Angel venture forum georgetown selection day you are offered a term sheet now what
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ANGEL VENTURE FORUM – GEORGETOWN SELECTION DAY YOU ARE OFFERED A TERM SHEET, NOW WHAT?. Why Sign a Term Sheet?. Presented by Angel or VC after initial due diligence and determination of interest Establishes valuation Summarizes basic deal terms

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Angel venture forum georgetown selection day you are offered a term sheet now what

ANGEL VENTURE FORUM – GEORGETOWN SELECTION DAYYOU ARE OFFERED A TERM SHEET, NOW WHAT?


Why sign a term sheet
Why Sign a Term Sheet?

  • Presented by Angel or VC after initial due diligence and determination of interest

  • Establishes valuation

  • Summarizes basic deal terms

  • Minimizes area of dispute in definitive documentation

  • Flushes out problems before sunk deal costs grow large


Angel vs vc term sheet
Angel vs. VC Term Sheet

  • Angel Term Sheet (if provided) much simpler than VC Term Sheet

  • Often outlines terms for convertible debt or Series Seed transaction

    • If Convertible Debt, avoids early valuation determination (although caps are becoming common)

    • Usually seeks some form of discount into Series A round (through discount or warrants)

    • Series Seed is short form Preferred Stock financing.


Venture capital series seed term sheet major issues
Venture Capital (Series Seed) Term Sheet – Major Issues

  • Economics (dividing the pie on exit)

  • Control (who is going to pilot the ship)

  • Shareholder Rights (protecting the investment and getting to the exit)


Economics
Economics

  • Pre-Money Valuation (% of company received for the investment).

  • Type of security (Preferred Stock vs. Common Stock).

  • Dividends (Cumulative vs. Non-cumulative).


Valuation
Valuation

  • Percent of company that VC receives

  • “Pre-money”

  • “Post-money”

  • Impact of options


Type of security
Type of Security

  • Preferred Stock vs. Common Stock

    • Fully Participating Preferred (1x or greater),

    • Capped Participation (1.5x to 10x),

    • Non-participating Preferred.


Example 5 000 000 sale 2 000 000 pre money vale 1 000 000 investment
Example: $5,000,000 Sale($2,000,000 Pre-Money Vale; $1,000,000 investment)

Non-Participating Preferred

  • Founders: $ 3,333,333.33

  • Investors: $ 1,666,666.67

    Capped Participation at 2X

  • Founders: $ 3,000,000.00

  • Investors: $ 2,000,000.00

    Fully Participating Preferred

  • Founders: $ 2,666,666.67

  • Investors: $ 2,333,333.33


Dividends
Dividends

  • Cumulative

    • Similar to interest accruing on a note, the dividends accrue to the liquidation preference.

    • Cumulative dividends erode ownership % over time (unless only payable in cash).

  • Non-Cumulative

    • (no dividend rights unless dividends are declared).


Control
Control

  • The Board of Directors (Remember the Board hires and fires the CEO)

    • A Voice (1 of 3, or 2 of 5),

    • Equality (2 VC directors, 2 founder directors, and 1 independent director, mutually agreed), or

    • Control (2 – 2 and 1 independent selected by the VC).


Control continued
Control continued…

  • Voting of shares (protective provisions):

    • changes to organizational documents,

    • liquidation, recapitalization, re-organization, etc

    • sale of equity,

    • incurrence of debt,

    • sale of the company or material assets,

    • payment of dividends or redemption of shares,

    • Hire or fire executive officers or change compensation.


Shareholder rights
Shareholder Rights

  • Protecting the Investment (minority protections):

    • Anti-dilution protections,

    • Participation/Preemptive Rights,

    • Restrictions on Transfer of Shares:

      • Right of first offer/refusal

      • Co-sale rights (i.e., the right to “tag along”).


Shareholders rights
Shareholders Rights

  • Getting to the Exit:

    • Demand Registrations Rights

    • Redemption Rights

    • Drag-along Rights


Other issues
Other Issues

  • Founder Employment Agreement

  • Vesting of Founder’s Shares through a Stock Restriction Agreement

  • 83(b) elections


Thank you for joining us
Thank you for joining us!

Karl T. Knoll

[email protected]

(703) 394-2279

Dean W. Rutley

[email protected]

(703) 394-2256


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