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Valuation Class Term Sheet
- 1. Negotiating and closing a VC deal [email_address]
- 2. Venture Capital Pros and Cons Pros New capital Capital markets experience Business growth experience Strategic value-add Credibility enhancement Cons Lose management control Heightened operating controls and scrutiny Must exit Substantial dilution
- 3. Investment Process Term Sheet / Letter of Intent / MOU Negotiation Due Diligence Share Purchase Agreement Shareholders Agreement Investor Rights Agreement / Registration Rights Agreement Stock Incentive Plan / Stock Option Plan Negotiation Disbursement
- 4. Due Diligence Be prepared Critical issues – Intellectual property rights / invention assignment agreements – Capitalization – Tax returns – Financial statements – Projections – Customer relationships
- 5. The Term Sheet The parties Securities to be issued Amount of financing & disbursement schedule Pre-financing valuation Option plan & earn-out Use of proceeds Liquidation Preference Protective Provisions, Voting Rights and BoD participation Anti-dilution Lock-ups Tag along and drag along Exclusivity Reporting ...
- 6. Termsheet Purpose: to gain fundamental agreement on the principal terms of the transaction Issues: Non-binding Subject to due diligence Subject to required consents and approvals Need to be careful on definition of terms and carve-outs
- 7. Principles of Negotiation Consider the practical application Who is helped; how, and how much Who is hurt; how, and how much Allocation of potential rewards and risks Administrative/management burden and costs Flexibility to manage the business Flexibility to raise new capital Unintended consequences Bargaining power Negotiation time and cost
- 8. Share Purchase Agreement Purpose: to organize overall transaction and provide the terms on which shares are purchased Issues: Simultaneous sign-and-close or deferred closing Closing conditions Representations and warranties Covenants between signing and closing Indemnification
- 9. Shareholders Agreement Purpose: to establish the rights as between and among different stockholders of the company Issues: Types of holders: Financial, Strategic, Founders Preemptive rights – exclusions Transfer restrictions Permitted transferees ROFO / ROFR Tag-Along / Drag-Along Other (non-compete)
- 10. Shareholders Agreement Board representation Negative and affirmative covenants Investor Rights Stock Incentive Plan or ESOPs
- 11. Board Seats and Reserved Matters Corporate boards: Not involved in day-to-day operations Hold extreme control in major corporate events (sale, mergers, acquisitions, IPOs, bankruptcy) Lead VC in each round takes seat(s) Reserved matters (veto or approval): Any sale, acquisition, merger, liquidation Budget approval Executive removal/appointment Strategic or business plan changes
- 12. Other Typical VC Rights Right of first refusal on sale of shares Tag-along rights: follow founder sale on pro rata basis Drag-along rights: force sale of company Liquidation preference: multiple of investment No-compete conditions on founders Right to participate in subsequent rounds (usually follow-on) Later VC rights often supercede earlier Anti-Dilution Protection Recompute VC shares based on subsequent “down round” so that issuing more shares does not “dilute” the value of VC’s holding