setting the deal: 101 investment terms for startup founders
TRANSCRIPT
SETTING THE DEAL29th October 2015
AN EVENT OF
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WHAT IS SETTING THE DEAL?
An experienced Venture Capitalist
Vsa successful entrepreneur and
his legal advisor
negotiating the terms of an early stage financing deal.
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THE TERMS
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2 types of shares. Preference shares and common shares.
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Negotiation on 5 basic terms
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#1VALUATION
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2 types of valuations. pre-money and post-money
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Postmoney = premoney + amount of cash invested
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Investors get:
Cash invested Post money valuation
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Example:Company is worth €1 million pre and raises €500K. • How much is post-money
valuation?• What % do investors own?
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Example:Company is worth €1 million pre and raises €500K. • How much is post-money
valuation? €1m + € 500K = €1,5 million
• What % do investors own? € 500K /€1,5million = 33.3%
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#2LIQUIDATION PREFERENCES
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Specify who gets paid first in event of liquidation (like sale of company)
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2 important things. The actual preference and participation
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Preference: A certain multiple of the original investment is returned to the investor before the common stock receives any payment.
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Example:• Investor has invested 1M for 30%
with a liquidation preference 3X. • Company is sold for 4M.
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Example:• Investor has invested 1M for 30%
with a liquidation preference 3X. • Company is sold for 4M.
Without preference he would get 30%*4M = 1,2M
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Example:• Investor has invested 1M for 30%
with a liquidation preference 3X. • Company is sold for 4M.
Without preference he would get 30%*4M = 1,2MWith 3X preference he gets 3X1M = 3M
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Participation: three varieties of participation: • full participation • capped participation• non-participating
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Participation: three varieties of participation: • full participation [more investor
friendly]• capped participation• non-participating [more
entrepreneur friendly]
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#3ANTIDILUTION
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Protects an investor if at the next round you raise money at a lower valuation than the one you currently have
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2 main formulas. -Full ratchet -Weighted average
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-Full ratchet - Investor does not dilute at all- More investor friendly,
-Weighted average- Investor dilutes (not as much as entrepreneur)
based on the amount of money raised in the past and being raised now.
- More entrepreneur friendly
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#4MANAGERS’ STOCK VESTING
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Vesting means that instead of founders getting their % immediately, they get it regularly over some period
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If founders have 50% of company with a 4 year vesting, this means that after 1st year they have 50%/4 = 12,5%, after 2nd year 25% etc…
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#5 PROTECTIVE PROVISIONS
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Protective provisions grant the investors the right to veto or block certain corporate actions. Examples: strategy, sale of company, change of CEO
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The rationale for these provisions is to protect the investors (minority shareholders) from the majority stockholders.
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heartVALVE
An imaginary company presentation created by…
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THE PLAYERS
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MODERATORS
Patrick Gabriëls Broos Bakens
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ENTREPRENEUR
Martijn Rutten
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LEGAL ADVISOR OF THE ENTREPRENEUR
Marc van Rijnsoever
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VENTURE CAPITALIST
Casper Bruens Kim de Boer
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START NEGOTIATION
START NEGOTIATION
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VALUATION
Pre-Money Valuation: The Original Purchase Price is based upon a fully-diluted pre-money valuation of €5,000,000 and a fully‑diluted post-money valuation of €7,692,000 (including an employee pool representing 10% of the fully‑diluted post-money capitalization).
Investors: InvestorVentures. Shares 35%, €2,692,000
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LIQUIDATION PREFERENCES
Liquidation Preference:
In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid as follows:
(full participating Preferred Stock): First pay two times the Original Purchase Price plus accrued dividends on each share of Series A Preferred. Thereafter, the Series A Preferred participates with the Common Stock pro rata on an as-converted basis.
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ANTIDILUTION
Anti-dilution Provisions: In the event that the Company issues additional securities at a purchase price less than the current Series A Preferred conversion price, then the conversion price will be reduced to the price at which the new shares are issued.
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MANAGERS’ STOCK VESTING
Vesting of Managers’ Shares: 100% of the shares directly or indirectly held by a Founder shall be subject to a: reverse quarterly vesting over a period of four years with a one year cliff, with a compensation in the amount of the unvested shares; nominal value in case of a bad leaver event and in the amount of the portion of the minimum of either the most recent financing round or current market price in case of a good leaver event.
"Good Leaver" means any employee shareholder who ceases to be employed as a result of death or permanent incapacity, summary dismissal when the dismissal is found to have been wrongful or constructive, or whose contract of employment is terminated in circumstances where he is not in breach of his contract. "Bad Leaver" means any employee shareholder who is not a Good Leaver.
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PROTECTIVE PROVISIONS AND VETO RIGHTS
In addition to any other vote or approval required under the Company’s Charter or Bylaws, the Company will not, without the written consent of the holders of at least 75% of the Company’s Series A Preferred, either directly or by amendment, merger, consolidation, or otherwise:
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Protective Provisions:
Matters Requiring Investor Director Approval:
The prior written approval of both the Series A Directors will be required to:
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Questions?
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Thank You