terms of investments - entrepreneurship 101
Post on 13-Sep-2014
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DESCRIPTION
Many technology ventures are focused on securing funds from venture capitalists (VCs). This lecture focuses on understanding the motivation of private venture capital firms and how it affects the structure of their term sheets and legal agreements. We explore common pitfalls in dealing with VCs, as well as success stories regarding VC investment.TRANSCRIPT
¡ 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 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 $495M
§ 30% of the company ¡ 43x return ¡ Great deal!
¡ 6-‐9 months to raise capital ¡ Several meetings
§ Want to get to know you § Assess your “Say/Do” factor ▪ Builds confidence
¡ Personal Recommendation: § Get to know the VC ▪ Process (who makes the decision, when & how often) ▪ Where are they in their fund life cycle ▪ What was their last deal ▪ Talk to their existing CEO ▪ Cash available to invest/reserves ▪ No “Yes” means “No”
§ Have to be able to live with them “til exit do you part”
¡ Non-‐binding offer to invest ¡ Outlines the general terms and conditions of investment § Which may change
¡ Not the definitive agreement simply a place to start
¡ Everyone uses it
¡ Non-‐heart ache § Company name § Investors § Date
¡ Everything else § Valuation § How much § Terms and conditions § Return protection
¡ Founders ¡ Employees ¡ Consultants ¡ Students/universities/research organizations etc
¡ Avoid convoluted IP structures § Only going to be unwound
¡ Non-‐competition ¡ Non-‐solicitation
§ Customers § Employees
¡ IP Assignment
¡ Ensure one common motivator ¡ Need to attract talent ¡ 10%-‐20% ¡ New CEO ¡ New executives ¡ Board members
§ Non-‐VC ¡ Pre-‐$
§ Dilutive to you
¡ Pref shares § Accrue § Price + dividend convert
¡ Protects an investor from down round § As if their investment had been done at the current lower price
§ Keeps the investor whole in bad times § 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