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!

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.

The Finals continue!  All info here at Term Sheet Central!  Denver round 1 here!

1. Board of Directors vs. 2. Vesting

Explanations:

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.

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.

C:V.’s Chief Term-ologist’s Take:  Easily the strongest region and two of the fiercest competitors in the entire tournament.  The Board is a consistent powerhouse with their far-reaching ability to provide advice, structure, and idea validation to the founders but Vesting is no push-over.  Its timing effects and potential implications on employee retention and performance are underrated. This matchup will be a close one.

Outcome: Matchups like these are what the madness is all about. Had the selection committee done better when seeding, this could have been the finals.  Alas, it is not and the Board has simply too strong of a balanced-attack style to be upset.  Board Advances.

We wrap up 1st round play in Boston!  Term Sheet central here!

1. Liquidation Preference vs. 4. Employee Option Pool

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 stock holders 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

Employee Option Pool: The amount of equity to be held for future issuance to employees. This can be a sneaky way to lower a company’s pre-money valuation if one is not too careful (larger option pool than prior cap table).  This is also a key term as it will help determine the resources a founder will have when allocating and attempting to attract new talent to the company.

C:V.’s Chief Term-ologist’s Take: While Options are key retention measures for future employees, poorly structured liquidation preferences can have devastating ramifications for “less than spectacular” exits on founder/employee ownership.  You can work to redeploy your options at later rounds, but attempting to get rid of a fully participating 3x liquidation preference is an evil nobody EVER wants to deal with.

Outcome:  Liquidation preference fends off an inspired comeback in the 2nd half from Option Pool to advance.

 2. Antidilution vs. 3. Conversion Rights

Explanations:

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.

Conversion Rights: The ability to convert preferred equity into common stock. Automatic conversion gets infuriating interesting when investors “must” convert at different prices upon an IPO.  If one investor has a $20M auto-conversion and a later round investor has a $60M conversion and the company wants to price an IPO at $50M then the later round investor can stall until the company can float an offering that will reach their $60M auto-conversion price.

C:V.’s Chief Term-ologist’s Take: While Conversion can get interesting upon an IPO, antidilution provisions can effectively cram-down any remaining founder ownership.  You tell us an original founder that is truly motivated to succeed after having half of his/her share taken at the B round and we will tell you about our cousin from Nigeria….

Outcome: In a less than eventful 2 v 3 matchup, Antidilution blows out Conversion to advance.

This is it folks, the field is now live, let the games begin!!

*Editor’s Note: Another huge thanks to Foundry Group and Venture Deals as without this book, our (limited) knowledge of these terms would be non-existent.

Regional Breakdown:

Palo Alto Regional:

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

2. Pay to Play vs. 3. Dividends

Denver Regional:

1. Board of Directors vs. 4. No-Shop Agreement

2. Vesting vs. 3. Protective Provisions

Boston Regional:

1. Liquidation Preference vs. 4. Employee Option Pool

2. Antidilution vs. 3. Conversion Rights