Top Ten Term Sheet Tricks
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Venture
Hacks
+
Institutional Knowledge
Read a blog post
“It’s Standard”
“If Slide is worth $550M...”
Leverage • Two + termsheets • Independent • Credible investors • Create a market for your shares!
“Raising venture capital is the art of younger men seducing older men” - Anonymous
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...
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
The Pitch Your 50-page business plan doesn’t matter
• One-liner; executive summary • 10 slides • Financials; micro-economics
The Approach Get introduced... ...to the Partner... ...from someone they respect... ...at roughly the same time.
Synonyms for “NO” “Maybe”
“Later”
“NO”
“We’ll follow a credible lead”
“Come back when you have more progress” “We need to see a CEO”
“It’s not you, it’s me”
“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!
1. The Board of Directors Valuation is temporary Control is forever
“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
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!
3. The Option Pool Shuffle Convert 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
4.Vesting is Testing With board control, it’s a founder issue 4 years, some credit, single trigger, double trigger
5. Liquidation and AntiDilution • “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 NonDisclosure “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
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
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...
• [email protected]
Hacks
+
Institutional Knowledge
Read a blog post
“It’s Standard”
“If Slide is worth $550M...”
Leverage • Two + termsheets • Independent • Credible investors • Create a market for your shares!
“Raising venture capital is the art of younger men seducing older men” - Anonymous
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...
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
The Pitch Your 50-page business plan doesn’t matter
• One-liner; executive summary • 10 slides • Financials; micro-economics
The Approach Get introduced... ...to the Partner... ...from someone they respect... ...at roughly the same time.
Synonyms for “NO” “Maybe”
“Later”
“NO”
“We’ll follow a credible lead”
“Come back when you have more progress” “We need to see a CEO”
“It’s not you, it’s me”
“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!
1. The Board of Directors Valuation is temporary Control is forever
“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
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!
3. The Option Pool Shuffle Convert 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
4.Vesting is Testing With board control, it’s a founder issue 4 years, some credit, single trigger, double trigger
5. Liquidation and AntiDilution • “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 NonDisclosure “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
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
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...
• [email protected]
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