Download - 5-minute primer on VC Term Sheets
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Venture Capital Term Sheets
or
How you can make millions of dollars and keep none of it for yourself
Leo Parker DiracUW Business School MBA CandidateSupporter of the Robot Revolution
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What you’ll learn
• What is Venture Capital When it’s appropriate
• What are Term Sheets A few things to watch out for
• VC’s are not the enemy
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How VC’s work
Investor
Investor
Investor
VCfund
Investor
Startup
Startup
Startup
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When VC is appropriate
• Good for Big Opportunities Need lots of cash to take advantage of
• Must have “exit” within a few years Way for VC to get their money back, e.g. Acquisition IPO
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VC is not for…
• Slow-growth companies• Lifestyle businesses
Image by Dubb http://www.subdivisionmodeling.com/forums/showthread.php?t=1133
Zombies!!!
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What is a Term Sheet
• Negotiated before actual contract• Lays out the important terms• Short and readable
At least, compared to legal contract
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What’s in the Term Sheet
• Numbers Amount of money to invest Number of shares Valuation Liquidation Preference Dividends
• Other terms Who’s involved Board of Directors What happens in future rounds Etc.
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Valuation
• How much is company worth? Determines share price & ownership % Somewhat arbitrary for startups
• Post-money = Pre-money + Investment $8m = $6m + $2m
• Value = Share Price * Number of shares
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Common Stock Payout
0
10
20
30
40
50
60
70
80
0 20 40 60 80 100
Company Value ($m)
Payou
t ($
m)
Management’s Share
VC’s Share
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Liquidation Preference
When there’s a Liquidation event, Acquisition Sold off for parts :(
VC’s get Preference. Investors get all their money back
before anybody else gets anything Sometimes 2x or 3x their money
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Liquidation Preference:At low valuation, VC’s take all
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At high valuation, payout % approaches ownership %
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Liquidation Preference Multipliers
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Is this Fair?
• Us entrepreneurs are getting screwed!
• They’re taking advantage of us with all these terms!
• Why can’t they just be regular shareholders?
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Preferred Shares are necessary
• If investors held common stock, they would have no control
• Preferred stock is necessary to avoid mischief
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Dividend Mischief
• Monday: VC’s invest $2m for 25% common equity share Check deposited into bank.
• Tuesday: I call shareholder meeting to vote on dividend. 75% vote Yes 25% vote HELL NO!!! WTFOMGBBQ!!! Motion passes
• Wednesday: Dividends dispersed. VC’s get $500k dividend check I’m off to Thailand with my $1.5m dividend
• Perfectly legal
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VC’s are not Evil
• They are protecting their investments
• Without VC your idea is not a company
• Don’t like the terms? You can walk away Try to find a better deal
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Cumulative Dividend
• Increases LP payout value over time Minimum investment return increases E.g. 8% per year
• Motivates Management to Exit Aligns incentives with VC
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Final Tips
• Talk to people who’ve been through it
• Get the waterfall chart Shows payout at different valuations
• Understand motivation behind terms Think collaboratively, not adversarially
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Thanks!
• Professor Lance Young
• Slides, Spreadsheets & more athttp://www.EmbracingChaos.com/business