Term Sheet Madness – Palo Alto Finals

The Regional Finals are upon us!  See here for Term Sheet Central and here for Palo Alto Round 1!

1. Price (Valuation) vs. 2. Pay to Play

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.

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).

C:V.’s Chief Term-ologist’s Take: Price looks to continue its hot streak in this competition but will be met with resistance by Pay to Play.  In the end, we feel that Price should be able to advance on its ability to heavily impact all future rounds of a firm even though Pay to Play’s ability to allow only the truly committed investors to remain preferred shareholders should not be forgotten.

Outcome: Price advances to the Term Sheet Madness Finals!  Get the scissors out! (Well, in this tournament, it’s probably more fitting to break out the pen/DocuSign link…)

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Term Sheet Madness – Denver Round 1

The Madness continues! Look here for Original Posthere for Full Field, and here for Palo Alto Regional!

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

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.

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

Explanations:

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.

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!

Introducing Term Sheet Madness!

march-madness-bracket

Do you find yourself wondering which terms and triggers in a term sheet or financing negotiation are most effective or powerful?  Losing sleep over whether or not to accept fully participating liquidation preferences with a full ratchet provision (hint: don’t)? Want to get a better understanding of the true power rankings of what is valuable and what is lawyer “boilerplate”?

If so, then you are in for a treat! In honor of “March Madness” we have decided to create our own version of the madness, C:V. style!  Over the coming days and weeks, we will be holding our first ever “Term Sheet Madness” where we will be matching up some of the key terms and triggers in a financing against one another and having them battle it out until a victor is crowned!

In the process, we will also give an explanation (as best we can, we are neither VC’s nor Lawyers…) on what the term means and why it is so often (or not often) used/in vogue/SAT word eligible.

Early “term-ologists” have Price and Liquidation Preference as early favorites, but Board Seats have made an impressive run in their conference tourney and is by far the hottest term in the field….

Term Sheet Central:

Full Field

Palo Alto Regional

Denver Regional

Boston Regional

Palo Alto Finals

Denver Finals

Boston Finals

Term Sheet Madness Finals