Term Sheet Madness – Palo Alto Round 1

Regional play began today! (See original post here for details)  Full Field here!

1. Price (Valuation) vs. 4. Right of Refusal

Explanations:

Price (Valuation): The amount of funding received in the round.  Can be referred to in aggregate ($40M) or price per share ($6/Share). This can be used to determine pre/post money valuation.

Right of (First) Refusal: Also known as the “Pro Rata Right”, it provides context for current investors to have the ability to purchase shares in a future financing (a good thing! usually…)

C:V.’s Chief Term-ologist’s Take:  While the ability to participate in a future financing is important for all parties at varying levels, Price (Valuation) has much larger ramifications that determine the economics and ownership of the company.

Outcome:  While we love an underdog, this is not RoFR’s day. Top seed Price (Valuation) rolls in a landslide.

 

2. Pay to Play vs. 3. Dividends

Explanations:

Pay to Play: Investors will have the option to purchase their “pro rata” share in a future financing (i.e. Right of First Refusal), but if they choose not to participate (Pay), the remainder of their allotment of ownership will be converted from preferred to common stock (preventing them to Play).

Dividends: Periodic Payments made via Cash or Equity to the investors at a percentage of the initial investment.

C:V.’s Chief Term-ologist’s Take: Pay to Play seems to be more of an issue with down rounds but we agree with their general premise of earning (and continuing to earn via continued participation) what you keep, so we are fans of Pay to Play.  Dividends on the other hand, not so much….While much can be made for a case for dividends in specific business lines, in general, we view cash as king and having to part with any additional cash when trying to scale a business is a recipe for trouble (and possible future down rounds…)

Outcome: If this were a more PE-focused site we could possibly see Dividends with the upset victory, but in the end Pay to Play advances to play tourney favorite Price (Valuation) in the Regional final!

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4 thoughts on “Term Sheet Madness – Palo Alto Round 1

  1. Pingback: Monday Morning Memo | Capital: Ventured.

  2. Pingback: Term Sheet Madness – Denver Round 1 | Capital: Ventured.

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  4. Pingback: Term Sheet Madness – Palo Alto Finals | Capital: Ventured.

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