Professional Documents
Culture Documents
Background
Trendsetter has two offers of VC funding. Presentations took two months. Time is of the essence: only 6 weeks of cash left to burn! How do the two term sheets compare? Which is the better proposal? Why?
Key Issues
Valuation Liquidation preference & antidilution Corporate governance Vesting & employment
Valuation
How much will VCs invest? Alphas pre-money valuation? Effect of revenue milestone on Alphas valuation? Likelihood of achieving revenue milestone? What is founders value?
How are liquidation preferences treated in each term sheet? What types of securities are being considered? What are potential liquidation scenarios under each term sheet? How do antidilution provisions differ?
Corporate governance
How are voting rights defined in each term sheet? Board composition? Information rights to investors? Role of the compensation committee? Number of investors (Alpha=one and Mega=two)
Alpha offers six months vesting with termination without cause Alphas accelerated vesting is undefined Megas terms of employment to be determined in subsequent negotiations prior to closing of the financing round
Renegotiate terms
Valuation (Alpha & Mega) Liquidation & antidilution (Mega) IPO requirements (Mega) Termination without cause (Alpha) Content of employment agreements & vesting schedules (Mega)
Renegotiate terms
Performance hurdle (Alpha) Board composition (Alpha) Specific instances of voting (Mega) Second VC (Alpha) Redemption rights (Mega) Co-sale rights (Alpha)
Key Learnings
Green flags
Simple, easy-to-understand term sheets Little downside protection for investors Plain vanilla convertible preferred stock
Yellow flags
Milestones may lead to short-term actions that jeopardize long-term potential for success Complicated terms and conditions Open-ended terms that require negotiation later in the closing documents Restrictive terms regarding fifth director Option pool comes out of founders shares
Red flags
Too many milestones Lengthy exclusivity of term sheet Complex due diligence procedures Triggers that take control from founders Mezzanine-type provisions in early round term sheets
Soft issues
Personal chemistry and reputation more important than higher pre-money valuation Select legal counsel experienced in the industry and in doing deals (verify) Specific VC partner (who will be on you board) matters more than the VC firm Trust your intuition rather than blind reliance on the numbers
The End
Questions?