9 VENTURE CAPITAL DEAL TERMS TO KNOW

Presented by: Kendrick Law Practice, Private Equity AttorneysDar’shun Kendrick, Esq./MBA

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ABOUT ATTORNEY KENDRICK & KLP

2 B.A.s (communications/political science)- Oglethorpe University

J.D./law degree- University of GA School of Law

M.B.A.- Kennesaw StateOldest of 2 entrepreneurs Life long learnerWe work with companies seeking to raise $250,000 or more in private equity funds.

DISCLAIMERS

These are not ALL the terms you will see in a VC deal. Deal structures vary from deal to deal. Consult your legal counsel for more information.ANDWe do NOT find companies funding or investors. That violates securities law. We work with companies to complete their legal compliance associated with raising capital.

WHAT IS “VENTURE CAPITAL”? It is money provided to seed, early

money, or emerging companies. A company would need venture capital if

they are too small for an IPO (initial public offering) and haven’t gotten to the point where they could secure a bank loan (lack of financials or history, etc.)

Venture Capital Firms are private equity firms that provide “venture capital financing.” In exchange, they usually want substantial

control of the business operations. In addition, you will find they demand a

high rate of return typically in less than 5 years.

TERM SHEET VS. STOCK PURCHASE AGREEMENT

Term sheets create no obligation for the VC firm to invest; the preliminary terms of the deal are outlined so that legal counsel can put in final Stock Purchase AgreementVs.Stock Purchase Agreement is where the terms discussed will come into play. Once this is signed, the VC is obligated to abide by the terms in the agreement.

TERM 1: TYPE OF SECURITY

VC firms usually prefer a convertible preferred stock. “Convertible” because the stocks convert to common stock upon a triggering event, such as an IPO, and “preferred” because it gives the VC firms advantages over common stockholders.

TERM 2: PRICING AND VALUATION

This includes the heart of the deal: The money!The amount the VC will invest and number of shares issued to the VC of the company’s fully diluted stock ownership.Valuation = Price per share x no. of shares available for purchase. This will usually be outlined in the term sheet.

TERM 3: FULL DISCLOSURE

VC companies will want extremely detailed agreements and disclosure schedules that include convenants (“agreement to do something”) and restrictive covenants “agreement not to do something”) as well as warranties and representations about the company.

TERM 4: LIQUIDATION AND DIVIDEND

VC firms will include a term that entitles them to a predetermined amount of the company is ever liquidated.

Because their stock is “preferred”, dividends must be issued to the VC firms before dividends can be issued to common stock holders.

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TERM 5: ANTIDILUTION CLAUSES

VC firms want to protect the percentage of ownership in the business against future ownerships. Therefore, most VC stock purchase agreements will have anti-dilution clauses to make sure they retain the same percentage of ownership throughout subsequent rounds of financing.

TERMS 6 & 7: VOTING & PREEMPTIVE RIGHTS

Since their stock is “preferred”, VC firms will have significant voting rights, including but not limited to, voting for a seat on the company’s Board of Directors.Additionally, preemptive rights give the VC firms the right to purchase more stock in future rounds of financing.

TERMS 8 & 9: MANAGEMENT NON-COMPETES & NON-DISCLOSURE

AGREEMENTSVC firms want to make sure that the founders and management of the business they are investing in won’t steal trade secrets and ideas to start another business and so they required Non-competes from the company.

A Non-Disclosure Agreement (NDA) term will be added to make sure confidential company information is not shared by the founders or management of the issuer/company.

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