Top 10 Term Sheet Hacks
Venture Hacks
Aug 28 2008venturehacks.com
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What is Venture Hacks? It!s just Game Theory applied to raising Venture Capital.
Looking a few moves ahead. Realizing the consequences of Series A decisions, and
knowing how it!ll affect future series, the management of the company, and the exit.
Apologize in advance to the VCs. :-)
Institutional Knowledge
“It’s Standard”
Read a blog post
“If Slide is worth $550M...”
Why cover it?
- VCs know a lot more than you do - Average partner invests in 2-3 deals, many trade
away. A VC firm puts out 30-50 termsheets per year, negotiates a dozen.
- The first round is the most important - most dilutive, template for later. Experience is
the worst teacher - exam comes before the lesson.
• Two + termsheets
• Independent
• Credible investors
• Create a market for your shares!
Leverage
Otherwise, you have no leverage!
I!ll touch on how to raise, briefly - we do cover some of this on the blog too.
“Raising venture capital is the art of younger men seducing older men”
- Anonymous
Or women, as the case might be.
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...
Again, not meant to be a “how do I raise money”.
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
Keynesian beauty contest.
Your 50-page business plan doesn’t matter
• One-liner; executive summary
• 10 slides
• Financials; micro-economics
The Pitch
The Approach
Get introduced...
...to the Partner...
...from someone they respect...
...at roughly the same time.
Timing is important - exploding termsheets notwithstanding, deals have a way of
going stale.
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”
Yes means a termsheet!
“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!
Let!s assume you get the termsheet... now for the real hacks.
1. The Board of Directors
Valuation is temporary
Control is forever
Classic mistake entrepreneurs make is to fixate on valuation. Control matters much
more, and most control derives from the board.
You can!t divorce your investors. You can!t recover control!
“Trust, but Verify”
- Ronald Reagan
“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
Intentions don!t matter!
Contracts are made for worst-case scenarios.
Partners come and go. Funds come and go.
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
2. Valuation
Learn to signal gracefully
Purely supply and demand
Ignore outliers
Money has karma too!
It!s an art, not a science, even though people try and calculate or justify it.
Investors in Ning and Slide aren!t saying those companies are worth hundreds of
millions - rather that Marc and Max are.
Down rounds kill you. High valuations seal the exits.
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
This one IS simple.
Convert by taking the post-money option pool percentage out of your pre-money.
4. Vesting is Testing
With board control, it’s a founder issue
4 years, some credit, single trigger, double trigger
Subtleties - do you vest just by being on the board? Definition of triggers. Cliff ?
Sweetener to bring on a CEO?
Without board control, it!s very important.
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
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
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
8. Counsel
Get your own advocate
There are “entrepreneur friendly” ones available
Draft the docs
Cap the fees
We can recommend you entrepreneur-friendly counsel.
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
In general, pro-rata is all you want. Otherwise, signaling.
10. Don’t Forget...
83(b)
Right to transfer / diversify
Founder Preferred
In Parting
• Line up your options
• Keep control
• Friendly investors don’t deliver hostile termsheets!
• Raising money is the easy part. Returning it...