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Osler, Hoskin & Harcourt LLP
Presented by:
Chad Bayne & Jamie Rosenblatt
Early Stage Term Sheets 101 for Emerging & High Growth Companies
Agenda
About
Term Sheets 101
◦ Getting to a Term Sheet
◦ Structure of a Term Sheet
◦ Choosing an Investor
◦ Investor Red Flags
◦ Best Practices
Q&A
Resources
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
About
Chad BaynePartner @ Osler
Jamie RosenblattInvestor @
Golden
• Canada’s leading venture capital and emerging companies lawyer
• Co-Chair of Emerging Companies Group at Osler, Hoskin & Harcourt LLP
• Deals Include work w/ Hootsuite, Wealthsimple, Sensibill, Creative
Destruction Lab, and the Next 36/Next AI
• LL.B., Univ. of Ottawa, B.A.Sc. (Computer Engineering), Univ. of Waterloo
• Head of Biz Dev @ Avid Life
• Corp Lawyer @ Osler, Hoskin & Harcourt LLP
• Corp Dev @ O'Leary Ventures
• JD/MBA, Univ. of Toronto, B.A. (Phil.), Univ. Western Ontario
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Golden Ventures
‐ Institutional Seed
‐ Highly concentrated
‐ Founder Empathy
Investing in extraordinary entrepreneurs building transformative businesses.
Investment Approach Focus
‐ Initial Cheque: $500,000 –$1.5M
‐ Reserve Ratio: 2:1
‐ Typically Lead
‐ Sector &Business Model Agnostic
‐ Value Add / Network
‐ Disruptive/Frontier Tech
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Portfolio
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Term Sheets 101
Getting to a Term Sheet
As a founder…
• Network
◦ Build relationships early -- VC’s invest in lines, not dots
◦ Coffee chats, investor updates, etc.
• Prepare diligence materials
◦ Craft your narrative -- Invest the time to make the deck/pitch compelling
◦ Setup a data room w/ basic biz/legal materials (deck, financial model, cap table etc.)
• Define your parameters/expectations
◦ How much do you want to raise? What is the use of funds?
◦ What are you looking for in an investor?
◦ Do you match the stage/investment thesis of a potential investor?
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Getting to a Term Sheet
Red flags for investors…
• Cap Table Issues
◦ Inverted Cap Table (i.e., dead weight on the cap table -- avoid giving up too much, too soon)
◦ Reverse vesting for founders helps mitigate
• Team
◦ One person teams are very difficult to invest in (What happens to MRR when you get sick?)
• Conduct
◦ Misrepresenting Information: Protect your reputation above all else, assume everything you say will be
referenced (i.e., if you claim to have a term sheet from Investor X, assume we will be checking)
• Other
◦ Asking for an NDA: VC’s aren’t looking to steal your idea.
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Getting to a Term Sheet
Investment Process at the Seed Stage
*Note: Process changes significantly depending on financing stage.
• Evaluation Criteria
◦ VC’s are looking for a combination of team, market, product/traction
◦ Importance of market size, venture scale returns
• Process
◦ Networking / Screening Meeting #1 (Associate/Principal) Meeting #2 (Partner) Diligence Q’s
Meeting #3 (All Partners) Decision Term Sheet
◦ Diligence often involves customer calls, technical review, background checks
• Timing
◦ Varies. but 4 – 12 weeks (Closer to 6 months when relationship/company building included)
◦ Survey of 500 VC’s (Source): Average was ~40 days
• 80% were able to close <60 days
• 41% had closed in <30 days
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Getting to a Term Sheet
Golden Ventures Funnel
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
• A term sheet sets out the conditions of an investment. While not legally binding, it is the roadmap
for the final legal documents:
‘Think of it as a blueprint for your future relationship with your investor’
– Brad Feld
• Key provisions generally relate to issues of economics or control
• Terms are typically set/negotiated with your lead investor
• Negotiating the term sheet is an excellent chance to codify
alignment with your investors, and set expectations early
• Understanding what is, and is not, ‘market’ is crucial
Structure of a Term Sheet
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Economic Provisions
Valuation/Price
◦ Determinants: Stage, Investor Type, Investor Interest, Team, Traction, Economic Climate
◦ Function of dilution & ownership allocation (Venture Math and generating venture scale returns)
◦ Highest Price =/= Best Price; expect 20-35% dilution per round.
Founder Vesting
◦ Essential; Protects founders as much as investors
◦ 4-year vesting, 1 year cliff
Type of Security
◦ Priced: Pref Shares
◦ Non-Priced: SAFE/KISS/Convertible NoteSource: Capshare.io
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Economic Provisions
Option Pool:
◦ Contains the shares set aside by the company for hiring and retaining employees.
◦ Investors will often negotiate for a large option pool early; Avg. 10-15% (Capshare)
Liquidation Preference
◦ Sets out how are proceeds shared following a liquidity event (i.e. sale, acquisition)
◦ Preference: multiple of original investment returned to investors ahead of common shareholders (1x)
◦ Participation: full, capped, none
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Control Provisions
Board of directors
◦ Purpose: Set strategic direction for the company, keep management accountable.
◦ Composition: Founder(s), Lead Investor, Independent
◦ Early on a company should have a founder controlled board.
Protective Provisions
Information/Inspection Rights
Pro-Rata Rights
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Choosing an Investor
Qualities to look for
◦ Investors who look to add value early and often
• Pre-Term Sheet: Feedback, guidance, customer intro’s
• Post-Term Sheet: Syndicate composition
• Post-Investment: Strategy, recruiting
◦ Well Networked/Domain expertise/Fund Reserves
Setting Expectations
◦ Raising from a VC entails certain expectations around scale and speed of growth, make sure you are on
the same page early.
How to diligence
◦ Reference them w/ other founders, advisors, and existing portfolio companies
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Why it matters
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Investor Red Flags
• Non-Market Terms
◦ Terms may be unusual (i.e. warrants) or predatory (i.e., >1x liquidation preference)
• Low Value Add
◦ Unhelpful / Unresponsive
◦ References poorly
◦ Minimal diligence
• Investment History
◦ Failure by former investor’s to follow-on can create signaling risk (particular worry when raising from a
lifecycle VC)
• Strategic Investors
◦ May try and extract unfavourable business advantages (i.e. exclusivity)
◦ Can have a cooling effect on attracting additional investment
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Additional Thoughts
• Get good counsel, someone to watch your back and that will guide you through the
process
◦ Could be another founder, your lawyer, other investors etc.
• Over communicate and be transparent.
◦ Hiding an issue never makes it easier to solve
◦ Establish a trust and good communication habits (i.e. monthly reporting) early
• Building a great company is the goal.
◦ Fundraising/receiving a term sheet is simply the means to an end.
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Resources
Resources
Online
‐ Captable.io
‐ Capshare.com
‐ Venture Hacks
‐ AVC.com (Fred Wilson)
‐ Feld.com (Brad Feld)
‐ How Do Venture Capitalists Make Decisions?
‐ SAAS Funding Napkin
‐ The Twenty Minute VC
Offline
‐ Your VC
‐ Your Lawyer
‐ Brad Feld (or, if unavailable his book)
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
Q&A
Thank You!
EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES
