This presentation was given to a group of Founders, CEO's and praticipants in the Financing of their growth companies at the Digital Media Zone at Ryerson University in Toronto today.

1. ENTREPRENEUR WORKSHOP:
Understanding Investor Term Sheets
There should be no surprises!

2. Agenda
•
•
•
•
•
•
Introduction of DMZ – Hilary Green
Overview of Maple Leaf Angels – Hilary Green
Participant Introductions
Participants goals for This Session
Introduction to Investor Term Sheets
Q&A
2

3. Who Am I
• I am Gerard Buckley
– Founder & CEO of Jaguar Capital an Advisory Practice for Growth
Companies in Financial Management, Financial Structuring &
Governance
– Chairperson of Board of Directors, Maple Leaf Angels Corporation &
Investor in eight early stage companies
– Certified Corporate Director of the Institute of Corporate Directors
– Previously Entrepreneur in Residence with Incubes (An Internet
Company Accelerator)
– Member of SME Committee of The Ontario Securities Commission
– Investment Committee of MSV University, Halifax, NS
– 32 yr. Career with Scotia Capital as a Financial Risk Management
Advisor to Fortune 200 Companies: Rogers, Irving Group, Empire
Co., Four Seasons, Bruce Power, OPG, Province of Ontario, Ford etc.
3

4. An Introduction to Term sheets
• A Term Sheet is the basis of a legal agreement
between an investor(s) and a company, outlining
the terms and conditions of an investment into
the target company
– Agreement in principle
– Non-binding (except non-disclosure and no-shop
clauses)
– Commence negotiating early in due-diligence
– Complex Term Sheets are seen as Founder Unfriendly
and will deter follow-on investment
4

5. Goals
• Hope for the best but plan for the worst
• Protect downside risk while maximizing upside
potential
• Forms the basis of a legal document
• Aligns interests of founders with interests of
investors
• Creates the rules to guide the company in future
follow on investment & M&A activity
• Establishes corporate governance structure
5

6. Critical Items
•
•
•
•
•
What do you want the deal to look like?
Type of security to be issued
Valuation and amount to be invested
Voting and information rights
Board establishment and representation
6

7. Types of Investment
• Equity
– Common
– Preferred
• Debt
– Straight (Senior, Subordinated or Mezzanine)
– Convertible
• Angel investments capture upside reward, therefore
Equity or Convertible Debt are instruments used
7

8. Seed Preferred Equity Structure
• Allows upside value capture
• Introduces rights available only to investors
–
–
–
–
–
Anti dilution
Investor board seats
Information rights
Redemption rights
Rights related to future investment rounds
8

9. Seed Convertible Debenture Structure
• Allows investor upside value capture with the following
typical terms:
–
–
–
–
–
–
–
Conversion into Series A preferred equity
Median conversion discount: 20%
Median interest: 5.5%
Median maturity: 18 months
Merger premium 2x
Secured against company IP
Often a cap set on valuation
9

10. Seed Convertible Debenture Structure
• Introduces rights available only to investors
–
–
–
–
–
–
–
Pre-emptive rights on next Financing
No board Seat
Information rights
Right of first refusal
Rights related to future investment rounds
Conversion on exit before financing
Co-sale rights
• Benefits to founders and investors
–
–
–
–
Defers negotiation on valuation and many pref share terms
Simplifies legals
Avoids Directors and Shareholders liability
Lender is a creditor, near front of line in a liquidation
10

11. Aligning Interests between Investors & Founders
• Identify key value drivers in the investment
–
–
–
–
Product launch
IP strategy
Strategic partnerships
Sales targets
• Focus on two or three key metrics
• Upon value creation event, management can claw
back a portion of equity if they have demonstrated
superior execution
• Warrant structure
11

12. Corporate Governance
• Goal is to achieve a balanced board from the
start
• 5 person board minimum – 3 person boards do
not work
• Expandable easily to 7
–
–
–
–
Current CEO
Founder representative
2 Investor representatives
Independent
12

13. Common Deal Terms
•
•
•
•
•
•
•
•
•
•
•
Requirement for a BOD Seat
Anti-Dilution Provision – Pre-Emptive Rights
Share Option Plan 10 – 15% of authorized shares
Drag Along Rights – a majority SHR
Tag Along Rights – a minority SHR
Postponement Agreements
Key officer insurance in addition to D & O
Price protection from a down round
Requirement to buy out investors after 5 years without an exit
Observer Rights
Reporting Requirements
13

14. Common Deal Terms
•
•
•
•
•
•
•
•
•
•
•
•
CD Valuation Cap
CD Discount to Qualified Financing 15 or 20%
Change of Control Provisions
Representations and Warrants
Covenants
Default provisions
Prepayment
Conversion at next round financing
Governing Law
Conversion on Sale or Optional Conversion
Who pays Legal Fees
Founder Stock Vesting
14

15. Liquidity Preference
• Convertible Debenture – many objectives that
include liquidity preference
• There is a lot of discussion around how liquidity
preference should be given in a company
liquidation vs. sale of company
• Warrant coverage is often and better way to
ensure CD protection is given – Equity Kicker
15

16. Unfriendly Terms to Founder(s) or Start-up
•
•
•
•
•
•
No-Shop Clause
Investor’s Legal Expenses
Confidentiality Clause
Share Ownership
Non-Compete
Security and Covenants
16

17. Financing Innovations – Y Combinator
• SAFE (simple agreement for future equity) Financing
Documents is intended to replace convertible notes
–
–
–
–
–
Safe Primer
Safe: Cap, no Discount
Safe: Discount, no cap
Safe: Cap and Discount
Safe: MFN, no Cap, no Discount
• Features
–
–
–
–
Not a debt instrument
Standardization
No interest
Reduced legal cost
- No Maturity Date
- No Security
- It is not a loan
- Negotiate one item – Valuation Cap
17

18. Contact Information
Gerard Buckley, BBA, FICB, ICD.D
President and CEO
Jaguar Capital Inc.
(C) 416-884-9522
(W) 416-646-6789
g.buckley@jaguarcapital.ca
www.jaguarcapital.ca
Twitter: @jaguarcapital
Twitter: @gerardbuckley
Slideshare: Jaguar Capital
18