On Wednesday, February 12, 2014, The Controllers RoundTable Boston presented “Term Sheet Wars,” which reviewed the intricacies and tips on effectively negotiating a Series A term sheet.
Our speakers included:
- Loretta Keane, CFO (moderator)
- Steven Wasserman, CFO, AppNeta, Inc.
- Michael H. Shanahan, Managing Partner, Egan-Managed Capital
- Mark Macenka, Partner, Goodwin Procter
A copy of the National Venture Capital Association’s (NVCA)’s standard form Series A Term Sheet was included as a handout for each attendee.
What did we learn?
Our panel discusses the intricacies of valuations and their effect on investment rounds
On Valuations: Valuations can be especially tough (and suspect) for pre-revenue companies. The panel stated that events and milestones should be the inflection point of the valuation, and the valuation should consider the value of the company fully structured as well as the plan for option pools. Of course, use your common sense – if your valuation shows as extremely above-market, it probably is.
On Liquidation Preference Terms: While approximately 1/3 of the transactions in the technology industry are ‘participating preferred’ transactions, most CFOs are against them as it’s essentially money out of the founders’ pockets. However, VC firms usually pay a higher price when this term is used, so it’s best to negotiate wisely in the interest of both sides.
Our thanks to Bentley University for hosting yet another packed Controllers RoundTable Boston event!
On Employee Stock Options, especially as it relates to expanding the unallocated stock option pool. The panel agreed that vesting should start at Day 1 of employment with the company, and also agreed that companies should avoid the ‘Full Rachet,’ meaning full-rachet anti-dilution protection which allows an investor to have his or her percentage ownership remain the same as the initial investment.
- On Board Changes: 9 times out of 10, new investment rounds do mean changes to your board. The opinion of our panel was that the ideal mix includes two investor representatives, one founder (if they’re still with the company), the CEO and two independent directors.
Have another question about term sheet negotiations that our panelists didn’t answer? Do you have advice that you’d like to share with your colleagues? Share with us in the comments today!
Photos and More Information
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