Term Sheet

@hekovnik / @filipdobranic

Return on investment

● Evaluates the efficiency of an investment

● ROI (%) = (net profit / investment) * 100● ROI = (gain - cost) / cost

Internal rate of return

● IRR = ERR = DCFROR = effective interest rate● Internal => without external factors (interest

rate, inflation…)● The rate at which an investment breaks even● IRR needs to be higher than the cost of capital

EBITDA

● Interest● Taxes● Depreciation● Amortization

● EBIDA● EBITA

Term sheet

● prepared by your VC● do not focus solely on your valuation● always consult an attorney at law● it is a conditional offer (employment

agreements, option plan, registration rights, shareholder agreements …)

Test case

● Pink Unicorn Skirts inc.● Investment: $1.8 million● Post-money-valuation: $2 million

Types of stock

● regular ● preferred

o series Ao series Bo series C

● last in, first out

Liquidation preference

● VCs have a broad definition of “liquidation”:o acquisition, bankruptcy, sale of assets

● Example:o 1X liquidation preference

● 2X, 3X definitely worth negotiating

Dividends

● Just like with a bank or a publicly traded company

● Usually 5 - 15 % payable in stock/cash● Cumulative dividends?● Cumulative preferred stock?

Reverse vesting

● Don’t be shocked● Immediate vesting● Standard:

o 33 months, 3% + 12 month cliffo 50 months, 2% + 18 month cliff

Drag-along rights

● Minority shareholders must agree to liquidation● Usually triggered when proceeds are less than

the liquidation preference -> founders get nothing

● Save your strength.

Option pool

● ESOP - Employee Stock Option Plan (10%)o created from founder shares

● MSOP - Management Stock Option Plan (depends on missing management members)o Example: CEO gets 7% at A round

Anti-dilution clause

● Down round

● Example:● 1 million shares + 200k option pool● 800k preferred stock● Pink Unicorn Skirts inc. runs into trouble, seeks

new investment

Types of anti-dilution clauses

● Full ratchet (EU)● Narrow weighted average calculation● Broad based weighted average adjustment (SV)

● Negotiate hard!

Legal fees

● $5k (seed)● $25-50k (A)● Often includes corporate cleanup

o it often makes sense to create a new company● Payable by startup from the investment

● Negotiate a cap on the fees with your attorney.

Attorneys involved

● Company’s lawyer● Founders’ lawyer● Investors’ lawyer

No shop clause

● Prevents you from actively seeking new investors● VCs use it to avoid renegotiation or losing the

deal altogether

● Negotiate the term (30-45 days).

Board of directors

● why do we need a board● board powers● investor powers

“Unimportant” clauses

● Registration rights clause● Information rights clause● Special voting powers (issuing new shares,

selling/buying companies, firing officers, expanding the board)