Venture Capital Notes

Venture Capital and Private Equity Session 5
Professor Sandeep Dahiya
Georgetown University
Course Road Map
What is Venture Capital - Introduction
VC Cycle
Fund raising
Investing
VC Valuation Methods
Term Sheets
Design of Private Equity securities
Exiting
Time permitting – Corporate Venture Capital (CVC)
Challenges of Venture Financing
Critical issues involved in financing young firms
Uncertainty
Asymmetric Information
Nature of Firm’s assets
Conditions of relevant financial and product markets
How do VCs address these problems
Security Design

Vesting Provisions

Covenants
Securities used by VCs
Common Stock

Debt

Preferred Stock
VCs response #1– Security Design
Redeemable Preferred (RP)
Convertible Preferred (CP) - Forced Conversion Clause
Participating Convertible Preferred (PCP)

VCs response #2 Vesting
Vesting – creates “Golden Handcuffs” for key employees
Idea being that you have to “Earn” your share of the company!
Also keeps the option pool from being depleted if employees leave
VCs response #3 Covenants
Covenants
Positive Covenants
Example Provide regular information
Negative Covenants
Example Sale of assets
Others
Mandatory redemption
Board Seats
Other Term Sheet Features
Vesting
Covenants

Liquidity Preferences
Anti-Dilution Protection
Board Seats
Please read the Note on Private Equity Securities
Liquidation – Quick Review
Deemed liquidation event

Liquidation preference (2X, 3X, etc.)
Non Participating
Fully Participating

Qualified public offering (QPO)

Facebook Cap Table
Biggest VC Success Story
Anti-Dilution Protections
Down round

Full-ratchet vs. weighted average

Adjusted conversion price, adjusted conversion rate
Dilution
A owns 100% of the company which is 1 million shares for which she had paid $2 per share
Company issues another 1MM shares and raises 2 MM from B
A is now 50% owner -- she has been diluted!
But A did NOT suffer any ECONOMIC DILUTION –