Weitere ähnliche Inhalte Ähnlich wie Term Sheet Negotiations (20) Mehr von Valla and Associates, Inc., P.C (15) Kürzlich hochgeladen (20) Term Sheet Negotiations1. © 2014 Valla & Associates, Inc., P.C.
www.vallalaw.com 1
Majda Barazzutti
July 23, 2014
2. THE VENTURE CAPITAL
FINANCING PROCESS:
TERM SHEET NEGOTIATION
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ENTREPRENEURIAL JOURNEY
3. Financing is a Staged Process
Common Stock
Bootstrapping
Friends and Family
Angels: Equity, Warrants, Convertible Notes
Series seed financing
Series A Preferred (B, C, etc.)
Liquidity Event
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4. Convertible Debt
Bridge loan before financings
Useful when the company does not have a
satisfactory valuation
Risks of repayment feature
No minimum capital but insolvency changes the
rules
Better include a provision to force conversion
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5. Warrants: option to purchase company shares
at a price within a set period
“Kicker” to increase the potential investment
value
Warrants increase in value as the value of the
underlying shares increase in relation to the
exercise price
Usually issued with bridge financing
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Warrants
6. Alternatives: Strategic Investors
Aims Differ
Not Interested in Helping the Company Grow
Conflict of Interest: greater returns from
commercial rights than growth
Expertise
Could affect future VC financings
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7. Venture Capital
Identify the Right VC
Due Diligence
The Risk of “Finders”
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8. Prior to Investing:
Document Employees
Founders Relationships
Securities filings
Confidentiality and Invention Agreements
Prepare for VC’s due diligence
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“Clean Up”
9. Preferred Stock (Series)
Why Preferred?
Liquidation Preference
Preserve a low common stock value for option grants
(ratio 1:4 to 1:8):
Common Stock was bought at cheap price, $0.10
to founders.
If Common were sold at same time at $5.00 to
VC, tax consequences for founders.
No limits to Preferred/Common ratio
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10. Sample Term Sheet
Binding Provisions:
No Shop
Confidentiality
Applicable law
ALL other provisions are not binding
See examples: NVCA (http://www.nvca.org)
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11. A Typical Term Sheet
Valuation/Number of Shares/Price
Liquidation Preference
Redemption
Conversion
Vesting of founders’ stock
Antidilution
Voting Rights
Protective Provisions
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12. Valuation/Price
Pre-money/Post-money valuation: Option pool shuffle
How are your shares valued?
8M pre-money valuation, 6M shares outstanding
$8M pre-money ÷ 6M existing shares = $1.33/share, right?
WRONG: The share price is $1.00
WHY? Read the term sheet: “The $8 million pre-money
valuation includes an option pool equal to 20% of the post-
financing fully diluted capitalization.”
$8M pre-money ÷ (6M existing shares+2M options )= $1/share.
Pre-money valuation includes an unallocated option
pool for new employees -- lowering pre-money valuation
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13. Liquidation Preferences
Liquidation Preference: 1x or more – 2x, 2x
Participating Preferred:
Straight/Non-participating 67%
Full participating (double-dip) 19%
Capped participating 14%
Preferred has the option to convert into Common
Interaction of various series: First pay B, then A, then
all; all participate equally, etc.
“Deemed Liquidation”: good times and bad times
Not an IPO
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14. Dividends
No expectation of dividends, but:
Cumulative Dividends: __ % cumulative dividend accrues over
time, whether or not the company declares it - PLUS participation
with Common Stock on an as-converted basis.
Non-cumulative Dividends: “An amount equal to $[_____] per
share of Series A Preferred when, as and if declared by the
Board”
PIK (payment-in-kind) dividends. Company option to pay
accrued and unpaid dividends in cash or in common shares
valued at fair market value.
Usually payable on liquidation or redemption, not conversion
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15. Redemption
Optional (Company call):
Company can repurchase stock at original price (plus
dividends) if Investors don’t convert to Common after x years
Mandatory (Investors Put)
Investor can force Company to repurchase shares after x
years – beware of redemption premium
Guaranteed exit path for VC if Company is “successful
enough”
But, Company must have legally available funds
22% of all VC financings in 2012, 35% in down rounds
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16. Conversion
Preferred always has a conversion to Common feature,
but loses all preferred privileges
Optional Conversion
Automatic Conversion: IPO
Conversion Ratio is initially 1:1, modified based on
anti-dilution provisions
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17. Anti-Dilution
Protect investors if company issues equity at a lower
valuation than preferred
Full Ratchet 3%
Weighted Average: Broad Base: more favorable 92%
Weighted Average: Narrow Base: less favorable to
company 4%
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18. Exclusions from Dilution
Carve-outs from anti-dilution:
Options grants to employees, consultants (negotiate
all or only authorized pool)
Warrants to lenders (approved by majority vs.
unanimous board approval)
Warrants to service providers, strategic partners
Shares issued in mergers / acquisitions
Exercises or conversions of current stock or grants
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19. Other Terms:
Vesting of founders’ stock, acceleration
Right of first refusal: new issuance and
transfers by founders
Employee pool
Co-sale agreement (drag along, tag along) :
force a sale
Registration rights
Board Control
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20. Other Terms:
No-shop agreement
Information rights
Confidentiality
Indemnification
Counsel expenses up to ___
Lock-up provisions
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21. Bottom Line
(Almost) anything can be negotiated
Pick your battles: Liquidation Preferences,
Protective Provisions, Board Control
Make sure you understand what you’re signing
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22. Thank you
IN BOCCA AL LUPO!
Valla & Associates, Inc., P.C.
1990 N. California Blvd., Suite 1060
Walnut Creek, CA 94596
USA
E-mail: majda.barazzutti@vallalaw.com
Phone: +1 925 705 7623 Fax: +1 925 705 7629
www.vallalaw.com
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