NEGOTIATING A SERIES A INVESTMENT TERM SHEET June 18, 2013 Karim Piguet, LL.M. Page : 1
CONTE ONTENT NT A. INTRODUCTION B. MAIN ISSUES 1. Valuation 2. Option Pool 3. How to split the reward 4. How to allocate control 5. How to align the interests Page : 2
INTRODUCTION (1/2) INTR ODUCTION (1/2) CONTENT AND EFFECT � Ø Intent of the parties on the main terms and conditions. � NON-BINDING / BINDING PROVISIONS � Ø Binding provisions: exclusivity, break-up fee, confidentiality, legal fees, effect of the term sheet, dispute resolution and governing law. � Ø Non-binding provisions: main economic terms of the transactions (subject to contract / CP). � LEGAL EFFECTS � Ø Pre-contractual duties: duty to negotiate in good faith, duty to inform, etc. � � � Page : 3
INTR INTRODUCTION (2/2) ODUCTION (2/2) WHAT EACH SIDE TRIES TO ACHIEVE? � Ø INVESTOR � Ø Maximize their return on investment � Ø Protect their investment � Ø Vetoes over certain company's actions � Ø Forced liquidation � Ø Founders and key management (stay incentive and aligned interests w/ investors). � Ø ENTREPRENEURS � Ø Funds until next financing rounds � Ø Keeping control over the company’s actions � Ø Protect their personal position � Page : 4
MA MAIN I IN ISSUES (1/15) S (1/15) VALUATION � Ø PRE-MONEY VALUATION / POST MONEY VALUATION / FULLY DILUTED � � Ø PRE = valuation of the company excluding the capital about to be invested by the investor. � � Page : 5
MAIN I MA IN ISSUES (1/15) S (1/15) VALUATION � Ø PRE-MONEY VALUATION / POST MONEY VALUATION / FULLY DILUTED � Ø PRE = valuation of the company excluding the capital about to be invested by the investor. � Ø POST = valuation of the company including the capital to be invested. � Page : 6
MAIN I MA IN ISSUES (1/15) S (1/15) VALUATION � Ø PRE-MONEY VALUATION / POST MONEY VALUATION / FULLY DILUTED � Ø PRE = valuation of the company excluding the capital about to be invested by the investor. � Ø POST = valuation of the company including the capital to be invested. � Ø FD = valuation of the company taking into account all stock options (option pool). � � Example: � � “ CHF [ amount ] fully diluted pre money valuation (including the effects of shares to holders of options, warrants and other convertible securities of the Company, if any) ”. � Page : 7
MINI C MINI CASE ONE (1/3) E ONE (1/3) PRE- AND POSTMONEY VALUATION Page : 8
MINI CASE ONE (2/3) MINI C E ONE (2/3) Ø MedTech SA is a Swiss limited company with a share capital of CHF 160,000.- divided into 160,000 shares of CHF 1.- each. � Ø Investor A wishes to invest CHF 4M and requests 20 % of the company in return. � Ø Postmoney valuation implied : CHF 20M. � Ø Premoney valuation : CHF 20M – CHF 4M = CHF 16M. � Ø Par value of each share : CHF 1.-. � Ø Market value of each share : CHF 100.- (16M/160,000). � Ø Investor A would receive 40,000 shares for a CHF 4M investment. New capital = CHF 200,000 � � Page : 9 �
MINI C MINI CASE ONE (3/3) E ONE (3/3) Ø One year later: Investor B offers to invest 8M for 20% of the company. � Ø Postmoney valuation implied : CHF 40M. � Ø Premoney valuation : CHF 40M – CHF 8M = CHF 32M. � Ø Par value of each share : CHF 1.-. � Ø Market value of each share : CHF 160 (32M/200,000). � Ø Invest A has achieved a step-up in the value of his shares from CHF 100.- to CHF 160.-. � Ø Value creation in one year: 32M (premoney N) - 20M (postmoney N-1) = 12M. � � � Page : 10
MINI C MINI CASE E TWO (1/5) WO (1/5) OPTION POOL Page : 11
MINI CASE MINI C E TWO (2/5) WO (2/5) Investor’s A term sheet: � Ø 8M pre-money valuation for a CHF 2M investment � Ø 8M pre-money / 6M existing shares = CHF 1.33/share ? � Initial Pre- Initial Stock Post- Fully Stock money � Ownership � position � Money � Diluted position � Ownership � Founders � 6M � 8M � 100% � 6M � 8M � 80% � Investor A � 0M � 0 � 0% � 1.5M � 2M � 20% � Total � 6M � 8M � 100% � 7.5M � 10M � 100% � Ø Term sheet : CHF 1 per share ! � Page : 12
MINI C MINI CASE E TWO (3/5) WO (3/5) Investor’s A term sheet: � Ø “The 8M pre-money valuation includes an option pool equal to 20% of the post-financing fully diluted capitalization” � Ø Slipping option pool lower the effective pre-money to 6M � Ø 8M pre / (6M existing shares + 2M new options) = CHF 1 per share � Initial Pre- Initial Stock Post- Fully Stock money � Ownership � position � Money � Diluted position � Ownership � Founders � 6M � 6M � 75% � 6M � 6M � 60% � Investor A � 0M � 0 � 0% � 2M � 2M � 20% � Option 2M � 2M � 25% � 2M � 2M � 20% � Pool � Total � 8M � 8M � 100% � 10M � 10M � 100% � Page : 13
MINI C MINI CASE E TWO (4/5) WO (4/5) TIPS TO ENTREPRENEUR � � Propose that the stock option pool be put in place after the investment – this will reduce the dilution experienced by the preexisting shareholders. � � If it is not accepted, suggest that only part of the pool be put in place before the investment. One way to make the case is to establish the list of individuals to be recruited over the next 12-18 months (the investment horizon of the investor) and the number of options to be granted to each . � � Page : 14
MINI CASE MINI C E TWO (5/5) WO (5/5) HOW TO CREATE AN OPTION POOL FROM A HIRING PLAN?* � Title � Range % � CEO � 5-10 � COO � 2 -5 � VP � 1 - 2 � Independent Board Member � 1 � Director � 0.4 – 1.25 � Lead Engineer � 0.5 – 1 � 5+ years experience Engineer � 0.33 – 0.66 � Manager or Junior Engineer � 0.2 – 0.33 � *Source : www.venturehacks.com Page : 15
MA MAIN I IN ISSUES (2/15) S (2/15) TERMS FOR SPLITTING THE REWARD � Ø WHAT THE INVESTORS TRY TO ACHIEVE (reminder) � Ø Maximize their return on investment � Ø Protect their investment � Ø Founders and key management (stay incentive and aligned interests w/ investors) � Page : 16
MA MAIN I IN ISSUES (2/15) S (2/15) TERMS FOR SPLITTING THE REWARD � Ø WHAT THE INVESTORS TRY TO ACHIEVE (reminder) � Ø Maximize their return on investment � Ø Protect their investment � Ø Founders and key management (stay incentive and aligned interests w/ investors) � Ø METHODS � Ø Exit preferences � Ø Dividend preferences ( pro memoria ) � Ø Staging of investment against milestones � Ø Option to invest more money at a defined price per share � Ø Antidilution � Page : 17
MA MAIN I IN ISSUES (3/15) S (3/15) TERMS FOR SPLITTING THE REWARD � EXIT PREFERENCES � Ø LIQUIDATION PREFERENCE � Ø Liquidity event � � � � Example: � « In the event of a voluntary or non-voluntary liquidation , a dissolution or winding up or a Sale of the Company occurs, the proceeds resulting therefrom shall be allocated as follows: (…) � A “ Sale ” means the sale, transfer or other disposal of shares in the Company that result in a change of control or the sale of all or substantially all of the Company’s assets. » � � Page : 18
MA MAIN I IN ISSUES (4/15) S (4/15) TERMS FOR SPLITTING THE REWARD � EXIT PREFERENCES � Ø LIQUIDATION PREFERENCE � Ø Liquidity event � Ø Types of LP : single / multiple ; Participating / Capped Participating / Non-Participating � � � � Example – single-multiple � In the event of a Deemed Liquidation, (…) each Preferred A Shareholder shall be entitled to receive an amount equal to 1 time (1x) the aggregate of his invetsment before any net assets or funds be distributed to other Shareholders (the « Preference A Amount ») � Page : 19
MA MAIN I IN ISSUES (5/15) S (5/15) TERMS FOR SPLITTING THE REWARD � EXIT PREFERENCES � Ø LIQUIDATION PREFERENCE � Ø Liquidity event � Ø Types of LP : single / multiple ; Participating / Capped Participating / Non-Participating � � � � Example - Participating � After the payment of the Preference A Amount to the holders of the Preferred A Shareholders, the remaining assets shall be distributed on a pro rata basis to the holders of Common Stock and the Preferred A Shareholders. � Page : 20
MA MAIN I IN ISSUES (6/15) S (6/15) TERMS FOR SPLITTING THE REWARD � EXIT PREFERENCES � Ø LIQUIDATION PREFERENCE � Ø Liquidity event � Ø Types of LP : single / multiple ; Participating / Capped Participating / Non-Participating � � � � Example – Capped Participating � After the payment of the Preference A Amount to the holders of the Preferred A Shareholders, the remaining assets shall be distributed on a pro rata basis to the holders of Common Stock and the Preferred A Shareholders, provided that the Preferred A Shareholders will stop participating once they have received a total liquidation amount per share equal to [x] time their investment (…). � Page : 21
MINI C MINI CASE E THR THREE (1/3) E (1/3) EXIT – LIQUIDATION PREFERENCES Page : 22
Recommend
More recommend
