The Venture Capital Term Sheet

If you are a business or venture thinking about obtaining Venture Capital funding it is very helpful to understand the terms of a venture capital deal. I worked in the private equity business for close to ten years and found many companies didn t really have a firm understanding what a VC Term Sheet comprised. A Venture capital Term Sheet sets forth the principal terms of the deal normally agreed to prior to drafting the Operating Agreements. Here is an example Term Sheet

v Offering: 100000 shares of Convertible Preferred Stock Series A Represents 45% of Company s Voting Power.

v Price per Share: $10/share; $1M in aggregate proceeds.

v Preferred Stock Voting Terms: One vote for each Common Stock Share into which the preferred is convertible on all Company matters with the following exceptions

v Liquidation Provision: $10/share preference over Common.

v Conversion: Subject to Anti-Dilution Adjustments.

v Anti-Dilution Terms: Weighted Average for subsequent issuances at a price below Conversion Price. Anti-Dilution protection for Stock Splits Stock Dividends.

v Dividend Payments: 10% accrued and payable quarterly starting at year 2.

v Redemption Procedure: Company may call Redemption at beginning of:

Acquisition of Company

IPO at excess of Redemption Price

3rd Anniversary of Issue at the following pricing: Year 3 and prior- 110% of Conversion Price. Year 4- 108% of Conversion Price. Year 5- 104% of Conversion Price. Year 6- at Conversion Price.

v Registration Rights:

Demand Registration: Two at Company s expense for Series A Preferred. Conditions: First Demand exercisable at earlier of Company IPO or 3rd Anniversary date of issue. Demand can t be exercised prior to 12 months following IPO. Minimum Aggregate Proposed Offering Price of at least $3500 per share Common Stock.

Piggyback Registration: Conditions: Subject to cut-back at Underwriter s Discretion. Company not required to offer opportunity to participate more than once except for those whose holdings are at least 1% of the Company outstanding Common Stock at time of registration.

v Representations & Warranties: Standard (please see my previous blog post)

v Financial Information & Inspection Rights:

Unaudited Monthly & Quarterly statements

Audited Yearly Statements

SEC Filings

Stockholder Communications

Business Plan Updates

Visitation Rights (with notice)

Inspect Properties

Obtain Non-Proprietary Information on Company s Affairs

v Board Representation: Five Members elected by Class voting. Common holders elect 2 Preferred elects 3. After Preferred Conversion all 5 Directors elected by Common Voting as a single class.

v Pre-Emptive Rights: Right to purchase a portion of any subsequent issuance of Company Common Stock (or equivalents) based on ownership percentage of the fully diluted Company Common Stock.