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The Venture Capital Term Sheet

June 14, 2010 by Frank Goley, Business Consultant

If you are a business or venture thinking about obtaining Venture Capital funding, it is very helpful to understand the terms of a venture capital deal. I worked in the private equity business for close to ten years and found many companies didn’t really have a firm understanding what a VC Term Sheet comprised. A Venture capital Term Sheet sets forth the principal terms of the deal, normally agreed to prior to drafting the Operating Agreements.  Here is an example Term Sheet…

v  Offering:  100,000 shares of Convertible Preferred Stock, Series A Represents 45% of Company’s Voting Power.

v  Price per Share:  $10/share; $1M in aggregate proceeds.

v  Preferred Stock Voting Terms:  One vote for each Common Stock Share into which the preferred is convertible on all Company matters, with the following exceptions……

v  Liquidation Provision:  $10/share preference over Common.

v  Conversion:  Subject to Anti-Dilution Adjustments.

v  Anti-Dilution Terms:  Weighted Average for subsequent issuances at a price below Conversion Price.  Anti-Dilution protection for Stock Splits, Stock Dividends.

v  Dividend Payments:  10% accrued and payable quarterly, starting at year 2.

v  Redemption Procedure:  Company may call Redemption at beginning of:

Ø  Acquisition of Company

Ø  IPO at excess of Redemption Price

Ø  3rd Anniversary of Issue, at the following pricing:  Year 3 and prior- 110% of Conversion Price.  Year 4- 108% of Conversion Price.  Year 5- 104% of Conversion Price.  Year 6- at Conversion Price.

v  Registration Rights:

Ø  Demand Registration:  Two, at Company’s expense, for Series A Preferred.  Conditions:  First Demand exercisable at earlier of Company IPO or 3rd Anniversary date of issue.  Demand can’t be exercised prior to 12 months following IPO.  Minimum Aggregate Proposed Offering Price of at least $3,500 per share Common Stock.

Ø  Piggyback Registration:  Conditions:  Subject to cut-back at Underwriter’s Discretion.  Company not required to offer opportunity to participate more than once, except for those whose holdings are at least 1% of the Company outstanding Common Stock, at time of registration.

v  Representations & Warranties:  Standard (please see my previous blog post)

v  Financial Information & Inspection Rights:

Ø  Unaudited Monthly & Quarterly statements

Ø  Audited Yearly Statements

Ø  SEC Filings

Ø  Stockholder Communications

Ø  Business Plan Updates

Ø  Visitation Rights (with notice)

Ø  Inspect Properties

Ø  Obtain Non-Proprietary Information on Company’s Affairs

v  Board Representation:  Five Members elected by Class voting.  Common holders elect 2, Preferred elects 3.  After Preferred Conversion, all 5 Directors elected by Common Voting as a single class.

v  Pre-Emptive Rights:  Right to purchase a portion of any subsequent issuance of Company Common Stock (or equivalents), based on ownership percentage of the fully diluted Company Common Stock.

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