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Disclaimer

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Let “experts” go to talk on talkshows

Just me…

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@danybus1

Daniele Della Seta

Agenda

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In this webinar I will explain the basics of Term Sheet, used in the VC industry. We are going to:•Answer the 4 W (What, Why, When, Who) •Translate some VC jargon in plain English (key terms used in a Term Sheet)•Describe 2 way of investing in startups (Equity vs. Convertible notes)•Present 2 industry standard contracts (with a little challenge)•Questions & Answers session

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What?

A non-binding agreement setting forth the basic terms and conditions under which a deal will be negotiated by investors

and founders.

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When?

It’s the first step just before the due diligence process

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Why…

Setting the major aspects of the deal, including the expenses, avoiding misunderstanding

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Why?

Laying the groundwork for ensuring the investment with two binding provisions: exclusivity & confidentiality

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Who?

The parties involved are the Investors and the Founders

Key terms• Reserved matters• Lock-up• Tag-along• Drag-along• Bad & Good leaver• Non compete• Anti-dilution• Liquidation preference

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Reserved matters

A list of issues that shall be validly passed with the Investor favorable vote in shareholder meetings (both ordinary or

extraordinary)

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Lock-up

A period during which Founders shall not transfer any shares

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Tag-along

The right of a minority shareholder (usually the VC) to join the transaction and sell – “tagging” – upon the same terms and conditions of majority shareholders (usually the founders)

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Drag-along

The right to force a shareholder – “dragging” – to join in the sale of a company

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Good & Bad leaver

The concept of “leavers” means shareholders who have been directors or employees of a company but have left that

employment

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Leaver provisions

Good leaver

Bad leaver

Health reasons or redundancy

Resignation orinfringement

Provisions determine what price should be paid for the shares

Market Value(commercial value as

determined by an independent expert)

Par Value(face value of the share

or the price paid if higher)

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Non compete

Founder can be asked not to compete with the startup in case they are let go

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Anti-dilution

Protects an investor from dilution resulting from later issues of stock at a lower price than the original

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Liquidation preference

How various investors' claims on dividends or on other distributions are queued and covered

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Others…

• Pre-emption: right to participate in any future issuance of securities by the company

• First refusal: right in respect of any proposed transfer of shares

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Types of investment

• Convertible note: short-term debt that converts into equity

• Equity investment: buying and holding of shares of stock in anticipation of income from dividends and capital gains

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Convertible note: key terms overview

• Maturity: the date by which the loan matures.

• Interest: the rate the startup shall pay on the loan

• Conversion: the conditions under which the loan is converted to equity

• Discount: the rate to convert the loan to equity with a discount in valuation compared to new investors

• Valuation cap: the maximum valuation at which the loan will convert

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Convertible notes: notable examples

SAFESimple Agreement for Future Equity

Developed by YCombinatorReleased open-source on March 2015

KISSKeep It Simple SecurityDeveloped by 500 Startups

Released open-source on July 2014

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Challenge: SAFE vs KISS

• 4 types – no equity version• No maturity• No interest• No minimum financing round• Cap & Discount• Transfer rights: affiliates of the

investor only

• 1 type – available equity version

• Maturity: 18 months• Interest rate: 5%• Minimum financing round: $1

million• Cap & Discount• Transfer rights: anyone &

anytime

SAFE KISS

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Q&A

If you have any question this is the right time to ask for!

THANK YOU

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