Trendsetter Term Sheet Negotiations

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Trendsetter Term SheetNegotiations

• Mergers and Acquisitions
• SCH-MGMT 597M

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Background

• Trendsetter has two offers of VC funding.
• Presentations took two months.
• Time is of the essence only 6 weeks of cash left
  to burn!
• How do the two term sheets compare?
• Which is the better proposal?
• Why?

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Key Issues

• Valuation
• Liquidation preference antidilution
• Corporate governance
• Vesting employment

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Valuation

• How much will VCs invest?
• Alphas pre-money valuation?
• Effect of revenue milestone on Alphas valuation?
• Likelihood of achieving revenue milestone?
• What is founders value?

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Liquidation preference antidilution

• How are liquidation preferences treated in each
  term sheet?
• What types of securities are being considered?
• What are potential liquidation scenarios under
  each term sheet?
• How do antidilution provisions differ?

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Corporate governance

• How are voting rights defined in each term sheet?
• Board composition?
• Information rights to investors?
• Role of the compensation committee?
• Number of investors (Alphaone and Megatwo)

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Vesting employment

• Alpha offers six months vesting with termination
  without cause
• Alphas accelerated vesting is undefined
• Megas terms of employment to be determined in
  subsequent negotiations prior to closing of the
  financing round

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Renegotiate terms

• Valuation (Alpha Mega)
• Liquidation antidilution (Mega)
• IPO requirements (Mega)
• Termination without cause (Alpha)
• Content of employment agreements vesting
  schedules (Mega)

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Renegotiate terms

• Performance hurdle (Alpha)
• Board composition (Alpha)
• Specific instances of voting (Mega)
• Second VC (Alpha)
• Redemption rights (Mega)
• Co-sale rights (Alpha)

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Less critical issues

• Information rights
• Dividends

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Key Learnings

• Green flags
• Yellow flags
• Red flags
• Soft issues

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Green flags

• Simple, easy-to-understand term sheets
• Little downside protection for investors
• Plain vanilla convertible preferred stock

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Yellow flags

• Milestones may lead to short-term actions that
  jeopardize long-term potential for success
• Complicated terms and conditions
• Open-ended terms that require negotiation later
  in the closing documents
• Restrictive terms regarding fifth director
• Option pool comes out of founders shares

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Red flags

• Too many milestones
• Lengthy exclusivity of term sheet
• Complex due diligence procedures
• Triggers that take control from founders
• Mezzanine-type provisions in early round term
  sheets

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Soft issues

• Personal chemistry and reputation more important
  than higher pre-money valuation
• Select legal counsel experienced in the industry
  and in doing deals (verify)
• Specific VC partner (who will be on you board)
  matters more than the VC firm
• Trust your intuition rather than blind reliance
  on the numbers

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The End

• Thoughts?
• Comments?
• Reactions?
• Questions?