The Madness continues! Look here for Original Post, here for Full Field, and here for Palo Alto Regional!
1. Board of Directors vs. 4. No-Shop Agreement
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.
No-Shop Agreement: The term sheet equivalent of monogamy, the No-Shop Agreement essentially makes it very difficult to field other offers when you are in the final stages of a financing.
C:V.’s Chief Term-ologist’s Take: Term sheet monogamy is important and all and while we hope No Shops would only be broken for a can’t miss deal, Board of Directors is a powerhouse in the control field. They advise, direct, mentor, and shape the direction of the company.
Outcome: The Board advances (unanimously)
2. Vesting vs. 3. Protective Provisions
Vesting: The time period and speed at which you earn your equity in the company. Simple in theory, huge implications in practice.
- Example: If you have a 4 year vesting schedule at 25% a year on 100 shares, you will get 25 shares a year for 4 years. If you leave after 2 years, you get 50 shares and 50 shares is “left on the table” unvested.
Protective Provisions: Essentially veto power, Protective Provisions are a list of company events (issuing shares, raising debt, selling the company, etc.) that the investors can vote to stop from happening. Depending on severity, this list of events can cause some serious control issues in a company.
C:V.’s Chief Term-ologist’s Take: A battle of two of the stronger Economics and Control provisions in the field, we see this going down to the wire. Vesting can have such profound impacts on employee performance (re: Worst Case = feeling of indentured servitude for life of vesting schedule) yet Protective Provisions, if severe enough, can effectively stop the company from doing anything. Now obviously we here at C:V. always hope for the best and would hope that vesting would be reasonable given the company stage and protective provisions would include materiality thresholds to allow for certain business measures to be enacted, but even still there is no clear-cut winner in this round.
Outcome: In a double-OT thriller, Vesting survives to advance to the finals to play the Board.
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Interesting blog Kevin! I was listening to a talk yesterday evening on how Zuckerberg lost billions because he didn’t set up vesting schedules with Eduardo Saverin.
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