Term Sheets

Term Sheets Michael D. Bain, WilmerHale iNNOVATOR EVENING

Attorney Advertising

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Financing Trends • Down-rounds • Multiple Return Liquidation Preferences and

subsequent rounds are senior to the existing liquidation preferences

• Antidilution ratchet

• Corporate Reorganizations

© 2014 Wilmer Cutler Pickering Hale and Dorr LLP

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Sources of Money • Self-Funding • Friends and Family • Angels • Organized Angels • Venture Capitalists • Strategic Partnerships • Government Grants


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What’s Important to an Angel

Angels and VCs rank their priorities in a deal very differently

Business Attributes Angel VC

Investor's possible involvement 1 3 Investor's strengths filling gaps in business 2 5

Geographically close 3 6

Potential exit routes (liquidity) 4 1

Investor's understanding of business or industry

4 2

Presence of (potential) co-investors 6 4 Source: Angel Investing: Matching Startup Funds with Startup Companies -- A Guide for Entrepreneurs, Individual Investors, and Venture Capitalists (Jossey-Bass, 2000).


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Why Angels vs. VCs • Need cash quickly • Proactive mentoring and counseling • Avoid valuation of the Company • Major milestone in reach • Business Plan not complete • Stealth mode/Avoid scrutiny • Lack of VC interest


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Goals in Early Rounds • Seek VC-friendly terms and conditions • Receive quality, critical early-stage advice • Move quickly • Minimize transaction costs • Improve Company’s prospects/reputation • Minimize number of stockholders • Avoid future legal problems


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Typical Seed Stage Deals • Cash Loan • Common Stock • Convertible Debt • Convertible Preferred Stock


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Cash Loan • Requires repayment in cash along with periodic

interest payments • Typically less sophisticated investors • Often changes form • Unfavorable Use of Proceeds • Quick and easy • Seek to delay principal and interest payments until

Series A Round • No dilution


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Common Stock • Affects Option and Restricted Stock Pricing • Often combined with additional VC rights

o Registration Rights o Board Seat o Information Rights o Right of First Refusal

• Valuation • Control • Probably least desirable


Presenter

Presentation Notes

[If stockholders have the right to remove directors without cause (either because (1) the Board is not classified or (2) notwithstanding the fact that the Board is classified, the charter permits removal without cause), then it may be appropriate to indicate whether a supermajority vote is required to remove directors without cause.] Directors are not entitled to remove other directors, either for cause or without cause.

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Convertible Debt • Most desirable • Minimum transaction costs • Very quick • Minimizes problems with VCs • Minimum additional rights • Postpones valuation analysis • Better than Common Stock for the Investor • Typically convertible at holder’s option


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Convertible Preferred Stock • Full set of rights typically associated with VCs • Too much control for too little money • Uses up “Series A” • Significant transaction costs • Requires valuation


Presenter

Presentation Notes

[In many cases, the advance notice bylaws will not be locked in by a supermajority voting provision.]

WilmerHale

• Liquidation Preferences • Participating preferred

stock • Super liquidation

preferences

• Dividends • Anti-dilution adjustments • Weighted average • Full ratchet

Venture Capital Terms to Know and Understand

• Drag along rights • Extraordinary put rights • Redemption rights

• Board control • Fair market value

redemption • Increase in conversion

price

• Pay to play


Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/code-of-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP

Date post:	13-Jan-2015
Category:	Business
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