Trendsetter: Negotiation and Term Sheets

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Entrepreneurial Finance: Negotiating with Venture Capitalists: Trendsetter Inc. TEACHING ENTREPRENEURIAL THOUGHT & ACTION
20 March 2012
Richard T. Bliss, PhD

Trendsetter Inc.
Learning Objectives 1. The entrepreneur/VC relationship 2. Exposure to deal term sheets 3. Moving beyond valuation 4. VC negotiations

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The Entrepreneur/VC Relationship
Entrepreneur VC

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The Entrepreneur/VC Relationship
• Provisions to address adverse selection − due diligence − staging/milestones − use of convertible preferred shares • Provisions to facilitate monitoring/control − rights to information and board seat − employment contracts and termination rights • Provisions to enable harvesting • Protection of standing − anti-dilution provision − preemptive rights and right of first refusal 4

Case Discussion Questions
1. Calculate the pre- and post-money valuations for Trendsetter under both term sheets. 2. What would the payoffs to the founders and the VC be if Trendsetter is acquired in a transaction that values the firm at $10 million? $25 million? 3. What are the main differences and similarities between the two term sheets? 4. If you were the entrepreneur and could not negotiate any of the terms in either sheet, which one would you prefer and why? 5. How would you seek to alter the terms in each term sheet during negotiations with the venture capitalists? 5

Trendsetter Inc. Overview

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Term Sheets: Key Provisions
1. Valuation
2. Dividends

3. Liquidation preference
4. Election of directors

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Valuation - Mega

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Valuation - Alpha

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Dividend - Mega

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Dividend - Alpha

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Liquidation Preference - Mega

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Liquidation Preference - Alpha

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$45

Liquidation Preference and Investor Value
$40 $35
Value of Ownership Stake
$30

$25 $20 Alpha: Series A $15 $10 $5 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 Alpha: Founders Mega: Series A Mega: Founders

Venture Value
14...
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