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TAG: Terms

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Are Pay to Play Provisions Coming Back? We Need Them Ex Post Facto

TheFunded.com Discussion

Posted by Anonymous on 2008-11-17

Tags: Negotiation Terms Pay to Play

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Term Sheet Questions

TheFunded.com Discussion

Posted by Anonymous on 2008-11-12

Tags: Negotiation Terms

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Terms on Convertible Debt

TheFunded.com Discussion

Posted by Anonymous on 2008-11-05

Tags: Negotiation Convertible Debt Terms

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Understand (And Avoid if You Can) the "Voting as a Single Class" Trick

TheFunded.com Advice

Posted by Nand on 2008-11-04

Tags: Negotiation Terms

PUBLIC:

There is some similarity between this and the elections, so it's a good time to discuss this.

What does "Voting as a single class" means for you (and other small investors) " and don't get it wrong, you may be a big shareholder today, but you must think like the small shareholder you will be down the road.

Here is an example of how a VC with 20% of the shares can force a decision on all the other shareholders and investors, most of which are against that decision.

The lead VC has 20% of the shares (5% B shares+ 15% C Shares)
The lead VC wants to force a decision, the rest of the shareholders are 80:20 against it.

There are 30% series C shares and 20% series B shares. the rest are common and options (who don't vote).

The holders of the C shares vote first, the decision, forced by the lead VC wins (although 40% of the C shares are against). but all of them are now "voting together as a single class", e.g. casting all their votes in favor of the decision.

The holders of the B shares do the same, they are against the decision (80:20) they "vote together as a single class" against the lead VC.

Then there is a second vote. The "holders of the preferred shares", although most of the holders of the preferred shares are against, and although all the B shares votes are against the decision. All "the holders of the preferred shares" are now forced to vote for the decision.

Now all the preferred shares vote together for the decision, although most of the holders of shares and most of the investors were against it.

The VC, with it's 20% of shares, against the will of most of the other investors and most of the shareholders can force a decision.

Try and use the smaller VCs to remove this from the investment agreements.
They will tell you this is only inserted to simplify things, they will describe situations where some retired employee can influence the decisions and so on. Remeber, this is just another mechanism to give power to the biggest shareholder (who, in the long run, is not you).

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When Potential Clients Want to Invest. How to Structure?

TheFunded.com Discussion

Posted by Anonymous on 2008-10-31

Tags: Negotiation Corporate Ventures Terms

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Start Up Finance: Wierd or What?

TheFunded.com Discussion

Posted by Anonymous on 2008-10-24

Tags: Preparation Financials Terms

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What Should a Term Sheet Represent?

TheFunded.com Discussion

Posted by Anonymous on 2008-10-21

Tags: Negotiation Terms Busines Plan

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London Angel Investor: Interested in U.S. Social Network

TheFunded.com Discussion

Posted by Anonymous on 2008-10-15

Tags: Negotiation Terms Equity

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First Agree on a Second Date Before Trying to Meet the Parents

TheFunded.com Advice

Posted by RichieBlueEyes on 2008-10-14

Tags: Pitching Strategy Terms

PUBLIC:

This is basic advice, applicable to any sales situation and a mistake people often make. If you are meeting a potential client (or investor) first make sure they are interested in your product (your company) and agree to go out again (meet again) and provide more background on yourself (your materials) before trying to to sneak into the bedroom and score (discuss terms). Often times terms come up early, I'd recommend saying "first lets see if we click before talking specifics" and drag it out a bit... a meeting or two .... before talking numbers. This way, you know there is an actual interest, potentially leading to a term sheet before entering any type of negotiation which can cause the whole thing to go sour if there is a disagreement. However, if you already are all over each other, you're more likely to settle the disagreement then storm away unhappy. This holds true for selling anything. First gain interest, then sell. Many people just jump the gun and try to sell before knowing if they customer wants anything and while it can work, it changes the tide of leverage.

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How are These Terms?

TheFunded.com Discussion

Posted by Anonymous on 2008-10-13

Tags: Negotiation Terms Energy

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My Term Sheet Got Pulled. What Next?

TheFunded.com Discussion

Posted by Anonymous on 2008-10-12

Tags: Closing Terms

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Private Placement Memorandum

TheFunded.com Discussion

Posted by Anonymous on 2008-09-30

Tags: Preparation Terms Presentation

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Where Can I Find Lists of Terms and Their Benefits/Risks for Contract Proposals?

TheFunded.com Discussion

Posted by Anonymous on 2008-09-11

Tags: Negotiation Terms

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Do We Move forward or Brake Up the Initial F&F Round?

TheFunded.com Discussion

Posted by Anonymous on 2008-08-30

Tags: Preparation Terms

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Can Anyone Point Me to the Right VC?

TheFunded.com Discussion

Posted by Anonymous on 2008-08-23

Tags: Funding Sources Equity Terms

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Not Raising Money but Technical Expertise

TheFunded.com Discussion

Posted by Anonymous on 2008-08-21

Tags: Preparation Terms Outsourcing Operations

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Skin in the Game

TheFunded.com Discussion

Posted by Anonymous on 2008-08-18

Tags: Preparation Terms Financials

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One or Two Investment Rounds?

TheFunded.com Discussion

Posted by Anonymous on 2008-08-17

Tags: Preparation Busines Plan Terms

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Term Sheets Question

TheFunded.com Discussion

Posted by Anonymous on 2008-07-28

Tags: Negotiation Terms

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Sereis C Investment

TheFunded.com Discussion

Posted by Anonymous on 2008-07-09

Tags: Negotiation Strategy Terms Crisis

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Stock Purchase Agreements

TheFunded.com Discussion

Posted by Anonymous on 2008-07-03

Tags: Negotiation Terms

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Pari Passu in Series A?

TheFunded.com Discussion

Posted by Anonymous on 2008-06-10

Tags: Negotiation Terms Pari Passu

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Why Dividends Matter

TheFunded.com Advice

Posted by fnazeeri on 2008-05-21

Tags: Negotiation Terms Dividends

PUBLIC:

Somehow when you see that little clause on the term sheet about an 8% dividend for the preferred shares, it doesn't seem that big of a deal at the time. But to put it in perspective, let's take a typical "success" story and see how that dividend affects the deal.

Imagine a scenario where a startup raises $14.5MM in 4 rounds (seed plus A, B and C) and that each round has the 8% compounding dividend paid on exit. Further, let's imagine the company sells for $75MM. Here's the cash flow:

[Once again, a table doesn't format here. Does anyone know how to insert a table using Textile or something similar" In the meantime you can go to http://www.altgate.com/ to see the table.]

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How Liquidation Preferences Work

TheFunded.com Advice

Posted by fnazeeri on 2008-05-14

Tags: Negotiation Terms Liquidation Preferences

PUBLIC:

Liquidation preferences are a key term in the definition of preferred stock (it's generally acknowledged to be the second most important economic term). Earlier, I wrote about this and other terms in a post on negotiating a term sheet, but here I want to give some specific examples to illustrate why this is such an important term.

You probably already know this, but it's worth repeating that liquidation preference refers to the procedure for paying investors off in a sale or winding up of the company. It typically includes two components: a preference (which is an amount that gets paid before others) and participation (the ability to "double dip"). Many folks have written on preferences in terms of definitions, so instead I'm going to give some simple examples.

For simplicity sake, imagine a VC has $10MM invested in one class of preferred stock in a company, owns 40% and the company is sold for $50MM. Here’s how the three different scenarios in my previous post work (in a specific example):

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The Science & Art of Term Sheet Negotiation

TheFunded.com Advice

Posted by fnazeeri on 2008-05-12

Tags: Negotiation Terms

PUBLIC:

By the time I was in the 9th grade, I had been playing chess for a few years (as in I knew the rules) but I didn't play seriously and more often than not I lost. Then one day at the library (remember, pre-internet) I happened to find a book on chess. So I read the book and almost overnight I became one of the chess "stars" in high school. In one of the funnier incidents, I started playing chess during lunch hour and was "hustling" money which on one occasion resulted in a kid pulling a knife on me after I relieved him of a few bucks. True story.

What was it in that book that allowed me to take advantage of the situation" Well, there was a lot of basic stuff, some general rules and even some strategy, however, the most useful bit of information, initially, was a table on the relative value of pieces. You know, a pawn is worth 1, a knight/bishop 3, rook 5, a queen 9 and the king "infinite" unless it's the endgame then it's more like a 4. Experienced players have a "feel" for this from many games played and they can also break the "rules" by, for example, sacrificing a queen for a rook to get better position. But these are all things learned from experience and best not tried by a novice. If you are new to the game, you have no idea. When you are starting out, having some rules of thumb can make all the difference between winning and getting hustled.

What does this have to do with negotiating term sheets" Well, I think a lot of newbies get hustled when negotiating term sheets because they don't know the relative importance of the various terms. Have you heard the joke about the VC who says, "I'll let you pick the pre money valuation if I get to pick the terms"" My goal here is to provide a framework that gives relative value of various terms on a term sheet and allows you to compare them on two dimensions: economics and control (or as my friend Noam Wasserman likes to say, "rich" versus "king"). In the same way that a chess grand master doesn't need rules of thumb from someone else, if you're a seasoned negotiator of term sheets then this is probably equally useless. And no, this is not based on any academic or scientific study. It's based on my own experience and, more importantly, that of a few other experts like Dave Kimelberg (Softbank's GC).

In my view there are 12 important terms on a typical Series A / B term sheet. Yes there are other terms and yes sometimes they are important, but if you go with the thesis of keep it simple, then 12 is the magic number. In terms of rating, the rich/king differentiation is important as different people are after different things so depending upon your motivation you may be inclined to pay more attention to one column than the other. So without further adieu, below is a table showing them as well as the relative importance:

[Sadly I couldn't get the table to format here. You can see the matrix on my blog at http://www.altgate.com/]

Here a 10 means it is really important to get as favorable a result as possible on this term, a 1 means it is not so important and a "-" means it doesn't apply (i.e. a zero). The cool thing about having something like this is you can use it as a tool to compare term sheets (provided you can determine how favorable or unfavorable each individual term is...more on that below).

The next part of this post is to provide a range of typical results for each term which will give you a means to rank each term in each term sheet with a "1,3 or 5" where 1 is "unfavorable", 3 is "fair" and 5 is "favorable." If you aren't already familiar with the terms in a term sheet, you should check out the model term sheet (basically a template) put together by the National Venture Capital Association. They have other model agreements too, but you will see with the term sheet that they include various options, some discussed here. Below is a scale for each of the 12 key terms across the two dimensions:

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