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This lecture focuses on understanding the motivation of private venture capital (VC) firms and how it affects their structuring of term sheets and legal agreements.
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¡ VC motivations § Driven by their model § Impacts their terms and expectations
¡ Most companies aren’t VC’able § Just don’t fit the “Big Money” model § May be good companies and businesses
¡ But if you are than you’ll be better equipped than most because of tonight
¡ 1,000 companies ¡ 10 investments
§ 2 may be widely successful (usually 1) § 6 “land of the living dead” § 2 fail horribly
¡ Winners have to offset my losers ¡ Start ups 10-‐12x return in 5-‐7 years ¡ Existing companies 5-‐7x in 4-‐5 years
¡ A company that doubles isn’t enough… ¡ Every opportunity has to have the potential to be a home run
¡ You Tube sold to Google for $1.65 Billion ¡ Sequoia invested $11.5M received $495M
§ $3.5m and $8m (in 2005/2006) § 30% of the company
¡ 43x return ¡ Only VC in the deal
¡ Great deal!
¡ 6-‐9 months to raise capital ¡ Several meetings
§ Want to get to know you § Assess your “Say/Do” factor § Close to truth ▪ Builds confidence
¡ Personal Recommendation: § Get to know the VC ▪ Process (who makes the decision, when & how often) ▪ Where are they in their fund life cycle ▪ What was their last deal ▪ Talk to their existing CEO ▪ Cash available to invest/reserves ▪ No “Yes” means “No”
§ Have to be able to live with them “til exit do you part”
¡ Non-‐binding offer to invest ¡ Outlines the general terms and conditions of investment § Which may change
¡ Not the definitive agreement simply a place to start
¡ Everyone uses it
¡ Non-‐heart ache terms § Company name § Investors § How much § Date
¡ Founders ¡ Employees ¡ Consultants ¡ Students/universities/research organizations etc
¡ Avoid convoluted IP structures § Only going to be unwound
¡ Never give a VC a reason to say no
¡ Non-‐competition ¡ Non-‐solicitation
§ Customers § Employees
¡ IP Assignment
¡ Ensure one common motivator ¡ Need to attract talent ¡ 15%-‐20% (low as 10%/12%) ¡ New CEO ¡ New executives (sales, tech & CFO) ¡ Board members
§ Non-‐VC ¡ Pre-‐$/Post-‐$?
§ Dilutive to you
¡ Pref shares § Accrue § Price + dividend convert
¡ Protects an investor from down round § Keeps the investor whole in bad times § As if their investment had been done at the current lower price
§ Full-‐ratchet § Weighted average
¡ VC can ask to have the company buy back shares
¡ Life of the fund ¡ Investors in funds want their money back ¡ Outcome:
§ Forces a sale § Get minimum investment back (P+dividends)
¡ Power of “OPM” § Get to know your VC § Won’t matter in good times § Can’t tell you what to do but prevent you from doing things
¡ 60-‐66 2/3% § Change nature of the business (acquire/divest) § Change capital structure/articles ▪ Default approval over future financing
§ Approve business plan/operating plan § Change in key employees (defined term) § Creation of ESOP § Unbudgeted expenditure in excess of $5,000 § Non-‐arms length transactions § ….
¡ Monthly prepared financial provided § 20-‐30 days from month end
¡ Quarterly financials § Actual vs budgets
¡ Board material ¡ Yearly operating plan
§ (30 days prior to beginning of fiscal year)
¡ Founder restrictions ¡ Drag Along
§ VCs need exit ¡ Tag Along
§ I can sell a portion if you can
¡ Friends and family ¡ Move to 5
§ 2 investor § 2 founder § 1 independent § Expect material in advance of meeting § Only a meeting if the VC is there ▪ Defer once
¡ Acceptance & Exclusivity § Deadline for acceptance § Use the time to negotiate § No “shop” ▪ Applies to company, depending on stage founders
Be careful what you ask for …don’t send the wrong message
