- founderCh. 3Angel InvestorAngel investors are individual investors who are often a key source of early-stage investment and are very active in seed rounds, and may be professional investors, successful entrepreneurs, friends, or family members.
- founderCh. 3Investor RelationsAngel investors and VCs are not homogeneous groups; each investor has individual incentives, pressures, experiences, and sophistication levels that will define the working relationship beyond negotiated terms.
- founderCh. 3Legal FeesInvestors attempt to make certain items binding in the term sheet (legal fees payable regardless of deal completion, no-shop restriction after term sheet signing, specified governing law) while reserving the right to back out based on conditions that still must be satisfied.
- neutralCh. 4Due DiligenceDue diligence is the process by which investors explore a company they are considering investing in.
- neutralCh. 4Lead VcA lead VC is the firm that commits via term sheet, takes a leadership role in the financing process, and typically becomes the most active new investor.
- investorCh. 7AntidilutionWeighted average antidilution is the most common antidilution mechanism and factors in both the lower issue price and the quantity of shares issued at that price when recalculating the conversion price.
- neutralCh. 7Change Of ControlA balanced approach to change-of-control vesting is commonly double-trigger acceleration with one year of vesting acceleration, though specific terms are often negotiated at the time of acquisition.
- neutralCh. 7Common StockFounders receive common stock when companies are created; VCs typically purchase preferred stock when investing.
- neutralCh. 7ControlEconomics refers to price per share and percentage ownership; control refers to governance rights and decision-making authority.
- neutralCh. 7ConversionPreferred stock voting power is typically calculated on an as-if-converted basis, equal to the number of common shares issuable upon conversion of each preferred share.
- neutralCh. 7Down RoundA down round is a financing round completed at a lower valuation than the previous round.
- investorCh. 7Employee PoolThe employee pool is the percentage of fully diluted capitalization reserved for future issuance to employees, directors, officers, and consultants.
- neutralCh. 7Liquidation PreferenceLiquidation preference is a multiple of the original investment per share returned to investors before common stock receives any consideration, historically standardized at 1×.
- founderCh. 7NegotiationNegotiations conducted when there is abundant opportunity or multiple alternatives are easier than negotiations conducted in scarcity conditions.
- investorCh. 7Option PoolAn option pool is the shares set aside by a company to provide stock options to employees.
- investorCh. 7Participating PreferredFully participating preferred stock first receives its liquidation preference, then participates pro rata with Common Stock on an as-converted (common equivalent) basis in any remaining proceeds, with no cap on the additional upside.
- neutralCh. 7Pay To PlayValuation alone does not capture deal economics; price per share, liquidation preference, pay-to-play, vesting, employee pool size, and antidilution all affect economic terms.
- founderCh. 7Premoney ValuationPremoney valuation is the value ascribed to a company by an investor before investing in the company.
- neutralCh. 7ValuationValuation is the value ascribed to a company by an investor.
- neutralCh. 7VestingValuation alone does not capture deal economics; price per share, liquidation preference, pay-to-play, vesting, employee pool size, and antidilution all affect economic terms.
- founderCh. 8Automatic ConversionAutomatic conversion of preferred stock into common stock typically occurs upon closing of a qualified IPO, defined as an underwritten public offering with a per-share price of at least three times the original purchase price and total offering size of at least $15 million.
- neutralCh. 8Negotiation MoveNegotiation Move
- neutralCh. 8Protective ProvisionsProtective provisions are veto rights that grant investors consent requirements over specified company actions.
- investorCh. 9DividendPreferred shareholders receive dividends at a fixed percentage of original purchase price per annum, with priority over common stock dividends, and may participate pro rata in common stock dividends on an as-if-converted basis.
- investorCh. 10Conditions PrecedentConditions precedent to financing typically include satisfactory documentation, successful due diligence completion, delivery of a customary management rights letter, and submission of a detailed twelve-month budget acceptable to investors.
- neutralCh. 10Founders Activities ClauseA typical founders' activities clause requires 100 percent of founder professional time to be devoted to the company, with all other professional activities requiring board approval.
- founderCh. 10No Shop AgreementA no-shop agreement obligates the company and founders not to solicit, initiate, encourage, or assist alternate proposals relating to equity issuance, acquisition, or material disposition during negotiations.
- investorCh. 10Pro Rata RightsA super pro rata right (a multiple on standard pro rata purchase rights within a right of first refusal) is generally considered an excessive ask, particularly early in a company's financing lifecycle.
- neutralCh. 10Registration RightsRegistration rights provisions in investor rights agreements typically include cross-indemnification, the period the registration statement remains effective, and underwriting arrangements.
- investorCh. 10Right Of First RefusalAn investor's pro rata right for right of first refusal purposes is calculated as the ratio of the investor's fully diluted shares to the total company's fully diluted shares outstanding immediately prior to the new issuance.
- investorCh. 12Fiduciary DutyDirectors and officers owe a fiduciary duty to creditors only when the company lacks sufficient cash to pay liabilities.
- neutralCh. 12Management FeeManagement fees are calculated as a percentage of total committed capital, typically between 1.5 percent and 2.5 percent, paid annually in quarterly or semi-annual instalments.
- founderCh. 14Negotiation LeverageUnderstanding an investor's strengths, weaknesses, and biases allows an entrepreneur to tailor negotiation strategy and identify leverage points.
- founderCh. 14Term SheetModern venture capital term sheets typically contain approximately eight pages and address two fundamental dimensions: economics (price and ownership percentage) and control (voting rights and decision-making authority).
- founderCh. 15AcquisitionA merger, acquisition, sale of voting control, or sale of substantially all assets in which shareholders do not retain majority ownership of the surviving corporation's outstanding shares is treated as a liquidation event, triggering liquidation preference provisions.
- neutralCh. 17Convertible DebtConvertible debt is a loan structure that converts to preferred stock, typically in a future financing round, usually with a discount applied to the conversion price.
- neutralCh. 17InsolvencyOutstanding employment litigation claimants are treated as creditors for purposes of insolvency liability.
- not applicableCh. 18Asset DealBuyers often request asset deal structures intending to purchase only desired assets while leaving liabilities and obligations behind.
- neutralCh. 18IndemnificationRegistration rights provisions in investor rights agreements typically include cross-indemnification, the period the registration statement remains effective, and underwriting arrangements.
- neutralCh. 18Letter Of IntentA letter of intent (LOI) is typically the first formal step by a buyer to signal interest in acquiring a company, and is usually nonbinding except for provisions like no-shop agreements.
- investorCh. 18LoiA nondisclosure agreement in an LOI is typically one of the few legally binding provisions, along with jurisdiction and breakup fees.
- neutralCh. 18Nondisclosure AgreementA nondisclosure agreement in an LOI is typically one of the few legally binding provisions, along with jurisdiction and breakup fees.
- investorCh. 18Purchase Price AdjustmentWorking capital adjustment provisions reduce purchase price if the seller's working capital at closing is below an agreed threshold; working capital equals current assets minus current liabilities.
- founderCh. 18Shareholder RepresentativePost-closing acquisition issues including escrow management, earn-outs, working capital adjustments, and litigation over reps and warranties extend long after deal closing and require ongoing shareholder representative involvement.
- investorCh. 19Intellectual PropertyProprietary information and inventions agreements are standard in all venture term sheets and serve as investor verification that the company owns its intellectual property.
- founderCh. 20Carve OutA carve-out in equity allows shareholders to agree to give a preferential payment to executives and employees ahead of other shareholders, typically used when liquidation preferences leave employees without sufficient financial interests.
- founderCh. 20ConfidentialityBuyer must maintain confidentiality of information stamped or identified as confidential by Sellers, and use such information only for evaluation of the proposed transaction unless required by law, necessary for filings/consents, or required in legal proceedings.
- investorCh. 20Conversion PriceA full ratchet antidilution provision adjusts the conversion price of earlier-round preferred stock down to the price of any subsequent lower-priced issuance, regardless of the number of shares issued at the lower price.
- neutralCh. 20EscrowAn escrow (or holdback) is cash the buyer retains for a defined period after closing to cover undisclosed issues or indemnification claims that arise post-acquisition; any amounts paid out from escrow reduce the actual purchase price the seller ultimately receives.
- neutralCh. 20Preferred StockOnce preferred stock is converted to common stock, there is no contractual provision allowing reconversion back to preferred status.
- neutralCh. 20Series A PreferredSeries A Preferred holders are entitled to annual budgets, audited annual and unaudited quarterly financial statements, budget variance reports, and standard inspection and visitation rights, terminating upon a Qualified IPO.
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