Category: Venture Capital & Term Sheets
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Unintended Consequences of a Long Additional Closing Period
Some financing rounds close on one specific day. Meaning, all investors fund their full investment amounts on the same date. This is common when a round has a small number of investors who can coordinate with the startup on logistics (wires, signature pages, and final documents). As the number of investors increases, coordinating everyone for…
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When Majority of the Board Doesn’t Mean Board Control
TL;DR: Giving up “only one board seat” doesn’t automatically mean you kept control. In venture deals, board control often shows up through approval rights (who must say “yes”) and stockholder class votes, even when founders still hold a board-seat majority. The misconception: “We kept the board, so we kept board control” I hear this a…
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Avoid Offensive Liquidation Preferences
In most equity financing rounds, an investor will ask for (and get) a term called a liquidation preference. A liquidation preference is the amount that must be paid to a preferred stock holder before any sale proceeds may be paid to the holders of common stock (i.e., founders, option holders, etc.). The amount of the…
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Term Sheet Purgatory
There’s plenty of advice on (1) how to attract VCs and (2) how to negotiate a venture capital term sheet. What gets less attention is the messy middle, the period between an investor expressing interest and you actually receiving a term sheet. I call that waiting period term sheet purgatory. Term sheet purgatory is an…
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Series A Startup CEO Salary
A startup’s CEO’s $500,000 Salary Burns Startup Into Fire Sale. The Importance of Startup CEO Salary The startup community focuses most of the term sheet discussion on liquidation preferences and anti-dilution, but startup CEO salary is nonetheless an important issue. According to Peter Theil, Startup CEO salary is a predictor of a startup’s success: “The…
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What is a Fully-Diluted Basis?
The concept of a fully-diluted basis is not difficult. A fully-diluted basis just means the assumption of the highest potential amount of common stock a startup will have outstanding, regardless of vesting provisions and assuming all options and other securities like convertible notes are converted into common stock. That is, assume the highest share count…
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Is a Term Sheet Binding?
A term sheet is an outline of the deal terms that helps frame the contemplated transaction for both parties. Term Sheets for financings and acquisitions are usually not binding. However, it is quite common to see various sections of the term sheet binding, including: –No Shop or Go Shop Clauses: Can a party shop the…
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What is an Option Pool?
An option pool is an amount of a startup’s common stock reserved for future issuances to employees, directors, advisors, and consultants. The option pool is created pursuant to a written plan in order to satisfy Rule 701 which provides a registration exemption from Section 5 the 1933 Securities Act. Via the written plan, a startup…
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What is a Liquidation Preference?
The liquidation preference is the amount that must be paid to the preferred stock holders before distributions may be made to common stock holders. The liquidation preference is payable on either a liquidation of the company, asset sale, merger, consolidation or any other reorganization resulting in the change of control of the startup. It is…
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Should Your Startup Lawyer Get a Finder’s Fee?
Heck no. Your lawyer should not get a contingent finder’s fee for introducing you to investors or potential acquirers. I think taking a finder’s fee would be a greater conflict than sitting on your startup’s board of directors. I’ve always felt introductions, whether to an accountant, potential co-founder, or investor is just part of the…