Angel and Venture Capital Term Sheets

Please download to get full document.

View again

of 44
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Information Report
Category:

Finance

Published:

Views: 4 | Pages: 44

Extension: PDF | Download: 0

Share
Related documents
Description
Angel and Venture Capital Term Sheets TCN March 6, 2013 Paul G. Sweeney Partner (617) Foley Hoag LLP. All Rights Reserved. Presentation Title 1 1 These materials
Transcript
Angel and Venture Capital Term Sheets TCN March 6, 2013 Paul G. Sweeney Partner (617) Foley Hoag LLP. All Rights Reserved. Presentation Title 1 1 These materials have been prepared solely for general information and educational purposes. The information protected does not constitute legal advice, nor does it establish any form of attorney-client relationship with the author or Foley Hoag LLP. Specific legal issues should be addressed through consultation with your own counsel, not by reliance on this presentation or these materials. Attorney Advertising. Prior results do not guarantee a similar outcome. Foley Hoag LLP United States Treasury Regulations require us to disclose the following: Any tax advice included in this document and its attachments was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein Foley Hoag LLP. All Rights Reserved. Presentation Title 2 2 INTRODUCTIONS Paul Sweeney - Corporate lawyer at Foley Hoag LLP Co-Chair of Technology Practice Named one of the Top 20 Startup Lawyers in Boston, and one of Ten Most Innovative Lawyers in America by the ABA Journal Have worked on over 100 angel and venture capital financings (debt and equity) over 14 years of practice Foley Hoag LLP. All Rights Reserved. Presentation Title 3 3 What is a term sheet? a/k/a- Letter of Intent, MOU, Agreement in Principle First major step in transaction, when material terms of deal are negotiated and agreed to Focus on the deal is at its maximum Gives road map for lawyers to draft actual docs How much detail? Beware of: The definitive documents will contain customary provisions regarding liquidation preference, anti-dilution protection, board composition, and required consents Foley Hoag LLP. All Rights Reserved. Presentation Title 4 4 Non Binding (to a point...) A couple provisions are usually legally binding Confidentiality (can t disclose terms) Exclusivity (can t shop deal - usually days) Ordinarily, term sheet is otherwise not legally binding Either party can walk Closing the deal is subject to negotiating actual docs, due diligence, closing conditions But terms are morally binding if you really want to mess up your transaction, the term sheet is the place to do it Foley Hoag LLP. All Rights Reserved. Presentation Title 5 5 VC financing at its core A sophisticated investor (or group of investors) invests money (capital) into the company in return for newlyissued shares of the company, along with certain contractual rights. Shares acquired are usually convertible preferred stock Stock equity ownership (junior to debt) Common Stock basic unit of equity ownership; issued to founders/employees/consultants. Convertible converts into common stock Preferred has preference over common stock - dividends, distributions, liquidation, redemption, etc Foley Hoag LLP. All Rights Reserved. Presentation Title 6 6 Founders Main Concerns Loss of control Dilution of personal equity position Stock gets tied up, as well as subject to repurchase if terminated Is the financing adequate for your plans? Future capital needs and dilution? Success of partnership with angels and VCs access to key industry contacts, future $, business guidance Foley Hoag LLP. All Rights Reserved. Presentation Title 7 7 Investors Main Concerns Accuracy of valuation (both present and projected) Risk level of investment, and ROI Liquidity if business in distress (downside protection) Ability to participate in later rounds (upside protection) Influence and control over management and strategic direction Foley Hoag LLP. All Rights Reserved. Presentation Title 8 8 Overview Economics of the Deal Control of Company Monitoring and Preserving Investment Maintaining / Increasing Equity Position Liquidity for Investors Restricted Stock for Founders Foley Hoag LLP. All Rights Reserved. Presentation Title 9 9 Key Terms Economics of the Deal - Pre-Money Valuation - Option Pool - Liquidation Preference - Anti-Dilution Protection - Dividends Foley Hoag LLP. All Rights Reserved. Presentation Title 10 10 Pre-Money Terminology I ll give you $2 million at a $3 million pre. We want to buy two-fifths, with a total investment of $2 million. The company is worth $3 million, and so I m looking to own 40% when we re done Foley Hoag LLP. All Rights Reserved. Presentation Title 11 11 Pre-Money Valuation If my money is buying me shares, then exactly how many shares do I get and what percentage of the company do those shares represent immediately after my investment? Side note: Remember, the number of shares you hold only tells you half the story. Be careful of optics. Compare Warren Buffet s 350,000 shares of Berkshire Hathaway (33.1% of 1,060,000 total shares) with 350,000 shares of Google Inc. (0.1% of 324,890,000 total shares) Foley Hoag LLP. All Rights Reserved. Presentation Title 12 12 Pre-Money/Post-Money Pre-Money Valuation = imputed dollar value of the company before the new money is invested Post-Money Valuation = pre-money valuation + the amount invested Foley Hoag LLP. All Rights Reserved. Presentation Title 13 13 Pre-Money Valuation Allows us to calculate the share price and the % of company being sold. Price = Pre-Money Valuation Pre-Money Shares Outstanding % Sold = Shares Issued = New $ Post-money Shares O/S Pre-Money + New $ Pop Quiz: I ll invest $5 million at a $10 million pre money. Question: What percentage would the investor own after the investment? A: 33% B: 50% C: It s too soon after lunch for a math quiz Foley Hoag LLP. All Rights Reserved. Presentation Title 14 14 Post-Money Valuation Price = Pre-Money Valuation Pre-Money Shares Outstanding Option Pool is critical issue Options are rights to buy shares of common stock in the future at a set price. Granted to employees, consultants, advisors, board members. The pool is the number of shares of common stock that you have reserved for options outstanding and options to be granted in the future. Do we have a sufficient number of shares reserved to compensate and motivate existing and future employees? The higher this number, the lower the share price for the investors, and thus the higher the number of shares issued for the same amount of money invested. Bigger isn t always better Foley Hoag LLP. All Rights Reserved. Presentation Title 15 15 Option Pool Pre Money Valuation (Without Option Pool) 33% Investors Founders 67% Foley Hoag LLP. All Rights Reserved. Presentation Title 16 16 Option Pool Pre Money Valuation (With Option Pool) 20% 33% Investors Founders Option 47% Foley Hoag LLP. All Rights Reserved. Presentation Title 17 17 Easy Math Question Offer 1: Pre-Money Value of $10 million, $5 million investment, 10% Post-Money Option Pool Offer 2: Pre-Money Value of $11 million, $5 million investment, 20% Post-Money Option Pool Which is the better offer for the founders? Foley Hoag LLP. All Rights Reserved. Presentation Title 18 18 Math Geek Part 1 Answer Offer 1, even though it s a lower pre-money valuation. Founders shares retain more value due to the smaller post-money option pool: Offer 1 Values: Preferred Stock $ 5,000,000 Option Pool 1,500,000 (10%) Common Stock 8,500,000 Total Post-money $15,000,000 Offer 2 Values: Preferred Stock $ 5,000,000 Option Pool 3,200,000 (20%) Common Stock 7,800,000 Total Post-money $16,000, Foley Hoag LLP. All Rights Reserved. Presentation Title 19 19 Term Sheet Language Pre Money Valuation and Option Pool Pre Money Valuation: The Per Share Purchase Price will be $, which is based upon a fully-diluted premoney valuation of $ million and a fully diluted post-money valuation of $ million (including an employee pool representing % of the fully diluted post-money capitalization) Foley Hoag LLP. All Rights Reserved. Presentation Title 20 20 Related terminology Up round where subsequent round is at a premoney valuation that is higher than post-money valuation of the prior round Flat round and down round Value is sometimes the tail wagging the dog in early stage companies, investors are often looking for a certain percentage of the company, and will back into a valuation that fits their math Cap table skills highly rewarded Foley Hoag LLP. All Rights Reserved. Presentation Title 21 21 We got a high valuation! Foley Hoag LLP. All Rights Reserved. Presentation Title 22 22 We got a high valuation! You can set the premoney valuation if I can set all the other terms Foley Hoag LLP. All Rights Reserved. Presentation Title 23 23 Liquidation Preference Applies when a liquidation event occurs (usually M&A) When distributing liquidation proceeds, preferred stock has right to get a certain amount of money back before the common stock gets anything (the preference. ) Foley Hoag LLP. All Rights Reserved. Presentation Title 24 24 Liquidation Preference Sometimes multiples are used (1x, 2x, 3x the investment amount) Sometimes accruing dividends are added on. Sometimes the preference overhang (total amount of proceeds due to the preferred stock) is so great that the common stock is effectively worthless Foley Hoag LLP. All Rights Reserved. Presentation Title 25 25 Liquidation Preference Three main flavors (ranked in order of bitterness): Non-participating Participating preferred (with cap) Participating preferred (without cap) Note: preferred always get the greater of either their preference or what they would receive if they converted to common stock Foley Hoag LLP. All Rights Reserved. Presentation Title 26 26 What does the term sheet say? In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid as follows: Alternative 1 (Non-Participating Preferred Stock): First pay the Original Purchase Price on each share of Series A Preferred. Thereafter, the balance of any proceeds shall be distributed pro rata to holders of Common Stock. Alternative 2 (Participating Preferred Stock with Cap): First pay the Original Purchase Price on each share of Series A Preferred. Thereafter, Series A Preferred participates with Common Stock on an as-converted basis until the holders of Series A Preferred receive an aggregate of [two] times the Original Purchase Price. Alternative 3 (Participating Preferred Stock): First pay the Original Purchase Price on each share of Series A Preferred. Thereafter, the Series A Preferred participates with the Common Stock on an asconverted basis Foley Hoag LLP. All Rights Reserved. Presentation Title 27 27 Examples of Liquidation Preference Assume a $5m Series A investment at $20m pre-money valuation (resulting in the Series A investors owning 20% of the company). The company ends up being sold for $40m without any additional shares issued after the Series A investment. A 1X Non-Participating Preferred means Series A get the greater of their $5m preference or what they would receive if they converted to common (i.e., 20% of $40m, or $8m). Result: $8m goes to the Series A; $32m goes to the common stock. (20%) A 1X Participating Preferred with a 2X Cap means Series A get their $5m preference plus 20% of the remaining $35m up to a total 2X cap ($10m). Result: $10m goes to the Series A; $30m goes to the common stock. (25%) A 1X Participating Preferred without a cap means Series A get their $5m preference (the preferred ) plus 20% of the remaining $35m, or $7m (the participating ). Result: $12m goes to the Series A; $28m goes to the common stock. (30%) Foley Hoag LLP. All Rights Reserved. Presentation Title 28 28 Liquidation Preference Take Aways Calculating Liquidation Preference gets VERY complicated, especially when multiple rounds of preferred are stacked. Liquidation preference is almost never negotiable, but participating preferred is almost always is. Liquidation preference becomes less meaningful in very large exit events, and participating preferred can be meaningless in very small exit events. Flat spots can create divergent incentives Early round investors often regret having received very rich terms, as these set a precedent for later rounds. Only applicable in a liquidation event. There are some exits (e.g. IPO) where preferred get converted to common, and liquidation preference becomes meaningless Foley Hoag LLP. All Rights Reserved. Presentation Title 29 29 Antidilution Protection Protects investors in a down round - when new money comes in at a pre-money valuation (or price per share) that is lower than the previous round s postmoney valuation. Anti-dilution protection is triggered whenever company issues shares at a lower valuation Certain (critical) exceptions will not trigger the adjustment Foley Hoag LLP. All Rights Reserved. Presentation Title 30 30 Antidilution Protection How does it work? At the beginning, preferred stock converts to common stock at a 1-for-1 ratio. When the anti-dilution protection is triggered, the conversion ratio is adjusted, resulting in the preferred stock getting more shares of common stock upon conversion. 2 Types: Weighted Average and Full Ratchet Don t fight the concept - focus on mitigating the impact (e.g. weighted average with broad list of exceptions) Foley Hoag LLP. All Rights Reserved. Presentation Title 31 31 Dividends Another debt-like feature of preferred stock Automatic vs. declared Cumulative vs. non-cumulative Compounding vs. non-compounding Dividends matter more with disappointing investments than with home runs Foley Hoag LLP. All Rights Reserved. Presentation Title 32 32 Control Protective Provisions aka Negative covenants, Veto rights or blocking rights Essentially a list of things you can t do without investors prior consent - Consent at either the Board or Stockholder level Usually hotly negotiated This is a foot on the break, not on the accelerator Gets complicated in later rounds; interests of investors can diverge Dependent on retaining level of ownership? Foley Hoag LLP. All Rights Reserved. Presentation Title 33 33 Control Board Seats Usually investors require one or more board seats Challenge: What is proper balance between founders, investors (both existing and new), and outside directors? Keep board size manageable bigger is not always better Sometimes a board observer rather than board seat Foley Hoag LLP. All Rights Reserved. Presentation Title 34 34 Monitoring and Preserving Investment Affirmative Covenants Financial Reporting Requirements Rights to Financial Information and Access Foley Hoag LLP. All Rights Reserved. Presentation Title 35 35 Maintaining / Increasing Equity Position Pre-emptive / Participation Rights (Company s stock) - Right to buy shares in future company financing - Major investors sometimes eat up unsubscribed shares - Pay to Play Rights of First Refusal (Founder s Stock) Foley Hoag LLP. All Rights Reserved. Presentation Title 36 36 Liquidating Equity Position Drag-Along Rights (M&A) triggered by required percentage of preferred forces founders and common holders to vote in favor of deal makes dissenters rights moot Tag-Along Rights (Co-sale with founder) Registration Rights (IPO) Redemption Rights Foley Hoag LLP. All Rights Reserved. Presentation Title 37 37 Founders Restricted Stock Company has right to purchase unvested shares if founder s employment terminates Vesting usually 4 years, with one-year cliff Sometimes founders get credit for prior vesting, or a shorter vesting period Forfeited shares have anti-dilutive effect on all other equity Single and double trigger acceleration on change of control Possible tax complications Foley Hoag LLP. All Rights Reserved. Presentation Title 38 38 A Word on Convertible Notes Automatic conversion on qualified financing Discounts are becoming increasingly common; sometimes coupled with a cap on valuation Paid or converted upon acquisition Interest Rate Maturity Date Collateral (secured or not) % needed to amend terms Foley Hoag LLP. All Rights Reserved. Presentation Title 39 39 Final Thoughts Foley Hoag LLP. All Rights Reserved. Presentation Title 40 40 Final Thoughts Foley Hoag LLP. All Rights Reserved. Presentation Title 41 41 Final Thoughts Choose your legal advisors wisely. This stuff gets complicated fast. And do it early (before negotiating the term sheet!) Choose your investors wisely. All money is not created equal their belief in you and your team is more important than their capital. Choose your fights wisely. Make sure you know what really matters to you, and understand the market dynamics. Don t be afraid to ask why do you need that? Foley Hoag LLP. All Rights Reserved. Presentation Title 42 42 Other Resources Glossary (commonly used terms) Ask the Startup Lawyers (common questions and answers; submit your questions!) EEC Perspectives (our quarterly publication tracking terms of New England VC deals) NVCA Model Venture Capital Financing Documents (including model term sheet): (click Resources then Model Legal Documents ) or use Forms are intended as starting point only Foley Hoag LLP. All Rights Reserved. Presentation Title 43 43 Questions? Paul G. Sweeney Partner (617) Foley Hoag LLP. All Rights Reserved.
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks
SAVE OUR EARTH

We need your sign to support Project to invent "SMART AND CONTROLLABLE REFLECTIVE BALLOONS" to cover the Sun and Save Our Earth.

More details...

Sign Now!

We are very appreciated for your Prompt Action!

x