VC motivations Driven by their model Impacts their terms and expectations
Most companies aren’t VC’able Just don’t fit the “Big Money” model May be good companies and businesses
But if you are than you’ll be better equipped than most because of tonight
1,000 companies 10 investments
2 may be widely successful (usually 1) 6 “land of the living dead” 2 fail horribly
Winners to offset my losers Start ups 10-‐12x return in 5-‐7 years Existing companies 5-‐7x in 4-‐5 years
VC is high risk Winners have to be “BIG” Example: $100M Fund
20% IRR 6 Years 3x
Target Exit Value: $300M The 2/6/2 Rule
20% Fail $20M = $0 60% Modest $60M = $120M 20% BIG Win $20M = $180M
$300M
WINNERS HAVE TO BE at least 9X
A company that doubles isn’t enough… Every opportunity has to have the potential to be a home run
You Tube sold to Google for $1.65 Billion Sequoia invested $11.5M received $495M
30% of the company 43x return Great deal!
6-‐9 months to raise capital Several meetings
Want to get to know you Assess your “Say/Do” factor Close to truth ▪ Builds confidenc
Personal Recommendation: Get to know the VC ▪ Process (who makes the decision, when & how often) ▪ Where are they in their fund life cycle ▪ What was their last deal ▪ Talk to their existing CEO ▪ Cash available to invest/reserves ▪ No “Yes” means “No”
Have to be able to live with them “til exit do you part”
Non-‐binding offer to invest Outlines the general terms and conditions of investment Which may change
Not the definitive agreement simply a place to start
Everyone uses it
Non-‐heart ache Company name Investors How much Date
Founders Employees Consultants Students/universities/research organizations etc
Avoid convoluted IP structures Only going to be unwound
Non-‐competition Non-‐solicitation
Customers Employees
IP Assignment
Ensure one common motivator Need to attract talent 15%-‐20% (low as 12%) New CEO New executives Board members
Non-‐VC Pre-‐$
Dilutive to you
Pref shares Accrue Price + dividend convert
Protects an investor from down round As if their investment had been done at the current lower price
Keeps the investor whole in bad times Full-‐ratchet Weighted average
VC can ask to have the company buy back shares
Life of the fund Investors in funds want their money back Outcome:
Forces a sale Get minimum investment back (P+dividends)
Power of “OPM” Get to know your VC Won’t matter in good times Can’t tell you what to do but prevent you from doing things
60-‐66 2/3% Change nature of the business (acquire/divest) Change capital structure/articles ▪ Default approval over future financing
Approve business plan/operating plan Change in key employees (defined term) Creation of ESOP Unbudgeted expenditure in excess of $5,000 Non-‐arms length transactions ….
Monthly prepared financial provided 20-‐30 days from month end
Quarterly financials Analysis vs budgets
Board material Yearly operating plan
(30 days prior to beginning of fiscal year)
Founder restrictions Drag Along
VCs need exit Tag Along
I can sell a portion if you can
Friends and family Move to 5
2 investor 2 founder 1 independent Expect material in advance of meeting Only a meeting if the VC is there ▪ Defer once
Acceptance & Exclusivity Deadline for acceptance Use the time to negotiate No “shop” ▪ Applies to company, depending on stage founders
Be careful what you ask for …don’t send the wrong message