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Important Notice: This presentation has been prepared by Varnum LLP for informational purposes only and does not constitute legal advice. Copyright © 2016, Varnum LLP. All rights reserved.
Term Sheet Basics
Matt [email protected]
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Topics
§ What is a Term Sheet?
§ Key Elements of a Series Seed Term Sheet
§ Key Elements of a Convertible Debt Term Sheet
§ A Word about Convertible Equity (SAFE)
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PART IWhat is a Term Sheet?
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What is a Term Sheet?
§ A term sheet is a bullet-point document outlining the material terms and conditions of a business agreement.
§ After a term sheet has been executed or approved, it guides legal counsel in the preparation of proposed final documents.
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PART IIKey Elements of a Series Seed Term Sheet
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Series Seed
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Series Seed
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Series Seed
§ Terms:§ Securities to be Issued (Series Seed or Series
AA)§ Aggregate Proceeds (How much are you
going to raise?)§ Investors (Accredited Investors)
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Series Seed§ Terms:
§ Price Per Share
§ Pre-Money Valuation = the valuation of a company prior to financing.
§ If the Pre-Money Valuation is $3M and the investors invest $1M, the Post-Money Valuation is $4M (Investors own 25%).
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Series Seed§ Terms:
§ Price Per Share
§ Pre-money valuation is on a fully-diluted basis.
§ The Option Pool decreases the per share price.
§ Only the Common Stock get diluted by the Option Pool.
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Series Seed§ Terms:
§ Liquidation Preference (Participating v. Non-Participating).
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Series Seed§ Terms:
§ Voting Rights
§ Common and Preferred vote together but…§ Preferred get veto over certain major actions.
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Series Seed§ Terms
§ Board of Directors (Founder Friendly):
§ Board of Directors (Investor Friendly):§ One Common§ CEO§ One Investor§ Second Investor§ Outside Director
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Series Seed§ Terms:
§ Information Rights§ Participation Rights (“Major Investors will
have the right to participate on a pro rata basis in subsequent issuances of equity securities.”)
§ Expenses (“Company to reimburse counsel to investors for a flat fee of $10,000.”)
§ Future Rights.
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Series Seed§ Terms:
§ Founder Matters
§ Reverse Vesting§ “Double Trigger”§ IP Assignment§ Dividends§ Redemption
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PART III:Key Elements of a Convertible Debt Term Sheet
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Convertible Debt§ Terms:
§ Amount of Financing (Minimum Investment?)§ Interest Rate§ Maturity§ Conversion Events
§ Next Equity Financing§ Corporate Transaction§ Maturity
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Convertible Debt§ Terms:
§ Conversion Price§ Equity Financing
§ Discount (20%?)§ Cap ($3M?)
§ Corporate Transaction § Maturity
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Convertible Debt§ Terms:
§ Prepayment§ Security§ Priority (i.e. Subordinate to Bank Financing?)§ Amendments and Waivers (i.e. “Requisite
Noteholders”)§ Expenses
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PART IV:A Word About Convertible Equity (SAFE)
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SAFEs§ What is a SAFE?
§ Simple Agreement for Future Equity.§ Similar to Convertible Debt but without the
Debt. § Same as Convertible Debt, SAFEs have a
cap, discount, and conversion price.§ No Interest Rate or Maturity Date.
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SAFEs§ Why use a SAFE?
§ Debt instruments have requirements –including regulations, interest accrual, maturity dates, the threat of insolvency and in some cases, security interests and subordination agreements. These requirements can have unintended negative consequences.
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SAFEs§ Why use a SAFE?
§ A safe is intended to be simple for both companies and investors, with the usual path to agreement requiring the negotiation of only one item – the “valuation cap.”
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SAFEs§ Why use a SAFE?
§ A simple equity security has the potential to become standardized, and a standardized form has the benefits of certainty and speed, which in turn results in lower transaction costs for companies and investors.
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Questions