Preferred Stock Term Sheets

Transcription

1 Preferred Stock Term Sheets Michael Weiner April 19,

2 Preferred Stock Term Sheet Basic terms for financing transaction 3-6 Pages Non-Binding Binding No-Shop (sometimes) Deals change very little after this stage Most executed term sheets get funded 2

3 Form Convertible Debt Common Stock Preferred Stock 3

4 Typical Seed Series Term Sheet Terms - Angel Pre-money valuation Liquidation preference simple Voting rights Protective provisions minimal Board seats no/maybe Anti-dilution protection Automatic conversion Right of first refusal 4

5 Convertible Debt Avoids Setting a Valuation Priority Over Equity Conversion Cap Conversion Discount Warrants 5

6 Typical Series A Term Sheet Terms - Institutional Pre-money valuation Liquidation preference multiples/participating Voting rights Protective provisions cover important issues: change of control, future financings Board seats Anti-dilution protection Automatic conversion Redemption Rights Expense of investor counsel Registration rights Demand Piggy back S-3 Right of first refusal Tag Along/Transfer Restrictions 6

7 Common Stock Sets Valuation Effects Future Employee Incentives Avoids Creating a Series of Preferred 7

8 Only Two Issues Matter Economics Pre-Money Valuation Amount raised Liquidation preference Control Protective provisions Board seats 8

9 Pre-Money Valuation Concept: The value of the company prior to the proposed financing Divide pre-money valuation by current outstanding numbers of shares plus reserved options to provide purchase price per share of Preferred Stock Useful fiction for financing: Preferred Stock and Common Stock are worth the same There is no magic to setting a pre-money valuation Often driven by amount needed to be raised 9

10 Pre-Money Valuation Pre-Money Example Shares Founders 4,000,000 Employee Pool 1,000,000 Total 5,000,000 Pre-Money Valuation $5,000,000 = $1.00 per share Outstanding Shares 5,000,000 Post-Money Capitalization Founders 4,000,000 40% Employee Pool 1,000,000 10% Investors 5,000,000 50% 10,000, % 10

11 Liquidation Preference Concept: Preferred stockholders get their money back first on liquidation of the company Liquidation includes changes of control Simple preference Investors get money back or increased multiple off the top, common stock gets residual Investors will convert to common stock if will get more money in liquidation Participating Preferred Investors get money back first, then share with common stock on an as-converted basis Sometimes capped If uncapped, preferred stock will only convert on IPO 11

12 Protective Provisions Concept: Gives investors veto rights over major decisions Often involves directly using investors money or next round of funding Stockholder right, can vote differently than at the board level No fiduciary duty owed by investor to company or other stockholders Often without 51%, protective provisions give investors effective control 12

13 Common Mistakes Set pre-money valuation too high Lower amount raised to protect pre-money valuation or voting control Too much concern over control 51% Too many shares reserved for future employees Liquidation preference too high 13

14 Thank you! For more information, please contact: Michael Weiner 14