Emerging & High Growth Companies Presented by: Chad Bayne & - PowerPoint PPT Presentation

Osler, Hoskin & Harcourt LLP Early Stage Term Sheets 101 for Emerging & High Growth Companies Presented by: Chad Bayne & Jamie Rosenblatt

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Agenda About Term Sheets 101 ◦ Getting to a Term Sheet ◦ Structure of a Term Sheet ◦ Choosing an Investor ◦ Investor Red Flags ◦ Best Practices Q&A Resources

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES About Canada’s leading venture capital and emerging companies lawyer • Co-Chair of Emerging Companies Group at Osler, Hoskin & Harcourt LLP • Chad Bayne Deals Include work w/ Hootsuite, Wealthsimple, Sensibill, Creative • Partner @ Osler Destruction Lab, and the Next 36/Next AI LL.B., Univ. of Ottawa, B.A.Sc. (Computer Engineering), Univ. of Waterloo • Head of Biz Dev @ Avid Life • Corp Lawyer @ Osler, Hoskin & Harcourt LLP • Jamie Rosenblatt Corp Dev @ O'Leary Ventures • Investor @ JD/MBA, Univ. of Toronto, B.A. (Phil.), Univ. Western Ontario • Golden

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Golden Ventures Investing in extraordinary entrepreneurs building transformative businesses. Focus Investment Approach ‐ Sector &Business Model ‐ Initial Cheque: $500,000 – ‐ Institutional Seed Agnostic $1.5M ‐ Highly concentrated ‐ Value Add / Network ‐ Reserve Ratio: 2:1 ‐ Founder Empathy ‐ Disruptive/Frontier Tech ‐ Typically Lead

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Portfolio

Term Sheets 101

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Getting to a Term Sheet As a founder… • Network ◦ Build relationships early -- VC’s invest in lines, not dots ◦ Coffee chats, investor updates, etc. • Prepare diligence materials ◦ Craft your narrative -- Invest the time to make the deck/pitch compelling ◦ Setup a data room w/ basic biz/legal materials (deck, financial model, cap table etc.) • Define your parameters/expectations ◦ How much do you want to raise? What is the use of funds? ◦ What are you looking for in an investor? ◦ Do you match the stage/investment thesis of a potential investor?

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Getting to a Term Sheet Red flags for investors… • Cap Table Issues ◦ Inverted Cap Table (i.e., dead weight on the cap table -- avoid giving up too much, too soon) ◦ Reverse vesting for founders helps mitigate • Team ◦ One person teams are very difficult to invest in (What happens to MRR when you get sick?) • Conduct ◦ Misrepresenting Information : Protect your reputation above all else, assume everything you say will be referenced (i.e., if you claim to have a term sheet from Investor X, assume we will be checking) • Other ◦ Asking for an NDA: VC’s aren’t looking to steal your idea.

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Getting to a Term Sheet Investment Process at the Seed Stage *Note: Process changes significantly depending on financing stage. • Evaluation Criteria ◦ VC’s are looking for a combination of team, market, product/traction ◦ Importance of market size, venture scale returns • Process Networking / Screening  Meeting #1 (Associate/Principal)  Meeting #2 (Partner)  Diligence Q’s  ◦ Meeting #3 (All Partners)  Decision  Term Sheet ◦ Diligence often involves customer calls, technical review, background checks • Timing ◦ Varies. but 4 – 12 weeks (Closer to 6 months when relationship/company building included) ◦ Survey of 500 VC’s ( Source): Average was ~40 days • 80% were able to close <60 days • 41% had closed in <30 days

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Getting to a Term Sheet Golden Ventures Funnel

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Structure of a Term Sheet • A term sheet sets out the conditions of an investment. While not legally binding, it is the roadmap for the final legal documents: ‘Think of it as a blueprint for your future relationship with your investor’ – Brad Feld • Key provisions generally relate to issues of economics or control • Terms are typically set/negotiated with your lead investor • Negotiating the term sheet is an excellent chance to codify alignment with your investors, and set expectations early • Understanding what is, and is not, ‘market’ is crucial

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Economic Provisions Valuation/Price ◦ Determinants: Stage, Investor Type, Investor Interest, Team, Traction, Economic Climate ◦ Function of dilution & ownership allocation (Venture Math and generating venture scale returns) ◦ Highest Price =/= Best Price; expect 20-35% dilution per round. Founder Vesting ◦ Essential ; Protects founders as much as investors ◦ 4-year vesting, 1 year cliff Type of Security ◦ Priced: Pref Shares ◦ Non-Priced: SAFE/KISS/Convertible Note Source: Capshare.io

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Economic Provisions Option Pool: ◦ Contains the shares set aside by the company for hiring and retaining employees. ◦ Investors will often negotiate for a large option pool early; Avg. 10-15% (Capshare) Liquidation Preference ◦ Sets out how are proceeds shared following a liquidity event (i.e. sale, acquisition) ◦ Preference : multiple of original investment returned to investors ahead of common shareholders (1x) ◦ Participation : full, capped, none

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Control Provisions Board of directors ◦ Purpose: Set strategic direction for the company, keep management accountable. ◦ Composition: Founder(s), Lead Investor, Independent ◦ Early on a company should have a founder controlled board. Protective Provisions Information/Inspection Rights Pro-Rata Rights

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Choosing an Investor Qualities to look for ◦ Investors who look to add value early and often • Pre- Term Sheet: Feedback, guidance, customer intro’s • Post-Term Sheet: Syndicate composition • Post-Investment: Strategy, recruiting ◦ Well Networked/Domain expertise/Fund Reserves Setting Expectations ◦ Raising from a VC entails certain expectations around scale and speed of growth, make sure you are on the same page early. How to diligence ◦ Reference them w/ other founders, advisors, and existing portfolio companies

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Why it matters

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Investor Red Flags • Non-Market Terms ◦ Terms may be unusual (i.e. warrants) or predatory (i.e., >1x liquidation preference) • Low Value Add ◦ Unhelpful / Unresponsive ◦ References poorly ◦ Minimal diligence • Investment History ◦ Failure by former investor’s to follow -on can create signaling risk (particular worry when raising from a lifecycle VC) • Strategic Investors ◦ May try and extract unfavourable business advantages (i.e. exclusivity) ◦ Can have a cooling effect on attracting additional investment

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Additional Thoughts • Get good counsel, someone to watch your back and that will guide you through the process ◦ Could be another founder, your lawyer, other investors etc. • Over communicate and be transparent. ◦ Hiding an issue never makes it easier to solve ◦ Establish a trust and good communication habits (i.e. monthly reporting) early • Building a great company is the goal. ◦ Fundraising/receiving a term sheet is simply the means to an end.

Resources

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Resources Online ‐ Captable.io ‐ Capshare.com ‐ Venture Hacks ‐ AVC.com (Fred Wilson) ‐ Feld.com (Brad Feld) ‐ How Do Venture Capitalists Make Decisions? ‐ SAAS Funding Napkin ‐ The Twenty Minute VC Offline ‐ Your VC ‐ Your Lawyer ‐ Brad Feld (or, if unavailable his book)

Q&A

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES Thank You! cbayne@osler.com jamie@goldenvp.com