Appendix: TS items definition and technical stuff

Great tool... but funny enough there is no option not to have a ratchet... by wallen Apr 24

You may need to click on the gray link at the bottom right of the i-frame to view the page by wallen Apr 24

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TS template These documents were originally created for YC-funded startups to use when raising angel rounds. They seem to have worked well in trial runs so far, so we're open-sourcing them. While they may not be suitable for all situations, the goal was to make the terms fairly neutral. So while we would of course advise both parties using these documents to have their lawyers look at them, they provide a starting point that we hope can be used in many situations without too many modifications.

Please direct any general questions regarding the term sheet generator to Tony Kikuta ( akikuta@wsgr.com ) or Yokum Taku ( ytaku@wsgr.com ) at (650) 493-9300. For technical issues, please contact the WSGR help desk at By using the WSGR Term Sheet Generator, you agree to the Terms and Conditions below. Because it has been designed as a generic tool that takes into account a number of options, this version of the term sheet generator is fairly expansive and includes significantly more detail than would likely be found in a customized application. WSGR TS generator

Liquidation Preferences. VCs have a broad definition of "liquidation," which includes an acquisition, bankruptcy, and the sale of much of a company's assets. For the most part, a VC wants to get as much capital back on such events. As the name implies, a liquidation preference means that a VC gets the first money out of a deal. Consider this example: ABC Corp. has a 1X liquidation preference in the term sheet. This means that—upon liquidation—the investor will receive up to $5 million. Overview on items definition 1/2

Overview on items definition 2/2 Anti-dilution. This provision is meant to protect investors in the event of a down round. To understand how the anti-dilution concept works, consider this example: ABC has 5 million shares of common stock outstanding (owned by the founders) and an option pool to purchase up to 1 million shares (for employees).

Economic terms - it all starts with price We have chosen to address the most frequently discussed terms in a venture financing term sheet. The early posts in the series will be about terms that matter – as we go on, we’ll get into the more arcane and/or irrelevant stuff (which – ironically – some VCs dig in and hold on to as though the health of their children depended on them getting the terms “just right.”) The specific contract language that we refer to (usually in italics ) will be from actual term sheets that are common in the industry. Ultimately, we might put this into a Wiki, but for now we’ll just write individual posts.

Note that it makes more sense to think about the preferred stock as debt plus common stock options from a new investor’s perspective. But if one is analyzing a publicly traded company , and the stock is trading above the conversion price of the preferred, it probably makes sense to think about the preferred stock as common stock plus a put on the common stock with a strike price equal to the conversion price of the preferred stock – which would be analytically equivalent to ‘debt plus common stock.’ The chart below shows the difference between a simple and a participating preferred liquidation on the distribution of funds in case of a liquidation event. For companies with a number of classes of preferred stock, graphing out the remuneration to the different investors based on exit values can be illuminating to such investors and allows for clearer decision making. Some technical valuation stuff

Ok I agree very it's technical... by wallen Mar 20

All sorts of excel models

Liquidation Preference Ironically, lawyers don’t necessary agree on a standard definition of the phrase “liquidity event.” Jason once had an entertaining (and unenjoyable) debate during a guest lecture he gave at his alma mater law school with a partner from a major Chicago law firm (who was teaching a venture class that semester) that claimed an initial public offering should be considered a liquidation event. His theory was that an IPO was the same as a merger, that the company was going away, and thus the investors should get their proceeds. Even if such a theory would be accepted by an investment banker who would be willing to take the company public (no chance in our opinion), it makes no sense as an IPO is simply another funding event for the company, not a liquidation of the company. However, in most IPO scenarios, the VCs “preferred stock” is converted to common stock as part of the IPO, eliminating the issue around a liquidity event in the first place.

Participating Preferences My east coast-centric world changed significantly after I moved to Colorado in 1996 and started doing venture capital. Because of geography and investment focus, I ended up working on more stuff on the west coast. There, I rarely saw a PP feature and was told flatly that PP was “an east coast term.” As the 1990′s marched on and the bubble started to build, I rarely saw a PP – even the east coast guys had dropped it from their standard term sheets. After the bubble burst in 2001, PP was back – and this time on both coasts. Suddenly every term sheet I saw had a PP feature in it, regardless of the stage of the investment, type of business, or location of investor.

Anti-Dilution and ratchets You might note the term “broad-based” in describing weighted average anti-dilution. What makes the provision a broad-based versus narrow-based is the definition of “common stock outstanding” (CSO). A broad-based weighted average provision includes both the company’s common stock outstanding (including all common stock issuable upon conversion of its preferred stock) as well as the number of shares of common stock which could be obtained by converting all other options, rights, and securities (including employee options). A narrow-based provision will not include these other convertible securities and limit the calculation to only currently outstanding securities. The number of shares and how you count them matter – make sure you are agreeing on the same definition (you’ll often find different lawyers arguing over what to include or not include in the definitions – again – this is another common legal fee inflation technique).

There is this sentence at the end "We advise you not to get hung up in trying to eliminate anti-dilution provisions": how sweat. Anti-dilution is a trojan horse - to be absolutely avoided!!! by wallen Mar 20

Full ratchet numerical example By issuing an additional 400,000 shares, the total number of shares has increased as well. The new investor would only own 42% if we were to stop here, but we won’t. Remember the first element of the deal: Done?

· That is confirmed by taking the total number of outstanding shares, 1,000,000 (your 600,000 and my 400,000) and multiplying that by the share price of $1.00. · That also says that the post-financing value of your company is $1,000,000. · Adding my $400,000 to that yields a post-financing value of $1,000,000. · Since you own 600,000 shares, that means the value of the stake in your company is $600,000, which is the pre-financing value. Weighted ratched numerical example

The Option Pool Shuffle - Venture Hacks @venturehacks A few hours of work creating a hiring plan increases your share price by 17% to $1.17: $7M effective valuation ÷ 6M existing shares = $1.17/share. 70% effective valuation + 10% new options + 20% cash = 100% total