conquering the term sheet: everything you need to know about deal terms for angel investing
TRANSCRIPT
Investment Checklist
1. Great team 2. Market 3. Easy to understand 4. Traction 5. Sponsorship 6. Good deal
A good (investment)
deal =risk-adjusted return
ample upside downside protection alignment of interests
“A non-binding agreement setting forth the basic terms and conditions under which an investment will be made.”
Term Sheet
Lesson 1
The Naked Term Sheet
Valuation Liquidation preferences
ESOP
Preemptive rights Anti-dilution protection Board representation
Control provisions
Convertible NotesDiscount
Cap Interest Maturity
Conversion Mechanics
Lesson 1 - Equity Lesson 3 (May 27)
Lesson 2 (May 20)
1.) Premoney + Investment Amt = Postmoney 2.) Investment amount/postmoney = % ownership
PreferencesESOPValuation
Art and a science of valuation: multiple methodologies
Early Stage
Mid Stage
http://blog.ourcrowd.com/index.php/2014/05/14/cashing-in-how-to-make-money-investing-in-startups/
Late Stage
Source:
PreferencesESOPValuation
Understanding objectives of founder/investor relationship:
zone of possible agreement (ZOPA)
PreferencesESOPValuation
Real Life Case Study
Deal terms reflect the current reality at the time they’re crafted
PreferencesESOPValuation
Valuation ESOP Preferences
Employee Stock Option Plan
Fluid over time, used to recruit and retain talent
Valuation ESOP Preferences
Investing at fully-diluted, premoney valuation with sufficient ESOP allocated to result in target postmoney pool
$20M premoney valuation Existing ESOP: 10% Desired ESOP: 20%
(10% will come out of premoney)
Effective Valuation: $18M
Valuation ESOP Preferences
High sticker price (valuation) vs.
Lower price per share
Something to look out for
Valuation ESOP Preferences
We invest $1M at $4M premoney (20%
ownership)
Company gets acquired at $10M
Example
Non Participating preferred
The greater of [1]x OR prorata $1M OR 20%*$10M
$1M < $2M
Valuation ESOP Preferences
We invest $1M at $4M premoney (20%
ownership)
Company gets acquired at $10M
Participating preferred
[1]x AND prorata Money back and then piece of remaining
pie…so,
$1M + (20%)x($9M) = $2.8M
Example
Valuation ESOP Preferences
We invest $1M at $4M premoney (20%
ownership)
Company gets acquired at $10M
Example
Partial (capped) Participation
[1]x + prorata up to [5]x If exit was $100M, then…
Valuation ESOP Preferences
Liquidation prefs can create indifference towards certain exit scenarios
Tradeoffs: Relationship between valuation and preferences
Next step?
Join us next week for Lesson 2Anti-dilution protection Board representation
Control provisions OurCrowd.com
Check out our real-life term sheets by
accrediting on our website