term sheet prep - how to raise money on optimal terms
DESCRIPTION
Slides from Simply Law's presentation for start-ups: Term Sheet Prep: How to Raise Money on Optimal Terms. The presentation concerns raising money in Denmark.TRANSCRIPT
TERM SHEET PREP
Kristian Holte, start-up lawyer
FUNDING PROCESS
# 1
FIND INVESTOR
# 2
TERM SHEET
# 3
DETAILS
# 4
CLOSE DEAL
# 5
MONEY IN THE BANK
WHAT IS A TERM
SHEET REALLY?
NON-BINDING DOCUMENT
VERY IMPORTANT, NO GOING BACK
KEY TERMS, NOT DETAILS
6 KEY TERMS
# 1
VESTING
VESTING
= "EARNING" YOUR SHARES
OVER TIME
FOUNDER LEAVES THE COMPANY
MUST SELL SOME OR ALL SHARES
VESTING
CREATES
INCENTIVES
& SAFETY
NUTS & BOLTS OF VESTING
SHARES NOW
OR
OPTIONS/WARRANTS?
LINEAR VESTING
CLIFF
DKK 1 PER SHARE
"MARKET VALUE", SAYS WHO?
PENALTY-PRICE
SPECIFIC CRITERIA
FOUNDER QUITS HERSELF
NOBODY DID ANYTHING WRONG
WHAT HAPPENS?
SCENARIO # 1
FOUNDER MUST SELL
UNVESTED SHARES
PRICE: 1 DKK PER SHARE
FOUNDER QUITS HERSELF
COMPANY IN MATERIAL BREACH
WHAT HAPPENS?
SCENARIO # 2
FOUNDER KEEPS ALL SHARES
FOUNDER IS DISMISSED
DISMISSAL WAS LEGAL
WHAT HAPPENS?
SCENARIO # 3
FOUNDER MUST SELL
UNVESTED SHARES
1 DKK PER SHARE
FOUNDER IS DISMISSED
FOUNDER IN MATERIAL BREACH
WHAT HAPPENS?
SCENARIO # 4
FOUNDER MUST SELL
ALL SHARES
1 DKK PER SHARE
TIPS FOR VESTING
PUT VESTING IN PLACE BEFORE
INVESTMENT
4 YEARS WITH A 1 YEAR CLIFF IS COMMON
NEGOTIATE LEAVER-SCENARIOS & PRICE
# 2
LIQUIDATION
PREFERENCES
30% MEANS 30%,
RIGHT?
IMPORTANT IN
"LOW-EXIT"
SCENARIOS
1X, 2X, 3X?
PARTICIPATING VS.
NON-PARTICIPATING
"CAPPING"
THE
PREFERENCE
DIVIDENDS
ALSO?
EXIT DKK 10 MILLION
INVESTOR TAKES OUT 2 MILLION FIRST,
8 MILLION THEN SPLIT:
FOUNDER 1 (35%)
= 2,8 MILLION
FOUNDER 2 (35%)
= 2,8 MILLION
INVESTOR (20%)
= 3,6 MILLION
OWNERS OF POOL (10%) =
800,000 K
TIPS FOR L-PREFENCES
DON'T PROPOSE THEM YOURSELF
NO MORE THAN 1X PARTICIPATING
NEGOTIATE CAP IN "HIGH-EXIT"
EXCLUDE DIVIDENDS
# 3
ANTI-DILUTION
EVERYBODY
SHARES
THE RISK
EQUALLY?
PROTECTION AGAINST
VALUE DILUTION
=
INVESTMENTS AT LOWER
VALUATION
WHAT THEN?
FOUNDERS SUFFER
MAJOR DILUTION
TIPS FOR ANTI-DILUTION
DON'T PROPOSE IT YOURSELF
LIMIT BROAD WORDING, ONLY DOWN
ROUNDS SHOULD BE COVERED
LIMIT SCOPE TO CASES WHERE INVESTOR
DOES NOT CO-INVEST
EXCLUDE OPTION POOL
# 4
OPTION POOL
AMOUNT OF SHARES SET ASIDE
FOR KEY
EMPLOYEES & OTHERS
WHO "PAYS"
FOR THE POOL?
TIPS FOR POOL
BE AWARE WHO "PAYS", OFTEN HIDDEN
NEGOTIATE OPENLY WHO'S GOING TO BE
DILUTED BY THE POOL
AUTHORIZE BOARD TO SET TERMS FOR
OPTIONS
# 5
SELLING
RESTRICTIONS
LOCK-UP
RIGHT OF FIRST
REFUSAL
TRIGGER
THIRD PARTY
VS.
OWN OFFER
DRAG-ALONG
THRESHOLD?
TAG-ALONG
THRESHOLD?
TIPS FOR SELLING
RESTRICTIONS
UNDERSTAND WHAT INVESTOR MIGHT DO
WITH THESE CLAUSES
BE AWARE OF THRESHOLDS IN RELATION
TO POWER BALANCE IN COMPANY
MAKE SURE INVESTOR CAN'T FORCE A
SALE
# 6
CONTROL
% DOES NOT ALWAYS
EQUALCONTROL
VETO
RIGHTS
BOARD
COMPOSITION
TIPS FOR CONTROL
NEGOTIATE TO LIMIT/ELIMINATE VETO
RIGHTS
ARGUE THAT ANGEL-INVESTMENT DOES
NOT JUSTIFY ABSOLUTE CONTROL
KEEP CONTROL OVER BOARD
