By: noina dodo
Submitted: 2010-06-10 03:09:50 | Word Count: 756
I will be discussing Venture Capital Deal Terms from 2 completely different perspectives, Business Venture Capital and Angel Funding. As I am going through every subject below I can purpose out the nuances of handling every kind of investor. A number of the differences are minor others are significant.
Remember that not all investors work the same mold. There are great variations in deal structures from one Angel investor to the next, and likewise with VC firms.
1. Term Sheet. At the tip of your Business Arrange you will need to include a Term Sheet with the Deal Terms that your Management Team is comfortable with. Higher to include the Term Sheet when you are talking with Angel Investors. It is not necessary to incorporate one when addressing a Business Venture Capital Firm. They can typically dictate the terms and financing structure anyway.
Investors can not conceive to a Term Sheet while not conducting due diligence. Therefore don't strive to urge them to commit, simply use it to weed out investors who might waste your time. Attempt to stop potential investors from conducting extensive due diligence on your company, for their own benefit. As an example, perhaps they funded one among your competitors and are merely on a fishing expedition.
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If your company has been operating you would like to determine its book value. Raise your accountant to assist you with this. Then offer Angel investors a proportion based mostly on the book worth and the number of funding you are seeking.
If your company may be a pure start up then specialise in the share of the company you are willing to sell for X dollars, instead of a number of shares. Your Management Team desires to concur on what they're willing to convey up if they get the total quantity of funding they are looking for.
Here are some queries the Team desires to agree on:
Can they provide up voting management?
Can they agree to simply accept another Director to the Board?
Will they conform to the funding being secured by all the assets of the Company? Will they conform to an anti-dilution clause?
Will they comply with a reverse merger and become a public company in six months?
2. Anti-Dilution Clauses. If the Management Team feels that strongly about its business model or the company's revenue potential, supply investors an "Anti-Dilution" clause. I wouldn't provide it to a typical Angel Investor unless it had been able to close the deal and obtain you the funding. In alternative words, use it as a carrot to close the deal.
On the opposite hand, most Venture Capital investors that offer the primary round of financing can probably demand an Anti-Dilution clause. If you provide it initial, it will show your confidence in carrying out your business arrange and achieving success.
Do not put it within the Term Sheet though, hold it until you are fairly sure they may fund. Then you can offer it, or a minimum of not be so stunned, once they require it for investment protection.
3. Super Preferred Stock. Use a Super Most well-liked Stock issuance to give your Management Team voting control. If a Venture Capital firm requires majority stock possession, you may be ready to keep up voting control. Build the Super Most popular non-convertible into common stock.
It works one thing like this: Management would own 1,000,000 shares of most popular stock with voting rights of twenty votes per share for twenty,000,000 votes. So if management owns 4,000,000 shares of common stock, but Angel investors own vi,000,000 shares, management still controls the company. The popular stock holders would be entitled to vote on any matters on which the common stock holders are entitled to vote. This would include electing the Board of Directors, increasing the quantity of shares approved and different company governance matters.
If the investor does not like the concept of the super most popular you'll invariably discuss their concerns. Maybe they're worried that Management might increase the amount of administrators or drastically increase the amount of common shares, thereby diluting the investor during a second spherical of financing. You'll be able to forever "carve out" or limit the utilization of the Super Preferred.
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