Venture Capital Term Sheet: 7 things you need to know by David Ehrenberg

  • Source link: https://earlygrowthfinancialservices.com/venture-capital-term-sheet-7-things-you-need-to-know/#:~:text=The%20Venture%20Capital%20Term%20Sheet&text=As%20you%20know%2C%20a%20venture,for%20you%20and%20your%20investor.
  • TL;DR: Some definitions of common terms used in term sheets today
  • How helpful?: 4/5
  • Topic Tags: term sheet, common uses
  • Relevant questions addressed: What are some of the most relevant concepts I should be familiar with when evaluating a term sheet?
  • Summary bullet points
  • What should your term sheet cover?
    • Preferred return
    • Protection of valuation and position in regards to future money
    • Investment management
    • Exit strategies
  • 7 Key Terms
    • Money Raised:
      • Investors require that a minimum amount of money is raised before they disburse their funds. Your responsibility to raise the rest of the money, so make sure it’s a realistic goal
    • Pre-money Valuation:
      • value of the company prior to investment. Calculated on “fully-diluted” basis, which includes all issued stock and anything that may be converted into stock (stock option pool). VC’s % ownership is calculated based on this value
    • Non-participating liquidation preference
      • Term that makes sure investors get their money back first (before common shareholders get their money back).
        • 1X means investors get their money back before common stock, 2X means double their money, etc…
        • In an exit, investors can use liquidation preference or just participate as shareholders
    • 1:1 Conversion to Common
      • Buyer of preferred can convert to common if they decide it’s a better rate
    • Anti-dilution provisions
      • “These provisions call for protection, for the fund, that your company will not sell stock at a price less than they have paid for it. The basic idea is that if you have a down round, the investors will get additional stock to preserve their shares. If you don’t stick to this provision, the fund has the right to maintain their original percentage interest without additional payment.”
    • The Pay-to-Play provision
      • Investors must participate in future financing (pay) if they want to continue to have preferred stock (play). Otherwise, their preferred stock is converted to common
    • Board representation
      • Investor may want a seat at the decision-making table of the company to protect their investment
  • Follow up links