Term Sheet Madness – The Champion is Crowned!

NCAA Men's Final Four - Championship

This is it, what you all have been waiting for.  Term Sheet Madness finals are here!  Find all you need on prior rounds here.

*Editor’s Note: Yes loyal reader, we also noticed that there is a 3 way battle for the champion of the Madness.  Whoever was in charge of the selection committee must’ve had a few too many “Rounds of the Week” when they selected the field….

1. Liquidation Preference vs. 1. Board of Directors vs. 1. Price (Valuation) 

Explanations: 

Liquidation Preference*: The determining term on how the proceeds of an exit will be shared.  The preference is given to preferred shareholders before common stockholders and can have vast implications for investors/entrepreneurs. Three types with very basic examples below:

  • Fully Participating: Receive shares on an “As-converted” basis i.e. if you have 2x Liquidation preference on 20% stake in a $100M post-money valuation (i.e.a $20M investment).  If the firm sells for $240M you will receive $40M (2x preference) and then 20% of remaining $200M or $40M for a total of $80M or 33% Ownership.  Founders receive remaining $160M.  C:V. Thought: Yikes.
  • Capped Participation: Will only participate up until a limit (i.e. 2x cap).  In this case, the firm makes more than double their money so they will not participate and simply receive 20% of $240M or $48M.  Founders receive remaining $192M. C:V. Thought: Less Yikes.
  • Non-Participating: Firm sells for $240M, investors receive 20% or $48M.  Founders receive remaining $192M. C:V. Thought: Normal.

*Editor’s Note: we combine participation and preference in this term

Board of Directors: One of the biggest control mechanisms and defining aspects of the company.  The Board of Directors is the management team that sets direction and helps the company achieve their vision.

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.

C:V.’s Chief Term-ologist’s Take: The three juggernauts of the tourney, each with their own strengths and weaknesses, will make for quite an interesting final match up.  While Liquidation Preference has some serious exit ownership implications and Price probably owns the most mindshare, we feel that the Board may have an advantage.  Its ability to advise and assist in the company can reap fantastic rewards. Hopefully so much so that founders do not have to worry about Liquidation Preference caps or Price…

Outcome: The Board fends off both challengers and takes home the hardware!  In the end, their ability to have both an immediate and a longer term impact allowed them to emerge victorious. Congrats to all the participants this year!

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Monday Morning Memo

C-V.-logo

New week, new logo!  Check it out and let us know what you think! MMM below:

Recap of Last Week: Last week we had more Term Sheet Madness, our VC spotlight on David Skok,  and our Round of the Week on Synack

What Lies Ahead: We will be finishing our Term Sheet Madness series and continuing to bring the best #ROTW and VC spotlight in the biz!

Round of the Week – Synack

BinaryPeople(1)

A crowdsourced enterprise security firm raises an A round from top investors and our “C:V. favorite” Shape Security’s CEO? Talk about a guaranteed way to get featured as a Round of the Week on C:V.! NSA-led Synack has done just that with their $7.5M Series A this week to capitalize on the growing security needs of the Fortune 2000.

*Editor’s Note: If you are new to this site (Welcome, we hope you like it!) or unfamiliar with our infatuation about A) enterprise security or B) Shape Security please refer to the respective hyperlinks to get a taste…

Name: Synack

Website: www.synack.com

Funding to Date: $9M ($1.5M Seed, $7.5M A)

Deal Notables: While we are on record here at C:V. for being suckers for a large disruptive market with a strong management team (Synack has these in spades), we are intrigued by this business model as it can drastically reduce the costs for mid to large size businesses looking increase their security awareness. Needless to say, we look forward to following Synack in its life cycle.

VC Spotlight of the Week – David Skok

Our most decorated entrepreneur yet, David Skok has been a serial entrepreneur for over 25 years and a VC for over 10.  He has founded four companies and taken 3 of them public.  Oh, and he writes a very influential blog for any aspiring entrepreneurs.  Not too shabby if you ask us…

Name: David Skok

Company: Matrix Partnersskok

Blog:  forEntrepreneurs (One of our liked blogs!)

Bio: David founded his first company in 1977 and went on to found three others before his crossing over to the other side of the table with Matrix in 2001.  More can be found about him here!

Miscellaneous/Interesting Facts: David’s blog is fantastic reading for anyone looking to for advice as an entrepreneur.  He may not post as often as most blogs on our links bar, but when he does it is A) very insightful and B) most likely has something to do with SaaS.  Very cool reading and C:V. recommended!

Term Sheet Madness – Boston Finals

We round out the regionals!  Term Sheet Central here!  Boston Round 1 here!

1. Liquidation Preference vs.  2. Antidilution

Explanations: 

Liquidation Preference*: The determining term on how the proceeds of an exit will be shared.  The preference is given to preferred shareholders before common stockholders and can have vast implications for investors/entrepreneurs. Three types with very basic examples below:

  • Fully Participating: Receive shares on an “As-converted” basis i.e. if you have 2x Liquidation preference on 20% stake in a $100M post-money valuation (i.e.a $20M investment).  If the firm sells for $240M you will receive $40M (2x preference) and then 20% of remaining $200M or $40M for a total of $80M or 33% Ownership.  Founders receive remaining $160M.  C:V. Thought: Yikes.
  • Capped Participation:  Will only participate up until a limit (i.e. 2x cap).  In this case, the firm makes more than double their money so they will not participate and simply receive 20% of $240M or $48M.  Founders receive remaining $192M. C:V. Thought: Less Yikes.
  • Non-Participating:  Firm sells for $240M, investors receive 20% or $48M.  Founders receive remaining $192M. C:V. Thought: Normal.

*Editor’s Note: we combine participation and preference in this term

Antidilution: A protective measure in the unfortunate case of a down round, it offers investment protection for investors by redefining the ownership of their initial investment.  Two types below:

  • Full Ratchet:  The harshest of the provisions, this translates the equity ownership from the prior round to the new price at the lower round.  i.e. If the original round was 20% on $100M Post (i.e. $20M investment) and the new round only valued the company at $50M the investors would then be awarded shares to keep their ownership the same at $20M or 40% of the new company. (See, we weren’t kidding that this was basically draconian…)
  • Weighted Average: A more forgiving provision that puts the incentive on both sides of the table.   The weighted average model only considers the new shares being issued and not the entire pool.

C:V.’s Chief Term-ologist’s Take: While Antidilution eased into the finals, we feel that they will not have an easy time with Liquidation Preference.  The powerhouse in the bracket, the Liquidation Preference can drastically reshape an investment landscape and even Antidilution’s most drastic provisions for down rounds should not be enough to overtake the Preference.

Outcome: Liquidation Preference rolls into the finals with a win over Antidilution.

Monday Morning Memo

boston

Big day in Boston today.  Best of luck to all the runners out there!  MMM below, read on!

Recap of Last Week: Last week featured more Term Sheet Madness, Round of the Week on Wefunder (and a nugget on how C:V. began), and our VC spotlight on Redeye’s Josh Kopelman!

What Lies Ahead: We will be finishing out the Term Sheet Madness as well as including our round and spotlight weekly features.  Also be on the lookout for a book review or another valuation in the coming days/weeks!

Round of the Week – Wefunder

WEFUNDER

One of the upstarts in the crowdinvesting space, Wefunder has reportedly raised a $500K round this week.  Similar to the AngelLists of the world, Wefunder is a crowdinvesting platform that allows almost anyone to invest in promising companies.  What type of companies you ask?  Well, you have your run of the mill tech/hardware startups and then there’s the Flying Cars company.  Seriously, one of the most successfully funded projects to date for them is Terrafugia, a flying car startup with $30M in preorders to boot.

Name: Wefunder

Website: www.wefunder.com

Funding to Date: ~$1.1M ($530K Seed, $500K A?)

Deal Notables: Not so much deal related, but C:V. has a storied history with Wefunder.  Some of our early inspiration for creating C:V. stemmed from an email chain between colleagues where we would evaluate and value selected Wefunder startups. We would pick a company and do a rundown on their market size, management team, and product offering to determine whether or not we saw the opportunity as viable for investment.  VC nerds gonna VC nerd…