SETTING THE DEAL29th October 2015

AN EVENT OF

Setting the Deal 3

WHAT IS SETTING THE DEAL?

An experienced Venture Capitalist

Vsa successful entrepreneur and

his legal advisor

negotiating the terms of an early stage financing deal.

Setting the Deal 4

THE TERMS

Setting the Deal 5

2 types of shares. Preference shares and common shares.

Setting the Deal 6

Negotiation on 5 basic terms

Setting the Deal 7

#1VALUATION

Setting the Deal 8

2 types of valuations. pre-money and post-money

Setting the Deal 9

Postmoney = premoney + amount of cash invested

Setting the Deal 10

Investors get:

Cash invested Post money valuation

Setting the Deal 11

Example:Company is worth €1 million pre and raises €500K. • How much is post-money

valuation?• What % do investors own?

Setting the Deal 12

Example:Company is worth €1 million pre and raises €500K. • How much is post-money

valuation? €1m + € 500K = €1,5 million

• What % do investors own? € 500K /€1,5million = 33.3%

Setting the Deal 13

#2LIQUIDATION PREFERENCES

Setting the Deal 14

Specify who gets paid first in event of liquidation (like sale of company)

Setting the Deal 15

2 important things. The actual preference and participation

Setting the Deal 16

Preference: A certain multiple of the original investment is returned to the investor before the common stock receives any payment.

Setting the Deal 17

Example:• Investor has invested 1M for 30%

with a liquidation preference 3X. • Company is sold for 4M.

Setting the Deal 18

Example:• Investor has invested 1M for 30%

with a liquidation preference 3X. • Company is sold for 4M.

Without preference he would get 30%*4M = 1,2M

Setting the Deal 19

Example:• Investor has invested 1M for 30%

with a liquidation preference 3X. • Company is sold for 4M.

Without preference he would get 30%*4M = 1,2MWith 3X preference he gets 3X1M = 3M

Setting the Deal 20

Participation: three varieties of participation: • full participation • capped participation• non-participating

Setting the Deal 21

Participation: three varieties of participation: • full participation [more investor

friendly]• capped participation• non-participating [more

entrepreneur friendly]

Setting the Deal 22

#3ANTIDILUTION

Setting the Deal 23

Protects an investor if at the next round you raise money at a lower valuation than the one you currently have

Setting the Deal 24

2 main formulas. -Full ratchet -Weighted average

Setting the Deal 25

-Full ratchet - Investor does not dilute at all- More investor friendly,

-Weighted average- Investor dilutes (not as much as entrepreneur)

based on the amount of money raised in the past and being raised now.

- More entrepreneur friendly

Setting the Deal 26

#4MANAGERS’ STOCK VESTING

Setting the Deal 27

Vesting means that instead of founders getting their % immediately, they get it regularly over some period

Setting the Deal 28

If founders have 50% of company with a 4 year vesting, this means that after 1st year they have 50%/4 = 12,5%, after 2nd year 25% etc…

Setting the Deal 29

#5 PROTECTIVE PROVISIONS

Setting the Deal 30

Protective provisions grant the investors the right to veto or block certain corporate actions. Examples: strategy, sale of company, change of CEO

Setting the Deal 31

The rationale for these provisions is to protect the investors (minority shareholders) from the majority stockholders.

Setting the Deal

heartVALVE

An imaginary company presentation created by…

Setting the Deal 33

THE PLAYERS

Setting the Deal 34

MODERATORS

Patrick Gabriëls Broos Bakens

Setting the Deal 35

ENTREPRENEUR

Martijn Rutten

Setting the Deal 36

LEGAL ADVISOR OF THE ENTREPRENEUR

Marc van Rijnsoever

Setting the Deal 37

VENTURE CAPITALIST

Casper Bruens Kim de Boer

Setting the Deal 38

START NEGOTIATION

START NEGOTIATION

Setting the Deal 39

VALUATION

Pre-Money Valuation: The Original Purchase Price is based upon a fully-diluted pre-money valuation of €5,000,000 and a fully‑diluted post-money valuation of €7,692,000 (including an employee pool representing 10% of the fully‑diluted post-money capitalization).

Investors: InvestorVentures. Shares 35%, €2,692,000

Setting the Deal 40

LIQUIDATION PREFERENCES

Liquidation Preference:

 

In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid as follows:

(full participating Preferred Stock): First pay two times the Original Purchase Price plus accrued dividends on each share of Series A Preferred. Thereafter, the Series A Preferred participates with the Common Stock pro rata on an as-converted basis.

Setting the Deal 41

ANTIDILUTION

Anti-dilution Provisions: In the event that the Company issues additional securities at a purchase price less than the current Series A Preferred conversion price, then the conversion price will be reduced to the price at which the new shares are issued.

Setting the Deal 42

MANAGERS’ STOCK VESTING

Vesting of Managers’ Shares: 100% of the shares directly or indirectly held by a Founder shall be subject to a: reverse quarterly vesting over a period of four years with a one year cliff, with a compensation in the amount of the unvested shares; nominal value in case of a bad leaver event and in the amount of the portion of the minimum of either the most recent financing round or current market price in case of a good leaver event.

"Good Leaver" means any employee shareholder who ceases to be employed as a result of death or permanent incapacity, summary dismissal when the dismissal is found to have been wrongful or constructive, or whose contract of employment is terminated in circumstances where he is not in breach of his contract. "Bad Leaver" means any employee shareholder who is not a Good Leaver. 

Setting the Deal 43

PROTECTIVE PROVISIONS AND VETO RIGHTS

In addition to any other vote or approval required under the Company’s Charter or Bylaws, the Company will not, without the written consent of the holders of at least 75% of the Company’s Series A Preferred, either directly or by amendment, merger, consolidation, or otherwise:

…

Protective Provisions:

Matters Requiring Investor Director Approval:

The prior written approval of both the Series A Directors will be required to:

…

Setting the Deal 44

Questions?

Setting the Deal 45

Thank You