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) 


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!