Venture Financing
Business Coach
Sample term sheet
Series A convertible preferred stock financing
Indiaco, www.indiaco.com
This proposed summary of the terms for the purchase of shares of Series A Convertible Preferred Stock of THE HOUND IS LOOSE.COM, INC. (the “Company”) does not constitute a binding contract or commitment but is solely for the purpose of outlining those terms that may be incorporated into a definitive stock purchase agreement, which must be prepared and executed by all necessary parties. Amount of investment $1,500,000 Securities 1,500,000 shares of Series A convertible preferred stock (the “Series A Stock”) Price of series A stock $1.00 per share Shares outstanding, pre-financing 10,000,000 shares of common stock Option pool Stock Option Plan with 3,500,000 shares reserved for issuance under the plan. Use of proceeds Proceeds will be used for research and development and other working capital. Resulting capitalization The resulting capitalization (assuming the grant and exercise of all options and the conversion of all Series A stock): Shares Common Stock 10,000,000 Series A Stock 1,500,000 3,500,000 Option Pool Total 15,000,000 Conversion price Each share of Series A stock is convertible at any time at the option of the holders of Series A stock into one share of common stock, subject to anti-dilution protections. Anti-dilution protection Anti-dilution protection for the Series A stock for changes in capitalization (stock splits, stock dividends, etc.) and mergers, consolidations, recapitalizations or other exchanges or substitutions of securities. Optional conversion Each Series A stock may at any time convert part or all of such holder’s shares of Series A stock into shares of common stock at the then applicable conversion rate. Automatic conversion The Series A stock will automatically convert into common stock upon the earlier of (i) the closing of a public offering of the Company’s common stock but only if the gross proceeds of the offering equal or exceed $ 5,000,000, (ii) the vote in favour of conversion of the holders of at least a majority of the outstanding Series A stock, or (iii) the Company first becoming subject to the SEC reporting requirements. Liquidation preference The Series A stock will have a liquidation preference of $ 1.00 per share, plus all declared but unpaid dividends, that is senior to the common stock. After this liquidation preference is satisfied, all remaining assets to be distributed to shareholders will be distributed to all holders of common stock on a pro rata basis. For this purpose, a liquidation will not include a merger, consolidation, reorganization, recapitalization, sale of substantially all of the assets or other similar transaction pursuant to which control of the Company is transferred. Dividends The holders of the Series A stock will be entitled to receive a non-cumulative, eight per cent (8%) dividend per annum prior to any payment of dividends on common stock, but only when and if declared by the Board of Directors. Voting rights The Series A stock will vote on an equal basis with the common stock on an “as if converted” basis. In addition, the Series A stock will be entitled to vote as a separate class by a majority in interest to the extent required by law. Registration rights The holders of Series A stock will have “piggy back” registration rights (i.e., the right to include shares in a registered public offering of the Company). Such rights will contain a typical underwriters’ cutback provisions (i.e., a provision requiring a prorata cutback of non-Company shares in the event that the public offering would be adversely affected) as well as other customary terms. r
For more information, visit: http://www.Business-asia.net or buy the Business Coach on CD-ROM at US$ 120/Indian Rs. 5,000.
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TECH MONITOR l Sep-Oct 2003
Business Coach
Venture Financing
Finance for start-ups
Business angels and venture capitalists
Rahul Patwardan, Indiaco
What is an angel investor? Most angel investors are successful business leaders or professionals who make significant investments in other companies, usually early-stage startups. They typically invest in businesses within their particular area of experience and expertise. The most important role of an angel investor is to infuse your startup with cash. But unlike other types of financing — such as bank loans — angel investors can do more than keep your company’s coffers full. Angels often take a hands-on advisory or consulting role in the company, especially when it’s just starting out. Angels can be invaluable resources who help you connect with future rounds of financing, build your executive team, choose advisory board members and meet potential business partners. Keep in mind, however, that an angel investor is just that — an investor. They expect to turn a profit by owning a part of your company. Therefore, not only should you have a plan for providing them with a reasonable return on their money, but you also need to agree on the details of the plan. Typically, a cash return within five to seven years is considered reasonable and is often achieved by selling the company or taking it public. Step 1 Select the type of venture capital that best suits your company’s needs. Equity Loan Offer of an ownership position to induce the loan, or can be a note that has an option to convert from debt to equity. First-Round Funding Typically funding that accommodates growth. Company may have finished R&D. Funding is often in the form of convertible bond. Intermediate/Second-Round Funding Maturing company where a future leveraged buyout, merger or acquisition and/or initial public offering is a viable option. Later-Stage Funding Mature company where funds are needed to support major expansion or new product development. Company is profitable or break-even. Merger and Acquisition The combination of two companies. If one company survives it is a merger; if both survive it is an acquisition. Mezzanine Funding Company’s progress makes positioning for an initial public offering viable. Venture funds are used to support the IPO. Seed/Startup Funding Earliest stage of business; typically no operating history. Investment is based on a business plan, the management group backgrounds and market and financial projections. While I’m looking forward to the capital I might receive and how my company could grow because of it, I’m also wondering how much control venture capitalists usually expect over their investments? What are the keys to working effectively with venture capitalists? Venture capitalists are investors. I know that seems obvious, but it’s important to remember what VCs are — and what they are not. Venture capitalists are not business managers; they are not business operators. In the best of all worlds for venture capitalists, they attend board meetings periodically, are presented with outstanding reports and go on to their next deal. The less time they are required to spend on their investments, the closer they come to meeting their own personal objectives. So how do you work effectively with venture capitalists? Make their life easy. Schedule regular board meetings. Venture capitalists will undoubtedly either have a seat on the board or observation rights. Give them timely information. Avoid surprises and keep them well informed. Invite their input on a regular basis when preparing for board meetings. Always hand out a packet of information about the agenda of the next board meeting a week in advance. And make sure they’re totally aware of your developments and capital requirements. Venture investors who already are invested can be your best advocates in helping you raise additional money when the time comes. r
For more information, visit: http://www.Business-asia.net or buy the Business Coach on CD-ROM at US$ 120/Indian Rs. 5,000.
TECH MONITOR l Sep-Oct 2003
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