term sheets 2 common stock
DESCRIPTION
TRANSCRIPT
1
Term Sheets
2
Common Stock(Common Equity)
Common Stock: the least senior claim on a venture’s asset (residual ownership)• Voting rights
• Right to legal dividends
• Preemptive rights:right for existing owners to buy sufficient shares to preserve their ownership share
3
Preferred Stock(Preferred Equity) Preferred Stock:
equity claim senior to common stock providing preference on dividends and liquidation proceeds
• Dividends as a percent of par
• Non-cumulative v. cumulative
Participating Preferred Stock:preferred stock with rights to participate in any dividends paid to common stockholders or preferred stock with an investment repayment provision that must be met prior to distribution of returns to common stockholders
4
Preferred Stock(Preferred Equity)
Paid in kind (PIK) Preferred Stock:preferred stock that has the option of paying preferred dividends by issuing more preferred stock
Redemption Feature:preferred stock feature permitting venture to redeem (buy back) preferred security
Convertible Preferred Stock:preferred stock with option to exchange into common stock
Conversion ratio vs. conversion price Down (reset) round:
venture round priced below most recent previous price
5
Convertible Debt
Convertible debt:debt that converts into common equity
• Has bankruptcy rights
• Has security interests in venture’s assets senior to preferred shareholders’ interests in venture’s assets
6
Options Option:
right to buy or sell additional shares of stock Call Option:
right, not the obligation, to purchase a specified asset at a specified price
Put Option:right, not the obligation, to sell a specified asset at a specified price
American-Style Option:an option that can be exercised at any time until expiration
European-Style Option:an option that can be exercised only at expiration date
Bermuda-Style Option:an option that can be exercised only at a specific set of dates
7
Option Payoffs
Out of the money options:not currently worth exercising
At the money options:breakeven current exercise
In the money options:profitable current exercise
8
Warrants
Warrants:
• call options issued by a company granting the holder the right to buy a common stock at a specific price for a specific period of time
• Typically involves new shares
9
SOLICITING INVESTMENTS: Suppliers of Venture Capital – 25-Year
Average
10
OBTAINING COMMITMENTS:Arrangements with Fund Investors
Capital Call:when the venture fund calls upon the investors to deliver their investment funds
• Common to require subsequent investments consistent with the levels of investors’ initial contributions
11
DUE DILIGENCE AND ACTIVE INVESTING: VC Fund Management
Deal flow:flow of business plans and term sheets involved in the venture capital investing process
Due diligence (in venture investing context):process of ascertaining the viability of a business plan
12
VC Screening Criteria
1. Venture Capital Firm Requirements 2. Characteristics of the Proposal 3. Characteristics of the Entrepreneur/Team 4. Nature of the Proposed Industry 5. Strategy of the Proposed Business
13
VC Screening Criteria
1. Venture Capital Firm Requirements• Cash out potential
• Equity share
• Familiarity with technology, product, market
• Financial provisions for investors
• Geographic location
• Investor control
14
VC Screening Criteria
Venture Capital Firm Requirements (cont’d)• Investor control
• Investor group
• Rate of return
• Size of investment
• Stage of development
15
VC Screening Criteria
2. Characteristics of the Proposal• Requirement for additional material
• Stage of plan
16
VC Screening Criteria
3. Characteristics of the Entrepreneur/Team• a. Ability to evaluate risk
• b. Articulate regarding the venture
• c. Background/experience
• d. Capable of sustained effort
• e. Managerial capabilities
• f. Management commitment
• g. References
• h. Stake in firm
17
VC Screening Criteria
4. Nature of the Proposed Industry• Market attractiveness
• Potential size
• Technology
• Threat resistance
18
VC Screening Criteria
5. Strategy of the Proposed Business• Product differentiation
• Proprietary product
19
Screening Outcomes
1. Seek lead investor position 2. Seek a non-lead investor position 3. Refer venture to more appropriate
financial market participants 4. SLOR (standard letter of rejection) the
venture
20
Structuring a VC Investment
Term Sheet:summary of the investment terms and conditions accompanying an investment
Typical Issues Addressed in a Term Sheet• Valuation• Ongoing funding needs• Size and staging of financing• Preemptive rights on new issues• Commitments for future financing rounds and
performance conditions• Form of security or investment• Redemption rights and responsibilities
21
Structuring (cont’d)
Typical Issues Addressed in a Term Sheet• Dividend structure (Number of VCs and outsiders)
• Additional management
• Conversion value protection
• Registration rights
• Exit conditions and strategy
• IPO-dictated events (e.g. conversion)
• Co-sale rights (with founders)
• Lock-up provisions
22
Structuring (cont’d)
Typical Issues Addressed in a Term Sheet• Employment contracts
• Incentive options
• Founder employment conditions: compensation, benefits, duties, firing conditions, repurchase of stock o termination, term of agreement, post-employment activities and competition
• Founder stock vesting
• Confidentiality agreements and protection for intellectual property