Download - Entrepreneur Workshop - Understanding Term Sheets

E n t r e p r e n e u r W o r k s h o pU n d e r s t a n d i n g I n v e s t o r T e r m

S h e e t sT h e r e S h o u l d B e N o S u r p r i s e s !

www.mapleleafangels.com | [email protected] | 416.646.6235 | @mapleleafangels

MLA CONNECTS

Our mandate is to connect experienced accredited investors, and the brightest, most passionate entrepreneurs in an effective investment process.


Agenda

• Introduction of DMZ • Overview of Maple Leaf Angels • Participant Introductions• Participants goals for This Session• Introduction to Investor Term Sheets• Q & A


Ryerson DMZ


INVESTMENT HISTORY

Sentient Magnetic

23 Investments$10 Million +

http://www.livehivesystems.com/index.html


How Does MLA Invest?

Considerations:• Management Team• Product/Service• Market Opportunity• Proof of Concept• Go to Market Strategy• The Financial Deal• Use of Proceeds• Exit

Pre-Money Valuation?

Typically under $4Million

MLA has Monthly Investment Meetings

Interesting in presenting to members?

See Hilary after the workshop!


MLA Resources

Funding Process

Pitch Deck

Executive Summary

http://www.mapleleafangels.com/entrepreneurs/the_funding_process

http://www.mapleleafangels.com/entrepreneurs/the_funding_process

http://www.mapleleafangels.com/entrepreneurs/the_pitch

http://www.mapleleafangels.com/entrepreneurgeneralresources/executivesummaryexamplefromangelsoftpdf

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• I am Gerard Buckley– Founder & CEO of Jaguar Capital an Advisory Practice for Growth

Companies in Financial Management, Financial Structuring & Governance– Chairperson of Board of Directors, Maple Leaf Angels Corporation &

Investor in eight early stage companies– Certified Corporate Director of the Institute of Corporate Directors– Previously Entrepreneur in Residence with Incubes (An Internet Company

Accelerator)– Member of SME Committee of The Ontario Securities Commission– Investment Committee of MSV University, Halifax, NS– 32 yr. Career with Scotia Capital as a Financial Risk Management Advisor to

Fortune 200 Companies: Rogers, Irving Group, Empire Co., Four Seasons, Bruce Power, OPG, Province of Ontario, Ford etc.

Who Am I


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• A Term Sheet is the basis of a legal agreement between an investor(s) and a company, outlining the terms and conditions of an investment into the target company– Agreement in principle– Non-binding (except non-disclosure and no-shop clauses)– Commence negotiating early in due-diligence– Complex Term Sheets are seen as Founder Unfriendly and

will deter follow-on investment

An Introduction to Term sheets


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• Hope for the best but plan for the worst• Protect downside risk while maximizing upside potential• Forms the basis of a legal document• Aligns interests of founders with interests of investors• Creates the rules to guide the company in future follow

on investment & M&A activity• Establishes corporate governance structure

Goals


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• What do you want the deal to look like?• Type of security to be issued• Valuation and amount to be invested• Voting and information rights• Board establishment and representation

Critical Items


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• Equity– Common– Preferred

• Debt– Straight (Senior, Subordinated or Mezzanine)– Convertible

• Angel investments capture upside reward, therefore Equity or Convertible Debt are instruments used

Types of Investment


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• Allows upside value capture• Introduces rights available only to investors– Anti dilution– Investor board seats– Information rights– Redemption rights– Rights related to future investment rounds

Seed Preferred Equity Structure


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• Allows investor upside value capture with the following typical terms:– Conversion into Series A preferred equity– Median conversion discount: 20%– Median interest: 5.5%– Median maturity: 18 months– Merger premium 2x– Secured against company IP– Often a cap set on valuation

Seed Convertible Debenture Structure


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• Introduces rights available only to investors– Pre-emptive rights on next Financing– No board Seat– Information rights– Right of first refusal– Rights related to future investment rounds– Conversion on exit before financing– Co-sale rights

• Benefits to founders and investors– Defers negotiation on valuation and many pref share terms– Simplifies legals– Avoids Directors and Shareholders liability– Lender is a creditor, near front of line in a liquidation

Seed Convertible Debenture Structure


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• Identify key value drivers in the investment– Product launch– IP strategy– Strategic partnerships– Sales targets

• Focus on two or three key metrics• Upon value creation event, management can claw back

a portion of equity if they have demonstrated superior execution

• Warrant structure

Aligning Interests between Investors & Founders


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• Goal is to achieve a balanced board from the start• 5 person board minimum – 3 person boards do not

work• Expandable easily to 7– Current CEO– Founder representative– 2 Investor representatives– Independent

Corporate Governance


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• Requirement for a BOD Seat• Anti-Dilution Provision – Pre-Emptive Rights• Share Option Plan 10 – 15% of authorized shares• Drag Along Rights – a majority SHR• Tag Along Rights – a minority SHR• Postponement Agreements• Key officer insurance in addition to D & O• Price protection from a down round• Requirement to buy out investors after 5 years without an exit• Observer Rights• Reporting Requirements

Common Deal Terms


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• CD Valuation Cap• CD Discount to Qualified Financing 15 or 20%• Change of Control Provisions• Representations and Warrants• Covenants• Default provisions• Prepayment• Conversion at next round financing• Governing Law• Conversion on Sale or Optional Conversion• Who pays Legal Fees• Founder Stock Vesting

Common Deal Terms


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• Convertible Debenture – many objectives that include liquidity preference

• There is a lot of discussion around how liquidity preference should be given in a company liquidation vs. sale of company

• Warrant coverage is often and better way to ensure CD protection is given – Equity Kicker

Liquidity Preference


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• No-Shop Clause• Investor’s Legal Expenses• Confidentiality Clause• Share Ownership• Non-Compete• Security and Covenants

Unfriendly Terms to Founder(s) or Start-up


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• SAFE (simple agreement for future equity) Financing Documents is intended to replace convertible notes– Safe Primer– Safe: Cap, no Discount– Safe: Discount, no cap– Safe: Cap and Discount– Safe: MFN, no Cap, no Discount

• Features– Not a debt instrument - No Maturity Date – Standardization - No Security– No interest - It is not a loan– Reduced legal cost - Negotiate one item – Valuation Cap

Financing Innovations – Y Combinator


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Contact Information

Gerard Buckley, BBA, FICB, ICD.DPresident and CEO Jaguar Capital Inc.(C) 416-884-9522(W) 416-646-6789

[email protected]

www.jaguarcapital.ca

Twitter: @jaguarcapital Twitter: @gerardbuckleySlideshare: Jaguar Capital


mailto:[email protected]

http://www.jaguarcapital.ca/


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MLA SPONSORS & GOVERNMENT PARTNERS