VC Rights: Up, Down, And Know What The Fuck Is Going On

Brad Feld

Even though a term sheet might be four to eight pages long and the definitive documents might be 100 pages or more, other than economics, there are really only three things a VC needs in a deal: 1. Pro-rata rights. When things are going well (up) a VC wants the ability to continue to invest money to maintain their ownership. 2. Liquidation preference. When things don’t go well (down), a VC wants to get their money out first. 3. Board seat. In reality it mainly gives one the ability to know what’s actually going on, to the extent that anyone knows what’s actually going on in a fast moving startup.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Sizing Option Pools In Connection With Financings

Fred Wilson 

Investors like to require that an unissued option pool is in the pre-money valuation calculation when they put money into early stage companies. This post is about how to size the option pool. Many investors just want the number to be as big as possible. They'll put 15% into the term sheet and then let the entrepreneur negotiate them down from there and maybe if you are lucky you'll get them to 10%. But there is no logic in that kind of negotiation. It is just a price negotiation disguised as something else. It is bullshit. And I see investors engage in that kind of practice all the time. It annoys me.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

First Round Funding Terms and Founder Vesting

Mark Suster 

I’m putting millions of dollars in your company.  My thesis is YOU.   I need some protection that you’re not fully or mostly vested where you could simply walk away with a large stake in the company, screwing not just me but the entire employee base of the company.  I’m not Sequoia.  I’m not looking to bring in a new team to replace you.  If you leave my thesis is largely out the door.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

The Problem With Tranched VC Investments

Chris Dixon

In venture capital, tranching refers to investments where portions of the money are released over time when certain pre-negotiated milestones are hit.  Usually it will all be part of one Series of investment, so a company might raise, say, $5M in the Series A but actually only receive, say, half up front and half when they’ve hit certain milestones.  Sometimes something similar to tranching is simulated, for example when a VC makes a seed investment and pre-negotiates the Series A valuation, along with milestones necessary to trigger it.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Founder Vesting

Chris Dixon

The most important term in a startup term sheet that no one seems to think carefully about isfounder vesting. There are two key points about vesting: 1) All startup employees – including founders! – should vest over 4 years from their start date (with a one year “cliff”). 2) Founders should always have acceleration on change of control!  

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Ideal First Round Funding Terms

Chris Dixon

Having been part of or observed about 50 early stage deals, I have come to believe there is a clearly dominant set of deal terms. Here they are.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Control Is A One Way Street

 Babak Nivi

Control is a one way street that runs towards investors. Control doesn’t run backwards toward founders or common stockholders. In each round of financing, the percentage of investor board seats goes up (or stays the same). Once the investors have more board seats than the common, you’ve lost control of the board and you’re never getting it back. Your best bet is to be stingy with board seats and hope you never have to raise a round without good leverage.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Why Do Investors Want Protective Provisions?

Babak Nivi

Protective provisions let preferred shareholders veto certain actions, such as selling the company or raising capital. They protect the preferred, who are minority shareholders, from unfair actions by the common majority. However, the preferred shouldn’t use protective provisions to serve their other interests.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

What Are Supra Pro Rata Rights?

Babak Nivi

An investor with supra pro rata rights wants the option of increasing his percent ownership in the next round. He probably told you “We like this company so much we might want to buy more of it!” Investors who want to increase their percent ownership try to drive down the next round’s valuation. Whether or not they have supra pro rata rights.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Keep Your Series A Options Open If You Raise Debt

Babak Nivi

Raising convertible debt from venture capitalists can restrict your Series A options and lower your Series A valuation—whether or not your investors have a right of first refusal on the Series A. You can keep your options open by raising debt from angels exclusively or raising debt from more than one VC.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Supersize Your Vesting With These Microhacks

Babak Nivi

This article is a collection of four vesting microhacks you can use to supersize your vesting. 1. Reclaim a terminated co-founder’s unvested shares. 2. Run screaming from the right to purchase vested stock. 3. Accelerate your vesting upon hiring a new CEO. 4. Keep vesting as a consultant or board member.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Annoying Term Sheet Things

Brad Feld

(1) Expenses. If the deal doesn’t close, the startup pays. That’s silly, especially for an early stage company. (2) Exclusivity. 90 day exclusivity is too long. I agree – if you can’t get the deal done in 45 days from the signing of the term sheet, something is wrong. (3) Founder Buy Back. This one isn’t simple – it’s very context specific, personality dependent, and linked to stage, capital structure, roles and responsibilities of the founders, existing and future management team, and a whole bunch of other stuff.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Term Sheets: Contentious Issues and Lawyers

Brad Feld

The most hotly negotiated term (after price) is the liquidation preference. In a Series A deal, it is between the company and the investor. While it’s often an intense negotiation, it’s straightforward because there are only two interests to consider (the founders and the Series A investors). In later stage, the negotiations become even more interesting.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms

Term Sheet: Indemnification and Assignment

Brad Feld

Given all the shareholder litigation in recent years, there is almost no chance that a company will get funded without indemnifying its directors. One can usually negotiate away insurance in a Series A deal, but for any follow-on financing, the major practice today is to procure director and officer (D&O) insurance. Assignment provisions allows venture funds to transfer between funds and make distributions to their limited partners (their investors). This is something companies must normally live with and is a term that is rarely availed upon by investors.

 



Filed Under:
Collection: Funding
Category: Term Sheet Terms