Term SheetsWho needs or even wants one?

William Botts

Q & A

About 11,600,000

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Convertible DebtDebt

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Common Stock

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Term Sheets

Why?When?What?Examples

Why?

First: If you need cash for your business you better understand the deal:

--A pound of flesh vs. 10% ownership might make you think more about “the deal”

--Handshakes are great but don’t suffice --Defines the intent of the parties

Second: Even if a one shot injection is all you need, the deal should be documented and agreed to by both parties

Lastly: Loosey goosey deals lead to loss of friendships, lawsuits, inability to do future financings and other troubles

THEOREM: Thou who wants to build a business should be businesslike in thy practices” (me)

Why Cash is King

CASH

+

_

$0Idea/Concept stage

Seed

Startup

Early Stage

Breakeven

Growth Stage

Mature Business

Cash funds losses Cash funds growth

Why Cash is King

CASH

+

_

$0Idea/Concept

Seed Startup

Early Stage

Breakeven

Growth Stage

Mature Business

$

The Valley of Death

Where Might This Cash Come From?

Your wife’s,

dad’s,

friend’s

credit card

Crowdfunding

sites

Family and Friends as investors in you and your deal Business

Associates

Individual HighNet Worth Investors

Angel Investorsor Angel Groups

Venture Capital Funds/firms

Mezzanine

Financing

Firms

Banks (DON’T

HOLD YOUR

BREATH)

Private Equity

FundsSome Incubators

Economic Development, funds, States, Feds, etc.

Government

Grants

So let’s Conclude that defining the deal is worthwhile

The Process:--Sell your concept--Negotiate a TERM

SHEET--If all GO, execute the

deal (stock purchase agreement, note, deal summary or other documents

that define the deal)--Build shareholder value

What?Depending on the type of deal there are many forms of Term Sheets

Examples:$ If a Simple Loan, use a simple note$ If a Loan with Equity Kicker (warrants),

a simple one page term sheet with the conditions, terms, interest rate, payoff & warrant definitions

$ If Convertible Debt, need full fledged term sheet

$ If a Preferred Stock offering, must cover the entire legal waterfront

$ If Crowdfunding, who knows how this is going to unfold?

$ If Dad’s Credit Card minimize commitments

$ Stickups the easiest requiring no Term Sheet but can lead to a Rap Sheet and free room & board

When?As early as possible

In order not to waste lots of time if the deal “sucks”

To allow time to pursue other avenues before you run out of gas

Great way to get better acquainted with your soon to be business partner

Find out early if you been smoking too much weed or if someone will really pay to play in your deal

As an angel investor I want early terms negotiations to be a part of my due diligence process, I want to know if the entrepreneur has his/her head screwed on right and if a deal is even possible-ASAP

So What Kinda Stuff Goes Into a Typical Term Sheet? Part 1—Offering Terms

Name of issuer Type of offering Closing date Valuation, pre and post Amount of raise $$$ Price per share if equity Use of Proceeds Cap table

Part 2-Ts & Cs for Stock Dividends Liquidation Preferences Conversion Antidilution

Part 2--(continued) Voting right Board seats and comp Protective provisions Information rights Registration rights (PAGES)

Part 3--Employee Matters Stock option, vesting, etc Proprietary & invention

agreements Founder activities Voting agreements, etc Compensation (sometimes) Key Man Insurance

More on Term Sheet Contents Part 4—Other

Matters Closing deliverables Assignment Purchase agreement Legal fees and

expenses Confidentiality Governing Law No shop agreement Condition to closing

Attachments Cap table

The Typical Stumbling Blocks

Amount of money needed……Entrepreneur under estimates need

Pre-money valuation..............Founder usually feels company worth more then offered.

Liquidation Preference………..Investors want their money back first then share in proceeds pro rata

Board representation………….Number of seats sometime an issue

General restriction on………….Sometimes a problem or requirements placed on entrepreneur ‘s actionsdecisions

Summary and Last Words

Get a Signed Term Sheet and You are on Your Way! (though normally not binding)

Don’t get greedy (100% of $0 is still $0)

Remember, the investor will have as much or more to lose than you, so wants to help not hurt the business

THEOREM—Whether you are a rich entrepreneur or a poor entrepreneur its always nice to risk the other guys money (me again)

Q & A and Samples

--Loan --Debt w/warrants--Preferred A--One weird deal

A TERRIFIC FREE GUIDE for ENTREPRENEURS-All 170 pages of guide available-Cover about everything an entrepreneur might want to know-Written by President & CEO of “i2e”-”i2e” is a combination incubator, seed funding, mentoring and angel funding organization in Oklahoma City-”i2e” stands for “Innovation to Enterprise”www.i2e.org/library/the-entrepreneurs_path/