shares
Friday, October 1, 2010
PriceAmounted
raised
Price per share, Conversion price
Price modifiers: warrants & ESOPs
Pre-, post-money
Price: $______ per share (the Original Purchase Price). The Original Purchase Price represents a fully-diluted pre-money valuation of $ __ million and a fully-diluted post money valuation of $__ 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 outstanding preferred stock of the Company, the exercise of all authorized and currently existing stock options and warrants of the Company, and the increase of the Company’s existing option pool by [ ] shares prior to this financing.
This is what matters.
Not this!
Friday, October 1, 2010
ParticipationLiquidation Preference: In the event of any liquidation or winding up of the Company, the holders of the Series A Preferred shall be entitled to receive in preference to the holders of the Common Stock a per share amount equal to [x] the Original Purchase Price plus any declared but unpaid dividends (the Liquidation Preference)
Participation: After the payment of the Liquidation Preference to the holders of the Series A Preferred, the remaining assets shall be distributed ratably to the holders of the Common Stock and the Series A Preferred on a common equivalent basis.
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 Original Purchase Price, plus any declared but unpaid dividends. Thereafter, the remaining assets shall be distributed ratably to the holders of the Common Stock.
Typically 1x
Not so nice, no matter regardless of the form.
Liquidation Preference
Friday, October 1, 2010
Best Practices
“Bored” composition
Board of Directors
Board Representation: The holders of Series A Preferred will have the right to elect one representative to the Company’s Board of Directors, based on a three member Board of Directors. The holders of the Series A will have the right to have observers attend all meetings of the Board of Directors.
Founder(s)
Independent
Investor
Friday, October 1, 2010
Protective Provisions
Veto rights that investors have on certain actions of the companyTypically covers actions that:
(i) changes rights, preferences or privileges of the class of stock that investors are holding
(ii) changes authorized number of shares of Common and/or Preferred
(iii) fund-raising veto of any instrument type, possibly with an amount cap
(iv) changes or waivers to the company’s articles/by-laws
(v) changes to board size and composition
(vi) payment or declaration of dividends(vii) capital expenditures in excess of
$35,000(viii) issuance of debt in excess of $100,000(ix) mergers, corporate reorganization,
sale of control or any transaction that results in sale of assets of company
Though some are just out of this world...(i) investments by the company which
is deemed by NRF Holdings to be illegal, criminal or which affects the interests, integrity or public security or national security of Singapore or the Singapore Government
Friday, October 1, 2010
Anti-dilution
Full ratchet Broad-based WA
Bad Entrepreneur-friendly
Entrepreneur bears 100% of dilutive effects in a downround; Investor(s)’ shareholding % is maintained.
For Weighted Average, investor(s) and entrepreneur share the dilutive effect.
CP2 = CP1 × (A+B) ÷ (A+C)where
CP2 = New Conversion PriceCP1 = Prior Conversion PriceA = # of shares outstanding prior to current roundB = ($ raised in current round ÷ CP1)
= # of shares issued as if raised at Prior Conversion Price
C = # of shares issued in current round
Narrow-based WA
Middle ground
Friday, October 1, 2010
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
Questions? I’ll do my best with them.
Thank you!
Friday, October 1, 2010
Price
Liquidation Preference
Investment Instrument
Board of Directors
Protective Provisions
Tag-along & Drag-along
Anti-dilution
Pay-to-play
Dividends
Redemption Rights
Conversion
Conditions Precedent
Information Rights
Registration Rights
Right of First Refusal
Voting Rights
ESOP
Restriction on Sales
Co-Sale Agreement
Founders activities
Confidentiality & No-Shop
Indemnification & Assignment
!!!
Friday, October 1, 2010