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    Session 4 Lecture Slides Case Study Trendsetter Inc

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    The document compares two term sheets from investment firms Alpha and Mega that are offering financing to Trendsetter Inc. It analyzes the differences between the two term sheets across key terms like valuation, liquidation preference, investor rights, board composition, vesting and more. The entrepreneur would need to consider many factors in deciding which term sheet to accept.

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    Session 4 Lecture Slides Case Study Trendsetter Inc

    Uploaded by

    eruditeaviator
    15K views10 pages
    The document compares two term sheets from investment firms Alpha and Mega that are offering financing to Trendsetter Inc. It analyzes the differences between the two term sheets across key terms like valuation, liquidation preference, investor rights, board composition, vesting and more. The entrepreneur would need to consider many factors in deciding which term sheet to accept.

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    HBS, HES, Private Equity, Venture Capital, Term Sheets

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    The document compares two term sheets from investment firms Alpha and Mega that are offering financing to Trendsetter Inc. It analyzes the differences between the two term sheets across key terms like valuation, liquidation preference, investor rights, board composition, vesting and more. The entrepreneur would need to consider many factors in deciding which term sheet to accept.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    15K views10 pages

    Session 4 Lecture Slides Case Study Trendsetter Inc

    Uploaded by

    eruditeaviator
    The document compares two term sheets from investment firms Alpha and Mega that are offering financing to Trendsetter Inc. It analyzes the differences between the two term sheets across key terms like valuation, liquidation preference, investor rights, board composition, vesting and more. The entrepreneur would need to consider many factors in deciding which term sheet to accept.

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    You are on page 1of 10

    Trendsetter Inc.

    Private Equity
    Session 4
    Source: Case Study Term Sheet Negotiations for Trendsetter Inc.

    2013 Viney Sawhney

    Trendsetter Inc.
    Term Sheets
    Integral part of the entrepreneurial process in the USA and abroad
    Each day hundreds of term sheets are proposed and evaluated by entrepreneurs and those who finance them Many entrepreneurs are not well versed in term sheets It is dangerous for an entrepreneur to assume that it will suffice if only his or her lawyer understands the term sheet Each entrepreneur should spend time studying term sheets before discussing his or her own term sheet under pressure in real time
    2013 Viney Sawhney 2

    Trendsetter Inc.
    Comparison of Term Sheets
    If you were advising the entrepreneurs at Trendsetter, and you would not change any of the terms in either term sheet, which would you recommend? What are some of the contextual elements of Trendsetter that you consider relevant for the analysis of the two financing offers?
    Typical case; Trendsetter needs capital upfront to develop software Entrepreneurs have done quite well in creating interest among VCs; seven presentations and six firms showed interest Time is of the essence (six weeks of cash left)
    2013 Viney Sawhney 3

    Trendsetter Inc.
    Comparison of Term Sheets
    How do the two term sheets compare? Clearly there are a lot of issues to compare. How can one sensibly structure the comparison into categories?
    Valuation Liquidation preference and Anti-dilution Corporate Governance Vesting and Employment Comparison and Renegotiation International Comparison

    2013 Viney Sawhney

    Trendsetter Inc.
    Flags in Term Sheets
    Green Flags
    Simple language Little downside protection for investors Plain vanilla convertible stock

    Yellow Flags
    Milestones (can lead to short-term optimizing) Complicated terms Language that requires negotiations later
    mutually agreeable to be determined

    Restrictive terms regarding appointment of 5th director Option pool comes out of founders shares
    Potential conflict: VC may want to award options to newly hired employees while entrepreneur may resist
    2013 Viney Sawhney 5

    Trendsetter Inc.
    Flags in Term Sheets continued
    Red Flags
    Too many milestones Lengthy exclusivity of term sheet Complex due diligence procedures Clauses / milestones that take control from founders Mezzanine-style provisions in early found term sheets

    Other key points


    Personal chemistry and reputation can be more important than higher pre-money valuation Work with lawyers who have extensive experience
    Ask for their VC list and deal list

    Specific VC partner matters more than the VC Firm


    Which VC partner will be on your board?
    2013 Viney Sawhney 6

    Trendsetter Inc.
    Differences in the Term Sheets
    Alpha Amount of Investment Pre-Dollar Valuation $5,000,000 $7,350,000 if meets hurdle $6,650,000 if does not meet hurdle 3,000,000 $4,200,000 if meets hurdle $3,800,000 if does not meet hurdle 501,253 shares $1.05 if meets hurdle $0.95 if does not meet hurdle Noncumulative 7.6% if meets hurdle 8.4% if does not meet hurdle 2 VCs
    2013 Viney Sawhney

    Better / Worse from the entrepreneurs perspective = depends

    Mega

    $5,000,000 $7,000,000

    Employee Pool (# of shares) Implied owner value

    < <

    2,500,000 $4,500,000

    Escrow Issue Price

    Non $1.00

    Dividend

    Cumulative 10%

    Number of Investors

    depends

    1 VC
    7

    Trendsetter Inc.
    Differences in the Term Sheets - continued
    Alpha Liquidation Preference 3X Better / Worse from the entrepreneurs perspective depends Mega 1.5X 1.25 in multiple 0.25 in dividend Higher Definition of a Qualified IPO ($20 / share; total offering >= $25M)

    Conversion Automatic Conversion

    Same Similar Lower Definition of a Qualified IPO ($5 / share; total offering >=$15M) Convertible preferred stock None Weighted average

    >

    Type of Security to be issued Redemption Rights Anti-dilution

    Convertible participating preferred stock > > Series A share price plus unpaid dividends Weighted average is sale between 50% -100% of price in Series A Full ratcheted if less than 50% Super Majority voting as class in instances not specified yet (closing docs)
    8

    Voting Rights

    Super Majority voting as class in many specific instances


    2013 Viney Sawhney

    >

    Trendsetter Inc.
    Differences in the Term Sheets - continued
    Alpha Better / Worse from the entrepreneurs perspective = = = < > < Given to investors (called pre-emptive) No rights For any investor 5 Total 2 VCs 1 CEO 2 Co (1 choice, 1 board) Mega Representations & Warranties Nondisclosure Right for First Refusal Co-Sale Rights Information Rights Board Same Same Given to investors Given to investors (p4) For investors > $250K 5 Total 2 VCs 1 CEO 2 Co (1 choice, 1 board) Note: last board seat goes to VC if Co misses hurdle) Controlled by VCs

    Compensation committee

    <

    None

    2013 Viney Sawhney

    Trendsetter Inc.
    Differences in the Term Sheets - continued
    Alpha Counsel and Expenses Investor choice of counsel (but Trendsetter pays <=$20K) Same Same (but for definition of Qualified IPO) Same base 6 months acceleration in termination Accelerated vesting (double trigger) in change of control 6 months salary if fired Better / Worse from the entrepreneurs perspective Mega Counsel already chosen by investors

    Indemnification Registration Rights

    = -

    Founders Vesting Founders Acceleration

    depends None (to be negotiated as part of employment contract)

    Misc Termination

    Depends

    None

    2013 Viney Sawhney

    10

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