Top Ten Term Sheet Tricks
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Transcript of Top Ten Term Sheet Tricks
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Venture Hacks
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+
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Institutional Knowledge
“It’s Standard”
Read a blog post
“If Slide is worth $550M...”
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• Two + termsheets
• Independent
• Credible investors
• Create a market for your shares!
Leverage
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“Raising venture capital is the art of younger men seducing older men”
- Anonymous
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The Timeless Art
• Social Proof - “We’re meeting Sequoia next week”
• Authority - “Marc Andreesen is an angel”
• Scarcity - “Only room for one investor in this round”
• Desirability...
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Five Quick Tips
• Great team (check the mirror)
• Pick a big market (now!)
• Even angels don’t fund niche plays
• Do something hard
• Have a plan for distribution
• Stay close to the money
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Your 50-page business plan doesn’t matter
• One-liner; executive summary
• 10 slides
• Financials; micro-economics
The Pitch
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The Approach
Get introduced...
...to the Partner...
...from someone they respect...
...at roughly the same time.
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Synonyms for “NO”
“Come back when you have more progress”
“We need to see a CEO”
“NO”
“Maybe” “Later”
“It’s not you, it’s me”
“We’ll follow a credible lead”
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“Value Add?”
Smart money
• Wisdom, not Intelligence and Energy
Money
Dumb Money
• Most likely to trumpet value add
Unbundle control, advice, and money - advisors are a bargain!
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1. The Board of Directors
Valuation is temporary
Control is forever
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“Trust, but Verify”
- Ronald Reagan
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“The line between good and evil is permeable and almost anyone can be induced to cross it
when pressured by situational forces.”
Philip Zimbardo,
Stanford Prison Experiment
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Rules of Thumb
• Make the Board Composition Proportional to ownership
• Independents usually aren’t
• Create a new seat for a new CEO
• Control is a one way street, from Common to Preferred
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2. Valuation
Learn to signal gracefully
Purely supply and demand
Ignore outliers
Money has karma too!
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3. The Option Pool ShuffleConvert apples-to-apples
Take the post-money option shares out of the pre-money
$6M pre-money$4M raised
25% post-money pool=
$3.5M pre-money
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4. Vesting is Testing
With board control, it’s a founder issue
4 years, some credit, single trigger, double trigger
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5. Liquidation and Anti-Dilution
• “Standard” is 1x, Broad-Based Weighted Average
• Designed to protect investors from quick flips and overpriced rounds
• Can change the terms dramatically!
• Great potential for mischief in private-private transactions
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6. Protective Provisions
AKA The Fine Print
Protect minority shareholders
Hack 1: Sale ok above a certain price
Hack 2: Fundraising ok above a certain price
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7. Expiration and Non-Disclosure
“We made a commitment to the other investors to give them time to do their diligence”
Either the termsheet is binding or it’s not...
...but it’s very bad form to shop
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8. Counsel
Get your own advocate
There are “entrepreneur friendly” ones available
Draft the docs
Cap the fees
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9. The New, New Thing
• RoFR - Spend now, pay later
• Super Pro-Rata - Huge option value, negative incentives
• One-sided confidentiality
• One-sided binding termsheet (pending diligence!) - placeholder
• Stock repurchase at FMV
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10. Don’t Forget...
83(b)
Right to transfer / diversify
Founder Preferred
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In Parting
• Line up your options
• Keep control
• Friendly investors don’t deliver hostile termsheets!
• Raising money is the easy part. Returning it...