Appendix: TS items definition and technical stuff
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Great tool... but funny enough there is no option not to have a ratchet... by Apr 24
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TS template
Series AA Equity Financing Documents Y Combinator and Wilson Sonsini Goodrich & Rosati are happy to announce the Series AA Equity Financing Documents. Their goal is to make angel funding rounds for startups easier for both sides. These documents were originally created for YC-funded startups to use when raising angel rounds.
This tool will generate a venture financing term sheet based on your responses to an online questionnaire. It also has an informational component, with basic tutorials and annotations on financing terms. This term sheet generator is a modified version of a tool that we use internally, which comprises one part of a suite of document automation tools that we use to generate start-up and venture-financing-related documents. 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.
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In this two-part series, columnist Tom Taulli defines key terms and sketches out common pitfalls for entrepreneurs negotiating a term sheet with venture capitalists By Tom Taulli A term sheet is a document prepared by venture capitalists that sets forth the key terms of a proposed investment. The temptation for the entrepreneur is to focus mostly on the overall valuation of the transaction. But this can be fatal. Keep in mind that a term sheet has a variety of protective clauses for the VC that can significantly reduce the valuation for the entrepreneur.
Overview on items definition 1/2
Overview on items definition 2/2
In this two-part series, columnist Tom Taulli defines key terms and sketches out common pitfalls for entrepreneurs negotiating a term sheet with venture capitalists By Tom Taulli In my last column, I looked at some of the key issues of negotiating a term sheet and offered advice on how founders should handle them (BusinessWeek.com, 8/15/08).
Economic terms - it all starts with price
A the end of the year, I completed a financing that was much more difficult than it needed to be. As Jason Mendelson (our general counsel) and I were whining to each other we decided to do something about it. At the risk of giving away more super-top-secret VC magic tricks, we’ve decided to co-author a series of posts on Term Sheets. We have chosen to address the most frequently discussed terms in a venture financing term sheet.
For some reason, my paper on LendingTree and valuing preferred stock, which I had posted on this blog last year, seems to be getting a few hits... So I thought I would also post this follow up paper, which I had written a few years ago, in case any one finds it useful. A less mathematical, and much more useful explanation of liquidation preferences can be found in Feld Thoughts' term sheet series, here . Preferred Stock in Venture Capital A Valuation Methodology
Some technical valuation stuff
Ok I agree very it's technical... by Mar 20
Liquidation Preference
I’ve written about liquidation preferences (and participating preferred) before, as have most of the other VC bloggers (and several entrepreneur bloggers.) However, for completeness, and since liquidation preferences are the second most important “economic term” (after price), Jason and I decided to write a post on it. Plus – if you read carefully – you might find some new and exciting super-secret VC tricks. The liquidation preference determines how the pie is shared on a liquidity event. There are two components that make up what most people call the liquidation preference: the actual preference and participation. To be accurate, the term liquidation preference should only pertain to money returned to a particular series of the company’s stock ahead of other series of stock.
Participating Preferences
When I wrote my first post on the structure and financial components of a typical venture capital investment – where I described Liquidation Preferences – I alluded to the concept of participating preferred as a maligned and typically hotly negotiated issue in many venture capital investments. In this post, I’m going to try to explain the notion of participating preferred (referred to hereafter as PP), how it works, and its financial and emotional impact on a deal. I’m not going to take sides, but rather try to give a broad perspective on it. First – some history. I first encountered PP when several of the angel investments that I did in 1994 and 1995 matured to the point where they raised a round of institutional venture capital. Since I was living in Boston at the time, most of the VCs looking at my angel deals were east coast firms.
Anti-Dilution and ratchets
It has been a while since I put up a term sheet post so I thought I’d tackle a hard one today. While it’s fun to tease lawyers about math (and – actually – about anything), my co-author on this series Jason Mendelson (a lawyer) often reminds me that lawyers can do basic arithmetic (and occasionally have to resort to algebra). The anti-dilution provision demonstrates this point. Traditionally, the anti-dilution provision is used to protect investors in the event a company issues equity at a lower valuation then in previous financing rounds. There are two varieties: weighted average anti-dilution and ratchet based anti-dilution. Standard language is as follows: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 Mar 20
Full ratchet numerical example
An investor in any given round of financing is concerned that the next round could be at a lower price per share than what he is paying this round. Therefore, the investor will insist upon anti-dilution protection. If pressed for justification, the investor may explain that if the value of a company declines between rounds, management must be largely responsible. The investor maintains that he shouldn’t be penalized for management’s deficiencies.An investor in any given round of financing is concerned that the next round could be at a lower price per share than what he is paying this round. Therefore, the investor will insist upon anti-dilution protection. If pressed for justification, the investor may explain that if the value of a company declines between rounds, management must be largely responsible. The investor maintains that he shouldn’t be penalized for management’s deficiencies. Unlike full ratchet anti-dilution protection that is effectively a “ do-over,” weighted average anti-dilution protection gives consideration to the relationship between the total shares outstanding as compared to the shares held by the original investor.
Weighted ratched numerical example
The Option Pool Shuffle - Venture Hacks @venturehacks
Summary: Don’t let your investors determine the size of the option pool for you. Use a hiring plan to justify a small option pool, increase your share price, and increase your effective valuation. If you don’t keep your eyes on the option pool while you’re negotiating valuation, your investors will have you playing (and losing) a game that we like to call:Dividends
As our term sheet series unfolds (almost as exciting as 24 , eh? – if you’ve been reading the last few days I bet you figured out that I recently had a 7 hour plane ride with a laptop battery that was in pretty good shape) we now shift gears from nuclear meltdown situations (also known as “things that matter a lot”) to economic terms that can matter, but aren’t as important (e.g. “why doesn’t Kim have a job at CTU anymore?”) Dividends are up first.Dividends matter
Somehow when you see that little clause on the term sheet about an 8% dividend for the preferred shares, it doesn’t seem that big of a deal at the time. But to put it in perspective, let’s take a typical "success" story and see how that dividend affects the deal. Imagine a scenario where a startup raises $14.5MM in 4 rounds (seed plus A, B and C) and that each round has the 8% compounding dividend paid on exit. Further, let’s imagine the company sells for $75MM.If you are avid followers of the TV series 24 (as Jason and I are), you’ll recognize that the next item in our term sheet series – Redemption at Option of Investors – has similar characteristics to the regular exchange Jack has with CTU: CTU Director (any of them – Driscoll, Tony, Ryan, George, Michelle) : “Jack – stand down – don’t go in there without backup.” Jack: (Gruffly, in a hoarse voice) “I gotta go in – there’s no time to wait – if I don’t go, the world will end and my (current babe, hostage, daughter, partner) will die.” Think of the discussion around redemption rights as this scene – utterly predictable and ultimately benign. Jack always goes in.
Read this sub-map only if you want a 101 on TS items or to see some detailed technical aspects by wallen Mar 21