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Term Sheets Fundamentals

Captures the fundamentals on term sheets

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Term Sheets Fundamentals

  1. 1. Manish Singhal @manish_saarthi 30 Aug August Fest Understanding Term Sheets
  2. 2. 30 Aug August Fest The Funding Curve
  3. 3. Typical Raise 0 1 2 3 4 5 6 7 8 9 Valuation Seed Round Angel Round Series A Series B Series C Product Market Fit Business Model Fit Bridge Round*
  4. 4. The Funding Process Pitch to Investors Verbal Commitment to Invest Term Sheet SHA Closure Legal DD Fix Issues Financial DD Drop Issues too serious? YN All Ok? Y N
  5. 5. Understanding Term Sheets vManagement typically holds common stocks vProfessional investors, both angels and venture capitalists, take preferred stock ØMore control over decisions ØBetter economic terms vInterests of common stocks and preferred stocks needs to be negotiated in the term sheet agreement vEcomonic & Control Interests
  6. 6. Key Terms vValuation vLiquidation Preference vFounder Lock-in vFounder Vesting Curve vAnti Dilution vPre-emptive Rights vTag Along Rights vExit Rights / Drag Along
  7. 7. Economic Interests vLiquidation Preference ØIn the event of sale / liquidation, preferred stock holders are entitled for a pre-determined return before common stock holders ØParticipating clause further allows the preferred stock holders to get further returns on pro-rata basis ØIf there is not enough cash, the preferred clause can take the founders with no returns
  8. 8. Example Liquidation Preference Basic Share (CR) Participating Share (CR) Total (CR) Simple Prorating 10CR [20% of 50CR] NA 10CR 1x 5CR 9CR [20% of 45CR] 14CR 1.5x 7.5CR 8.5CR [20% of 42.5CR] 16CR 2x 10CR 8CR [20% of 40CR] 18CR vAmount Invested = 5CR @ 20CR pre-money vInvestors hold 20% stake vCompany exited at 50CR
  9. 9. Liquidation preference vTypical clauses Ø1.x or Investment Amount (higher of the two) Ø1.5x with a cap on time or money
  10. 10. Key Terms vValuation vLiquidation Preference vFounder Lock-in vFounder Vesting Curve vAnti Dilution vPre-emptive Rights vTag Along Rights vExit Rights / Drag Along
  11. 11. Founder Lock-in & Vesting vRestriction on Founders selling their stake without investor permission Ø4 year lock-in is normal vVesting Curve ØYou re-earn the shares you own ØTypical curves are 4 year vesting / 1 year cliff / quarterly / monthly vesting ØSome pre-vesting can be negotiated depending upon the stage of the venture
  12. 12. Founders Agreement vEquity Vesting & Exit Terms vNon-compete vIP assignment
  13. 13. Key Terms vValuation vLiquidation Preference vFounder Lock-in vFounder Vesting Curve vAnti Dilution vPre-emptive Rights vTag Along Rights vExit Rights / Drag Along
  14. 14. vAnti – Dilution ØClause comes into play when there is a down- round and the first round investor has to protect his interests ØFull Ratchet & Weighted Average ØPay-to-play clause can help the founders get further investments from the original investors
  15. 15. vPre-emptive Rights Future Participation in Financing / Sale ØRight of First Offer – Preferred Stock holders get the first right to participate. Can limit the founders to get investors who can add more value vDrag-Along Rights ØInvestors can force the sale of the company under certain conditions vTag-Along Rights ØManagement agrees not to sell without giving investors a right for pro-rata participation in sale
  16. 16. Some more things vTranching vESOP vROFR / ROFO vClaw Back vReserved Matters
  17. 17. Convertible Note vDefer the valuation till next round of financing vMany different ways of structuring vKey Parameters ØMax Valuation Cap ØDiscount ØLower Cap
  18. 18. Others vLegal & Accounting Fees ØMostly all investors put the burden of the legal fees on the entrepreneur. Can negotiate some overall caps vNo Shop ØThis prevents entrepreneurs from shopping around with other investors while the dialogue is on. Time period can range from a few weeks to a few months. vDue Diligence
  19. 19. Thank You! © Copyright Saarthi Integrated Consulting LLP. All rights @manish_saarthi
  20. 20. Example vAmount Invested = 5CR @ 20CR pre-money vNumber of shares before series A = 1M Stake 20% [5CR / 25 CR] Number of Shares Issued 250K Price / Share 200 INR [5CR / 250K]

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Captures the fundamentals on term sheets

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