term sheet: blood, sweat and tears june 6, 2007 henry wong diamond tech ventures sara rauchwerger bg...
TRANSCRIPT
TERM SHEET: BLOOD,SWEAT AND TEARS
June 6, 2007
Henry WongDiamond Tech Ventures
Sara RauchwergerBG Strategy
Samba Murthy, DirectorXambala
Fred GregurasFenwick & West LLP
1727808.1
2
SERIES A FINANCINGS KEY TERMS
Pre-money valuation – item 1, page 1
Size of option pool – item 5, page 1
Founders vesting schedules – item 13, page 6
Board size and composition – item 12, page 6
Liquidation preference – item 7(2), page 2
No shop period – item 16, page 7
Drag-along rights – item 17, page 7
3
IMPACT OF OPTION POOL SIZEEXAMPLE (I)
Fully-diluted means (1) outstanding stock, plus (2) outstanding options, plus (3) option reserve, plus (4) any other outstanding equity
Pre-money valuation includes fully-diluted stock not just issued shares
Pre-money of $6M
Investment of $4M
Shares %
Founders (CS) 4M 40%Stock Option Pool (CS) 2M 20%Series A Investors 4M 40%
Price per share = $6M/6M shares or $1 per share
4
IMPACT OF OPTION POOL SIZEEXAMPLE (II)
Pre-money of $6M
Investment of $4M
Shares %
Founders (CS) 4M 34.3%Stock Option Pool (CS) 3M 25.7% Series A Investors 4,667,445 40.0%
Price per share = $6M/7M shares or $0.857 per share
Series A shares purchased is $4M/$0.857 = 4,667,445
5
LIQUIDATION PREFERENCE EXAMPLE (I)
Startup, Inc. is acquired for $40M
Series A LP is for $4M, participating, no cap Series A owns 50% and common stock owns 50% of the outstanding shares
Distribution: 1) $4M to Series A (initial)
2) $18M to Series A $18M to common stock
3) Series A receives a total of $22M. common stock gets $18M
6
LIQUIDATION PREFERENCE EXAMPLE (II)
Startup, Inc. is acquired for $40M
Series A LP is for $4M, participating, 3X cap
Series A owns 50% and common stock owns 50% of the outstanding shares
Distribution: 1) $4M to Series A (initial); next $18M to Series A, $18M to common stock but Series A capped at 3X or $12M
2) Conversion to common stock scenario-50% is $20M
3) Series A will elect to convert so will receive $20M as compared to $22M in a no cap situation. Common stock gets $20M.
7
DRAG-ALONG RIGHTS
Drag-along Rights – Item 17, page 7
• Purpose is to provide investors with control over having liquidity through an M&A
• Requires certain common stock holders to vote in favor of an acquisition
• Board and preferred stock approve the transaction
• Acquiror not affiliated with any major investor
• Base valuation for the acquisition