T 4/13/21 How to Structure Venture Capital Term Sheets for a Win-Win Deal 7 PM to 8:30 PM Pacific Time (Online) https://www.meetup.com/Silicon-Valley-Startup-Idea-to-IPO/events/276787604/

1. How to Structure Venture Capital Term Sheets
for a Win-Win Deal
Presented on April 13, 2021 by Jason Putnam Gordon
Email: jgordon@polsinelli.com

2. 2
• Today’s Discussion is General Information – Not Legal Advice
• We will be discussing rules and exceptions thereto. Those rules,
exceptions, and exceptions to the exceptions may not be applicable to your
situation.
• You need to retain competent legal counsel to review all facts and
circumstances before weighing in with advice.
• Off-the-cuff answers to your questions are not, and should not be taken as,
legal advice.
Important Caveats

3. 3
• My Background
• Items to be covered
• What a venture capital financing is
• How venture capital financings fit into the business model of emerging-growth companies
• What venture capital fund investors look for in an investment
• What strategic investors look for in an investment
• The difference between what the two types of investors
• The costs and benefits of having only one type of investor in a round.
• The costs and benefits of having both types of investors in a round.
• What you should look for in a venture capital investor
• Why it’s critical to run pro forma cap tables before financings
• The terms commonly negotiated in a venture capital term sheet
• How to handle requests for side letters
• Common legal mistakes in raising capital
Overview

4. 4
• Venture Capital and Emerging Growth Company attorney—practicing law
since 2005.
• Polsinelli is an Am Law 100 firm with approximately 900 attorneys in over
twenty offices throughout the US.
• My office is in San Francisco, but I work with companies throughout the
US and the world.
• I love working with entrepreneurs on financings and as outside general
counsel.
My Background

5. 5
Venture Capital Financing

6. 6
What Happens Between Rounds
Idea(s)
(Intangible Assets)
Technicians who have
skills like: sales,
marketing, business
acumen
(Services)
Investors
(Capital)
Company Increases in Value

7. What VCs Want
 Objectives of Investors
 Building a portfolio where a few companies will be home runs
 Fund’s life is usually around 10 years
 Strategic investors have different considerations
 Mechanisms to reach objectives
 Investing in rounds
 Syndicating rounds
 Protective provisions and rights.

8. What You Want in a VC
 Answer in comments and let’s discuss

9. 9
 Correct structure
 Having company documentation in place
 Modeling round
Pre-Round Issues

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Example 1 Shares Fully Diluted%
Founder 1 3,000,000 40.00%
Founder 2 3,000,000 40.00%
Preferred 1,500,000 20.00%
Total 7,500,000 100.00%
Example 2 Shares Fully Diluted%
Founder 1 3,000,000 28.72%
Founder 2 3,000,000 28.72%
Converted SAFEs/Notes 1,000,000 9.57%
Warrants 100,000 0.96%
Preferred 2,000,000 19.15%
Outstanding Options 300,000 2.87%
Available Options 1,045,000 10.00%
Total 10,445,000 100.00%
Pro Forma Cap Tables

11. 11
How to Negotiate a Term Sheet – Standard Deal Points
 How much of the company is
being sold based on a valuation
 Dividends
 Liquidation preferences
 Voting Rights
 Protective provisions
 Optional and Mandatory
Conversion
 Check out NVCA.org for Model
Term Sheet
 Anti-dilution protection
 Vesting for founders
 Documentation
 Attorneys Fees
 No Shop and Confidentiality
Provisions
 Whether investors will get a
board seat

12. 12
 Deep dive on dilution with Supporting Strategies -
https://www.youtube.com/watch?v=zOWV7zaHYKo
Economics – Exit Waterfall

13. 13
Control Rights
 Right to Elect Directors – For so long as x number of shares of preferred are outstanding, the
preferred have the right to elect y number of directors.
 Protective Provisions – For so long as x number of shares of preferred are outstanding, the
following require approval by y% of the outstanding preferred.
 Liquidation of the company
 Issuing cryptocurrency
 Dividends or distributions
 Authorizing senior equity or
increase in a series of preferred
 Changing charter or bylaws
 Changing the equity incentive plan
 Creation of debt, usually with thresholds
 Changing the board composition
 Partial ownership of a subsidiary
 Voting Rights
 Vote along with the common, on an as converted basis
 Separate class vote on various corporate matters

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 Agreements outside of financing documents
 Terms commonly negotiated in side letter
 Board observer seats
 Preemptive rights
 Information rights
 Other covenants
 Commercial terms
 Alterations to rights to amend other agreements
Side Letters

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 Negotiating before you have run a proper pro forma
 Securities laws issues
 Finders
 Poor record keeping
 Napkin promises
Common Pitfalls and Traps for the Unwary

16. Polsinelli PC provides this material for informational purposes only. The material provided herein is general and is not intended to
be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances,
possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an
attorney-client relationship.
Polsinelli is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results;
that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and
should not be based solely upon advertisements.
© 2020 Polsinelli® is a registered trademark of Polsinelli PC. Polsinelli LLP in California. Polsinelli PC (Inc.) in Florida.
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