1. Hacking Term Sheets ap
res
en
tat
Day 2 - Oct 1, 2010 ion
by
Jam
es
Ch
an
Friday, October 1, 2010
2. Just to make sure you’re in the right room...
Today, we’re talking term sheets for
early-stage investments
Friday, October 1, 2010
3. Before we begin...here’s a little bit about myself.
Professional VC
x 20+ term sheets
+ & =
x 8 investments
(from 2006 - 2010)
Me!
If you’re more experienced, please join me up in front!
Friday, October 1, 2010
4. 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
5. 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
6. 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
7. 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
8. Naughty investors use your lack of expertise with term
sheets against you.
Nice!
Naughty?
www.displaycostume.com
Nice investors leave nothing to your imagination and
always explain their term sheets thoroughly to you.
Friday, October 1, 2010
9. The entire process can be really quick, but can also
drag on. It’s hard to find one size that fits all.
Investment syndicate
Definitive Documents
Pitch Negotiations Term Sheet Completion
Due Diligence
No-shop kicks in
Investment Committee
3Fs, sophisticated angels, institutional investors? Or a
blend? There’s trade-offs to be had. YMMV, but above
all, GIWYEO.
Friday, October 1, 2010
10. Voting Rights
Liquidation
Preference Board of
Pay-to-play
Directors Redemption
Conditions Price ??? Rights
Precedent Protective
Investment Provisions
Right of First
Instrument Refusal
Tag-along &
Conversion
Drag-along
Anti-dilution
Founders
activities
Information
Dividends ESOP
Rights
Confidentiality &
No-Shop
Registration
Co-Sale Indemnification
Rights Restriction on
Agreement & Assignment
Sales
Friday, October 1, 2010
11. Drown out the noise, and focus on what matters most.
Control
Economics
Investor-entrepreneur trust is paramount.
Friday, October 1, 2010
12. The term sheet is a preliminary, non-binding agreement.
Word-smiths are not welcomed.
Friday, October 1, 2010
13. Voting Rights
Liquidation
Preference Board of
Pay-to-play
Directors Redemption
Conditions Price ??? Rights
Precedent Protective
Investment Provisions
Right of First
Instrument Refusal
Tag-along &
Conversion
Drag-along
Anti-dilution
Founders
activities
Information
Dividends ESOP
Rights
Confidentiality &
No-Shop
Registration
Co-Sale Indemnification
Rights Restriction on
Agreement & Assignment
Sales
Friday, October 1, 2010
14. Liquidation
Preference Board of
Directors
Price !!!
Protective
Investment Provisions
Instrument
Anti-dilution
Friday, October 1, 2010
15. Common
Shares
Investment Preference
Instrument Shares
Convertible
Notes
+Warrants
Friday, October 1, 2010
16. This is what matters.
Amounted
Price raised
Price: $______ per share (the Original
Purchase Price). The Original Purchase
Price represents a fully-diluted pre- Price per share,
money valuation of $ __ million and a
fully-diluted post money valuation of Conversion price
$__ 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 Pre-, post-money
outstanding preferred stock of the
Company, the exercise of all authorized
and currently existing stock options and
warrants of the Company, and the
Price modifiers:
increase of the Company’s existing
option pool by [ ] shares prior to this
warrants & ESOPs
financing. Not this!
Friday, October 1, 2010
17. Liquidation Not so nice, no matter
Preference regardless of the form.
Participation
Liquidation Preference: In the Participation: After the payment of
event of any liquidation or winding the Liquidation Preference to the
up of the Company, the holders of holders of the Series A Preferred,
the Series A Preferred shall be the remaining assets shall be
entitled to receive in preference to distributed ratably to the holders of
the holders of the Common Stock a the Common Stock and the Series
per share amount equal to [x] the A Preferred on a common
Original Purchase Price plus any equivalent basis.
declared but unpaid dividends (the
Liquidation Preference) 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
ypically 1x
Original Purchase Price, plus any
T declared but unpaid dividends.
Thereafter, the remaining assets
shall be distributed ratably to the
holders of the Common Stock.
Friday, October 1, 2010
18. Board of
Directors
Founder(s) Board Representation: The
holders of Series A Preferred will
Investor have the right to elect one
representative to the Company’s
“Bored” composition Board of Directors, based on a
three member Board of Directors.
The holders of the Series A will
Independent have the right to have observers
attend all meetings of the Board
of Directors.
Best Practices
Friday, October 1, 2010
19. Veto rights that
investors have on certain
Typically covers actions that: actions of the company
(i) changes rights, preferences or
privileges of the class of stock that
investors are holding
(ii) changes authorized number of shares
Protective
of Common and/or Preferred
(iii) fund-raising veto of any instrument
Provisions
type, possibly with an amount cap
(iv) changes or waivers to the company’s
articles/by-laws Though some are just out of this world...
(v) changes to board size and (i) investments by the company which
composition is deemed by NRF Holdings to be
(vi) payment or declaration of dividends illegal, criminal or which affects the
(vii) capital expenditures in excess of interests, integrity or public security
$35,000 or national security of Singapore or
(viii) issuance of debt in excess of $100,000 the Singapore Government
(ix) mergers, corporate reorganization,
sale of control or any transaction that
results in sale of assets of company
Friday, October 1, 2010
20. Middle ground
Bad Entrepreneur-friendly
Narrow-based WA
Full ratchet Broad-based WA
Entrepreneur bears 100% of For Weighted Average, investor(s) and
dilutive effects in a downround; entrepreneur share the dilutive effect.
Investor(s)’ shareholding % is
maintained. CP2 = CP1 × (A+B) ÷ (A+C)
where
CP2 = New Conversion Price
CP1 = Prior Conversion Price
A = # of shares outstanding prior to
Anti-dilution current round
B = ($ raised in current round ÷ CP1)
= # of shares issued as if raised at
Prior Conversion Price
C = # of shares issued in current round
Friday, October 1, 2010
21. 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
22. Questions? I’ll do my best with them.
Thank you!
Friday, October 1, 2010
23. Voting Rights
Liquidation
Preference Board of
Pay-to-play
Directors Redemption
Conditions Price !!! Rights
Precedent Protective
Investment Provisions
Right of First
Instrument Refusal
Tag-along &
Conversion
Drag-along
Anti-dilution
Founders
activities
Information
Dividends ESOP
Rights
Confidentiality &
No-Shop
Registration
Co-Sale Indemnification
Rights Restriction on
Agreement & Assignment
Sales
Friday, October 1, 2010