Entrepreneur Workshop - Understanding Term Sheets

Entrepreneur Workshop
U n d e r s t a n d i n g I n v e s t o r Te r m
Sheets
There Should Be No Surprises!

M L A C O N N EC T S

Our mandate is to connect experienced accredited investors, and the brightest, most
passionate entrepreneurs in an effective investment process.

www.mapleleafangels.com

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info@mapleleafangels.com |

416.646.6235 |

@mapleleafangels

Agenda

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Introduction of DMZ
Overview of Maple Leaf Angels
Participant Introductions
Participants goals for This Session
Introduction to Investor Term Sheets
Q&A


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Rye rs o n D M Z


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416.646.6235 |

@mapleleafangels

I N V E ST M E N T H I STO RY

Sentient Magnetic

23 Investments
$10 Million +

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H o w D o e s M L A I nv e st ?
Considerations:
• Management Team
• Product/Service
• Market Opportunity
• Proof of Concept
• Go to Market Strategy
• The Financial Deal
• Use of Proceeds
• Exit

Pre-Money
Valuation?
Typically under
$4Million

MLA has Monthly Investment
Meetings
Interesting in presenting to
members?
See Hilary after the workshop!


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416.646.6235 |

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M L A Re s o u rc e s

Funding
Process

Pitch
Deck


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Executive
Summary

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@mapleleafangels

Who Am I
• I am Gerard Buckley
– Founder & CEO of Jaguar Capital an Advisory Practice for Growth
Companies in Financial Management, Financial Structuring & Governance
– Chairperson of Board of Directors, Maple Leaf Angels Corporation &
Investor in eight early stage companies
– Certified Corporate Director of the Institute of Corporate Directors
– Previously Entrepreneur in Residence with Incubes (An Internet Company
Accelerator)
– Member of SME Committee of The Ontario Securities Commission
– Investment Committee of MSV University, Halifax, NS
– 32 yr. Career with Scotia Capital as a Financial Risk Management Advisor to
Fortune 200 Companies: Rogers, Irving Group, Empire Co., Four Seasons,
Bruce Power, OPG, Province of Ontario, Ford etc.


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416.646.6235 |

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8

An Introduction to Term sheets
• A Term Sheet is the basis of a legal agreement
between an investor(s) and a company, outlining the
terms and conditions of an investment into the target
company
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Agreement in principle
Non-binding (except non-disclosure and no-shop clauses)
Commence negotiating early in due-diligence
Complex Term Sheets are seen as Founder Unfriendly and
will deter follow-on investment


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416.646.6235 |

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Goals
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Hope for the best but plan for the worst
Protect downside risk while maximizing upside potential
Forms the basis of a legal document
Aligns interests of founders with interests of investors
Creates the rules to guide the company in future follow
on investment & M&A activity
• Establishes corporate governance structure


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Critical Items
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What do you want the deal to look like?
Type of security to be issued
Valuation and amount to be invested
Voting and information rights
Board establishment and representation


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Types of Investment
• Equity
– Common
– Preferred

• Debt
– Straight (Senior, Subordinated or Mezzanine)
– Convertible

• Angel investments capture upside reward, therefore Equity or
Convertible Debt are instruments used


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Seed Preferred Equity Structure
• Allows upside value capture
• Introduces rights available only to investors
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Anti dilution
Investor board seats
Information rights
Redemption rights
Rights related to future investment rounds


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13

Seed Convertible Debenture Structure
• Allows investor upside value capture with the following typical
terms:
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Conversion into Series A preferred equity
Median conversion discount: 20%
Median interest: 5.5%
Median maturity: 18 months
Merger premium 2x
Secured against company IP
Often a cap set on valuation


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416.646.6235 |

@mapleleafangels

14

Seed Convertible Debenture Structure
• Introduces rights available only to investors
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Pre-emptive rights on next Financing
No board Seat
Information rights
Right of first refusal
Rights related to future investment rounds
Conversion on exit before financing
Co-sale rights

• Benefits to founders and investors
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Defers negotiation on valuation and many pref share terms
Simplifies legals
Avoids Directors and Shareholders liability
Lender is a creditor, near front of line in a liquidation

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Aligning Interests between
Investors & Founders
• Identify key value drivers in the investment
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Product launch
IP strategy
Strategic partnerships
Sales targets

• Focus on two or three key metrics
• Upon value creation event, management can claw back
a portion of equity if they have demonstrated superior
execution
• Warrant structure

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16

Corporate Governance
• Goal is to achieve a balanced board from the start
• 5 person board minimum – 3 person boards do not
work
• Expandable easily to 7
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Current CEO
Founder representative
2 Investor representatives
Independent


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@mapleleafangels

17

Common Deal Terms
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Requirement for a BOD Seat
Anti-Dilution Provision – Pre-Emptive Rights
Share Option Plan 10 – 15% of authorized shares
Drag Along Rights – a majority SHR
Tag Along Rights – a minority SHR
Postponement Agreements
Key officer insurance in addition to D & O
Price protection from a down round
Requirement to buy out investors after 5 years without an exit
Observer Rights
Reporting Requirements


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416.646.6235 |

@mapleleafangels

18

Common Deal Terms
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CD Valuation Cap
CD Discount to Qualified Financing 15 or 20%
Change of Control Provisions
Representations and Warrants
Covenants
Default provisions
Prepayment
Conversion at next round financing
Governing Law
Conversion on Sale or Optional Conversion
Who pays Legal Fees
Founder Stock Vesting


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416.646.6235 |

@mapleleafangels

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Liquidity Preference
• Convertible Debenture – many objectives that
include liquidity preference
• There is a lot of discussion around how liquidity
preference should be given in a company liquidation
vs. sale of company
• Warrant coverage is often and better way to ensure
CD protection is given – Equity Kicker


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416.646.6235 |

@mapleleafangels

20

Unfriendly Terms to Founder(s) or
Start-up
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No-Shop Clause
Investor’s Legal Expenses
Confidentiality Clause
Share Ownership
Non-Compete
Security and Covenants


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416.646.6235 |

@mapleleafangels

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Financing Innovations – Y Combinator
• SAFE (simple agreement for future equity) Financing
Documents is intended to replace convertible notes
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Safe Primer
Safe: Cap, no Discount
Safe: Discount, no cap
Safe: Cap and Discount
Safe: MFN, no Cap, no Discount

• Features
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Not a debt instrument
Standardization
No interest
Reduced legal cost

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- No Maturity Date
- No Security
- It is not a loan
- Negotiate one item – Valuation Cap


416.646.6235 |

@mapleleafangels

22

Contact Information
Gerard Buckley, BBA, FICB, ICD.D
President and CEO
Jaguar Capital Inc.
(C) 416-884-9522
(W) 416-646-6789
g.buckley@jaguarcapital.ca
www.jaguarcapital.ca
Twitter: @jaguarcapital
Twitter: @gerardbuckley
Slideshare: Jaguar Capital


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416.646.6235 |

@mapleleafangels

23

THANK YOU

M L A S P O N S O RS & G OV E R N M E N T PA R T N E RS


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416.646.6235 |

@mapleleafangels

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