Venture Capital - Elements of a Term Sheet

If you've successfully sold your business concept to a venture-capital is the next step in the term sheet. This is essentially the offer letter stating how much of the VC will buy at what price, and under what conditions. Term sheets can be incredibly simple, one or two page documents, or incredibly complex and lengthy.

If you are an incredibly complex and lengthy sheet-term review, that as a potential VC investor. If this is the first document that you get from them,imagine how complex the actual rights of investors and subscription agreements. This means a costly legal bill, which will be by the way, sent to you.

Fundamentals of supply:

Closing date - an estimated date on which they expect to have wrapped up the legal work and you will receive your money.

Investors - who will join the party. You can invest more than a venture capital firm in your company (), especially in later stages.

Amountraised - how much they are giving you. Price per share - what they are planning, you pay per share.

Pre-money assessment - what they see as your company is not worth the money. Upper and lower case letters - which is often split into pre-and post-review article. It says how many shares there are outstanding prior to the investment and how many shares will be outstanding after the investment.

Fundamentals of terms:

Dividends - the stock that the venture capitalistseither will be preferred or participation preferred. At some point, if your company is successful, the VCs will convert their shares of common stock - for sale. You want to make sure they have the same rights, the dividend to the shareholders have. In some cases, they want the rights to the dividend of common stock do not have nice (, huh?). This will also be listed here - try to negotiate cumulative dividends, since this is an unpaid dividendgathers that the preferred shareholders and is due upon liquidation or redemption. It is a path to a higher valuation to give you a good feeling, but actually more of your business, without in any more money.

Liquidation preference - this is what happens when you (1) liquidation of the Company or (2) for sale / IPO. Typically, you would think that the VC owns 40% of the company, they would be 40% of the profits. Well, if you just prefer, that's true, but theywith a special design to make sure they can get a bit more: think of participating preferred. See the example below for an explanation.

Liquidation Preference Example:

Were in the old days, VCs 5 million U.S. dollars to invest in a company worth $ 5 million pre-investment and receive 50% of companies in the preference shares.

At the time of sale, the VCs would get money back in this way:

1. Sale price: $ 7 million. VC's get back to their 5 million U.S. dollars to maintain the founder of 2 million U.S. dollars. (This isthe preferred part - they get their money back before the holders of common shares as payment.)

2. Sale price: 10 million U.S. dollars. VCs convert to common and get half the VCs and the founders will receive half (each $ 5 million).

In this case, the company for more than 10 million U.S. dollars has to be sold for the VCs to make a return.

In the days of the internet boom ... VCs realize that they threw their money behind some pretty crappy stuff, so that explains some smart MBA Financial Engineer of theparticipating preferred stock. Same example: VCs invest 5 million U.S. dollars into a company worth $ 5 million pre-investment and receive 50% of companies in the preference shares. However, means of participating role that they get their money back before the remainder is divided according to ownership.

1. Sale price: $ 7 million. VC's get back to their 5 million U.S. dollars, the founders and VCs is split the remaining 2 million $ 50/50. In this case founders get $ 1 million.

2. Sale price: 10 million U.S. dollars. VC's on their5 million U.S. dollars back, so is the founder and VCs split the remaining 5 million USD 50/50. Founders will receive 2.5 million U.S. dollars.

In this case, the company for more than 5 million U.S. dollars has to be sold for the VCs to make a return - a much lower hurdle.

The multiplier part is the amount by which the VCs want to get back before any division between the shareholders. In the above case, if the investment may 1.5x return, the participating VCs require 7.5 million U.S. dollars to pay for it, then the remaining amountwould be divided between the VCs and the founders.

Voting rights - this sets out how the VC is permitted to vote his shares. Normally they make it up so that even if it holds a minority stake, they have the majority of votes if there) to something important ( "safeguards".

Safeguards - the VC wants to ensure that they can protect their investments. You will want to be the right position to say whether the company will not sell or whether there is aChangeover to the joint, add board members to borrow money, etc.

Anti-dilution provisions - another tool for the VC to protect its investment. Suppose the VC owns 40% in value of $ 4M and you have 60% in value of $ 6 million. You need to raise more money ($ 4M), but you can only find a pre-money valuation of $ 8M. If dilution could be the end result will be VC2 receives 33.3%, your share would be 40%, VC1 share would be reduced be reduced to 26.6%. If anti-dilution provisions are in a position, the result wouldVC2 will be replaced by 33.3%, would your share to 26.6%, VC1 share would be reduced to remain at 40%. Ouch.

Redemption Rights - what if your business happens to be one of the living dead. When you build a decent company and make a good life, but the company is not growing at a rate that a buyer will attract or allow an IPO, the VC finally goes on zurückhaben wants his money. This gives them the right to take them again) (plus accrued dividends. This usually occurs after the fifth yearand is payable over a few years.

Representations and warranties - the escape clause. They will say that you are certain things that have held them, such as revenue growth, customer, etc. After the term sheet is signed it out through your books and records, comb, and if they do not like what they see, they are again .

Conditions for the conclusion - another escape clause. They should note that the offer on beliefs that may change after they take care of you statedBooks. It also contains some legalese meeting on appropriate storage and statutory requirements.

Discusses the basics of this fairly simple concept sheet. A broader view sheet is liable to the rights of investors on the conditions, which still included in the protective vein, make sure that the VC has sold the first shot, their shares if the company goes public, that the company (not the VC) is charged for the registration of shares, what type of information, the rights of the VC, whether theVC has the right to participate in future rounds, the investor, which permit and all necessary non-disclosure and non-compete provisions.

The term sheet will contain very probably, an expiration date and no-shop provision to ensure that you are not able to find a different name to have on hand, as a comparison. Your objective in this case, several potential investors who enter all term sheets at the same time.

Your job is to negotiate your transaction to your advantage. Doa lot of time to think about the assessment, but pay attention to the control rules and negotiate them.

Good luck!

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