This lecture focuses on understanding the motivation of private venture capital (VC) firms and how it affects their structuring of term sheets and legal agreements.

5. ¡ 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

7. ¡ 1,000
companies
¡ 10
investments
§ 2
may
be
widely
successful
(usually
1)
§ 6
“land
of
the
living
dead”
§ 2
fail
horribly
¡ Winners
have
to
offset
my
losers
¡ Start
ups
10-­‐12x
return
in
5-­‐7
years
¡ Existing
companies
5-­‐7x
in
4-­‐5
years

8. ¡ A
company
that
doubles
isn’t
enough…
¡ Every
opportunity
has
to
have
the
potential
to
be
a
home
run

10. ¡ You
Tube
sold
to
Google
for
$1.65
Billion
¡ Sequoia
invested
$11.5M
received
$495M
§ $3.5m
and
$8m
(in
2005/2006)
§ 30%
of
the
company
¡ 43x
return
¡ Only
VC
in
the
deal

11. ¡ Great
deal!

12. ¡ 6-­‐9
months
to
raise
capital
¡ Several
meetings
§ Want
to
get
to
know
you
§ Assess
your
“Say/Do”
factor
§ Close
to
truth
▪ Builds
confidence

13. ¡ 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”

14. ¡ 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

15. ¡ Non-­‐heart
ache
terms
§ Company
name
§ Investors
§ How
much
§ Date

21. ¡ Founders
¡ Employees
¡ Consultants
¡ Students/universities/research
organizations
etc
¡ Avoid
convoluted
IP
structures
§ Only
going
to
be
unwound
¡ Never
give
a
VC
a
reason
to
say
no

22. ¡ Non-­‐competition
¡ Non-­‐solicitation
§ Customers
§ Employees
¡ IP
Assignment

23. ¡ Ensure
one
common
motivator
¡ Need
to
attract
talent
¡ 15%-­‐20%
(low
as
10%/12%)
¡ New
CEO
¡ New
executives
(sales,
tech
&
CFO)
¡ Board
members
§ Non-­‐VC
¡ Pre-­‐$/Post-­‐$?
§ Dilutive
to
you

25. ¡ Pref
shares
§ Accrue
§ Price
+
dividend
convert

27. ¡ Protects
an
investor
from
down
round
§ Keeps
the
investor
whole
in
bad
times
§ As
if
their
investment
had
been
done
at
the
current
lower
price
§ Full-­‐ratchet
§ Weighted
average

28. ¡ 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)

29. ¡ 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

30. ¡ 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
§ ….

31. ¡ Monthly
prepared
financial
provided
§ 20-­‐30
days
from
month
end
¡ Quarterly
financials
§ Actual
vs
budgets
¡ Board
material
¡ Yearly
operating
plan
§ (30
days
prior
to
beginning
of
fiscal
year)

32. ¡ Founder
restrictions
¡ Drag
Along
§ VCs
need
exit
¡ Tag
Along
§ I
can
sell
a
portion
if
you
can

33. ¡ 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

34. ¡ 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