Term Sheet Negotiations | Summary and Q&A

Transcript

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Summary

In this video, three panelists discuss the terms of a term sheet for a potential investment in a company. They discuss various topics such as valuation, vesting schedule, board composition, and liquidation preference. The panelists present differing perspectives and negotiate their preferences.

Questions & Answers

Q: Can you introduce yourselves and explain your experience with term sheets?

Greg and Valon are partners at adventure capital firms, while Barb is the CEO and co-founder of a startup. Greg and Barb share their experiences negotiating term sheets, highlighting the importance of understanding the process and having good advisors.

Q: What is the sticking point for Barb regarding the valuation?

Barb is looking for a higher valuation for his company, as he believes he already has a convertible debt offer on the table that values his company higher. He suggests that if the valuation cannot be met, he would consider doing a debt round instead.

Q: How does Ken respond to Barb's valuation concern?

Ken acknowledges Barb's perspective but explains that the valuation in the term sheet is based on market standards and the amount of investment being provided. He suggests that having more capital available would give Barb's company a competitive advantage.

Q: How do they negotiate on the valuation?

Ken proposes a range of $2-2.5 million for the investment, with a minimum post-money valuation of $7-7.5 million. Barb is open to the idea but expresses his preference for a higher valuation. Ultimately, they agree to continue discussing the valuation within the proposed range.

Q: What is the issue with the vesting schedule for Barb's shares?

Barb wants the vesting of his founder shares to start from the time he began working on the company, rather than from the date of the term sheet. He explains that he has been working full-time for a year without any income and wants that time to count towards his vesting.

Q: How does Ken respond to Barb's vesting schedule concern?

Ken understands Barb's perspective and appreciates his commitment to the company. He suggests that the vesting schedule in the term sheet aligns with Barb's work on the company and addresses the concerns of potential future team members.

Q: What compromise is reached regarding the vesting schedule?

They agree to give Barb credit for one year of vesting upfront, with the remaining 80% of shares vesting over the next four years. This allows Barb to have some of his shares vested immediately while still providing long-term incentives.

Q: What issue does Barb have with the board composition?

Barb is concerned that the term sheet states that only the CEO, who is a common shareholder, can have a seat on the board. He wants to ensure that the common shareholders have the ability to vote for board members.

Q: How does Ken propose a solution for the board composition?

Ken suggests leaving the language as it is for now, with the CEO having a board seat. However, if Barb were to cease being the CEO, they would then negotiate to expand the board to include Barb as a board member and an additional board member appointed by the preferred shareholders.

Q: Does Barb agree with Ken's solution for the board composition?

Barb is concerned that this solution still limits the voting rights of common shareholders. He suggests removing the independent board seat and creating a board with two common and two preferred shareholders. Ken agrees to consider this alternative.

Q: What is the issue with the liquidation preference in the term sheet?

The term sheet states that the Series A investors will receive three times the initial purchase price in any liquidation event. Barb argues that this is too high and suggests a 2x preference instead.

Q: How does Ken justify the liquidation preference in the term sheet?

Ken explains that the participation and liquidation preference in the term sheet are meant to incentivize both parties to work towards building a large and successful company. He argues that a high liquidation preference aligns with their goals as venture capitalists.

Q: Is a compromise reached regarding the liquidation preference?

They agree to set the liquidation preference at a 2x multiple without participation, meaning that the Series A investors would receive 2 times their initial purchase price in a liquidation event, but would not participate in any remaining proceeds.

Takeaways

Negotiating a term sheet involves addressing various concerns and finding compromises that satisfy both the investors and the founders. It is important for founders to have a strong alternative option, such as convertible debt, to have leverage in negotiations. Valuation, vesting schedule, board composition, and liquidation preference are key areas of negotiation. It is important for both parties to understand market standards and consider the long-term goals and incentives for building a successful company.