new term sheet presentation final
DESCRIPTION
A presentation given by @billbotts to #VegasTech about Term Sheets.TRANSCRIPT
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Term SheetsWho needs or even wants one?
William Botts
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Q & A
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About 11,600,000
Wiki
pedi
a
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Sample
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tter o
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ent
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Anatomy of
How to re
ad
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Convertible DebtDebt
Preferred A
Purchase Agreement
Common Stock
On line creation
MOI
LOI
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Term Sheets
Why?When?What?Examples
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Why?
First: If you need cash for your business you better understand the deal:
--A pound of flesh vs. 10% ownership might make you think more about “the deal”
--Handshakes are great but don’t suffice --Defines the intent of the parties
Second: Even if a one shot injection is all you need, the deal should be documented and agreed to by both parties
Lastly: Loosey goosey deals lead to loss of friendships, lawsuits, inability to do future financings and other troubles
THEOREM: Thou who wants to build a business should be businesslike in thy practices” (me)
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Why Cash is King
CASH
+
_
$0Idea/Concept stage
Seed
Startup
Early Stage
Breakeven
Growth Stage
Mature Business
Cash funds losses Cash funds growth
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Why Cash is King
CASH
+
_
$0Idea/Concept
Seed Startup
Early Stage
Breakeven
Growth Stage
Mature Business
$
The Valley of Death
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Where Might This Cash Come From?
Your wife’s,
dad’s,
friend’s
credit card
Crowdfunding
sites
Family and Friends as investors in you and your deal Business
Associates
Individual HighNet Worth Investors
Angel Investorsor Angel Groups
Venture Capital Funds/firms
Mezzanine
Financing
Firms
Banks (DON’T
HOLD YOUR
BREATH)
Private Equity
FundsSome Incubators
Economic Development, funds, States, Feds, etc.
Government
Grants
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So let’s Conclude that defining the deal is worthwhile
The Process:--Sell your concept--Negotiate a TERM
SHEET--If all GO, execute the
deal (stock purchase agreement, note, deal summary or other documents
that define the deal)--Build shareholder value
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What?Depending on the type of deal there are many forms of Term Sheets
Examples:$ If a Simple Loan, use a simple note$ If a Loan with Equity Kicker (warrants),
a simple one page term sheet with the conditions, terms, interest rate, payoff & warrant definitions
$ If Convertible Debt, need full fledged term sheet
$ If a Preferred Stock offering, must cover the entire legal waterfront
$ If Crowdfunding, who knows how this is going to unfold?
$ If Dad’s Credit Card minimize commitments
$ Stickups the easiest requiring no Term Sheet but can lead to a Rap Sheet and free room & board
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When?As early as possible
In order not to waste lots of time if the deal “sucks”
To allow time to pursue other avenues before you run out of gas
Great way to get better acquainted with your soon to be business partner
Find out early if you been smoking too much weed or if someone will really pay to play in your deal
As an angel investor I want early terms negotiations to be a part of my due diligence process, I want to know if the entrepreneur has his/her head screwed on right and if a deal is even possible-ASAP
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So What Kinda Stuff Goes Into a Typical Term Sheet? Part 1—Offering Terms
Name of issuer Type of offering Closing date Valuation, pre and post Amount of raise $$$ Price per share if equity Use of Proceeds Cap table
Part 2-Ts & Cs for Stock Dividends Liquidation Preferences Conversion Antidilution
Part 2--(continued) Voting right Board seats and comp Protective provisions Information rights Registration rights (PAGES)
Part 3--Employee Matters Stock option, vesting, etc Proprietary & invention
agreements Founder activities Voting agreements, etc Compensation (sometimes) Key Man Insurance
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More on Term Sheet Contents Part 4—Other
Matters Closing deliverables Assignment Purchase agreement Legal fees and
expenses Confidentiality Governing Law No shop agreement Condition to closing
Attachments Cap table
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The Typical Stumbling Blocks
Amount of money needed……Entrepreneur under estimates need
Pre-money valuation..............Founder usually feels company worth more then offered.
Liquidation Preference………..Investors want their money back first then share in proceeds pro rata
Board representation………….Number of seats sometime an issue
General restriction on………….Sometimes a problem or requirements placed on entrepreneur ‘s actionsdecisions
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Summary and Last Words
Get a Signed Term Sheet and You are on Your Way! (though normally not binding)
Don’t get greedy (100% of $0 is still $0)
Remember, the investor will have as much or more to lose than you, so wants to help not hurt the business
THEOREM—Whether you are a rich entrepreneur or a poor entrepreneur its always nice to risk the other guys money (me again)
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Q & A and Samples
--Loan --Debt w/warrants--Preferred A--One weird deal
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A TERRIFIC FREE GUIDE for ENTREPRENEURS-All 170 pages of guide available-Cover about everything an entrepreneur might want to know-Written by President & CEO of “i2e”-”i2e” is a combination incubator, seed funding, mentoring and angel funding organization in Oklahoma City-”i2e” stands for “Innovation to Enterprise”www.i2e.org/library/the-entrepreneurs_path/