Term Sheet Definitions PE条款清单.docx
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Term Sheet Definitions PE条款清单.docx
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TermSheetDefinitionsPE条款清单
TermSheetDefinitions
gutsofthebusinessdeal
NOTa“legal”document
short(~5-8pages)
VCoffersitstemplate
TermSheetDefinitions
“PreferredStock”
“preferred”becauseit’sgotbetterrightsandprotectionsthancommonstock
exactdefinitionofpreferencesiskeyfocusofnegotiation(andthiscourse)
whatFoundersandEmployeesget
hasvotingrightsbutnotmuchelse
optionsandrestrictedstock
TermSheetDefinitions
“CommonStock”
“Pre-money”:
valuebeforefinancing
“Post-money”:
pre-moneyplusfinancing
Valuation
VCstakestatedaspercentageofpost-money:
“4on6”=
$6Mpre-moneywith$4Mround=
$10Mpost-money;VCsown40%ofthecompany
Control,Ownership&EconomicPower
5KeyTermstoNegotiate:
BoardofDirectors
Vesting
OptionPool
ParticipatingPreferredStock
Anti-DilutionProtection
Boardofdirectors(continued)
Notsubjecttopubliccompanyregulations
Pre-money--usuallyconsistsofemployeesonly
Post-money--amixofVCs,employees,outsiders
Compositionpost-money
Aimfor“2-2-1”?
Vesting
OptionPool
Percentageofcompany’stotalstockpost-moneythatwillbereservedforfuturehires
VC’spreferredstockisaddedintocalculationon“as-converted”basis(1:
1)initially
TypicalAround:
15-25%
Poolalwayscomesoutoffounders’,notVC’sshare
Typical“CapTable”post-money:
VC1
35%
Vc2
15%
total
50%
common
founder
35%
opinion
15%
total
50%
Haveyoualreadylosteffectivecontrol?
Poolisnecessity;don’tcheapout.
ParticipatingPreferred
1.“Liquidationpreference”:
VCsget100%oforiginalmoneybackbeforeCommongetsonepenny
2.Then,VCs“participatein”(take)proratashareofleftoverswithCommon
ParticipatingPreferred
Co.has$60pre-moneyvaluation
VCputsin$40
Co.has$100post-money
VCowns40%(4/10)
2yearslater,Co.soldfor$160...
$160proceeds
VCgets:
$40backrightoffthetop(investmentreturned),plus
$48=40%of$120(VC’spercentageownershipofleftoverassets)
$88total(55%ofCo.value)
$160proceeds
Commongets:
$72=$160-$40-$48
$40=“VC’spreference”
$48=“VC’sparticipation”
$72total
45%ofCo.value,despite
60%ofCo.ownership
Anti-DilutionProtection
VC’sprotectionineventof“downround”sothatARoundinvestors’“conversionratio”isequaltosubsequentinvestors’.
2flavors:
“fullratchet”and“weightedaverage.”
FullRatchet:
draconian;“ifonlyonenewshareisissued”inBround,allAroundinvestorsentitledtoBround’sconversionratio.
WeightedAverage:
Lessharsh;takesintoaccountthetruedilutiveeffectofthesubsequentdownround.
•broad-based(founderfriendly)
•narrow-based(almostlikefullratchet)
Broad-BasedWeightedAverage
广泛基础加权平均
一种在企业进行后续发行时保护现有优先股股东的反摊薄条款。
广泛基础加权平均条款适用于所有以往发行的股票及当时进行的发行
Preferredstocktypicallyisissuedwithwhatisoftenreferredtoasstructural(nonprice
based)anti-dilutionprotection,whichprotectsagainsttheeffectsofstock
dividends,stocksplits,reversesplits,andotherrecapitalizations.Thisisthemostbasic
formofanti-dilutionprotection.
Anotherformofnon-pricebasedanti-dilutionprotectionisarightoffirstrefusal
(alsocalledapreemptiverightorarighttoparticipate).Theseprovisionsallowthe
preferredstockholdertopurchaseaproratashareoffutureissuancesofstockbythe
company(orsalesofstockbythefounders),therebypermittinganinvestortomaintain
hisorherpercentageownership.Theseprovisionsareparticularlyimportantin
protectinganinvestor’sownershippercentageinan“upround”offinancing.
itiscommonfortheserightstobeaccompanied
byanexceptionforthesaleofstocktostrategicpartners,consultants,employees,or
directors.
Furthermore,in
exchangeforgrantingsuchrights,anentrepreneurmayrequestthattherightbe
reciprocal(i.e.,thatthecompanyorentrepreneurhasarightoffirstrefusalonsalesofthe
preferredstockbytheinvestor).
Anti-Dilution(pricebased)
Thevaluationofearlystagecompaniesishighlyuncertain.Asaresult,an
investorcouldbeinvestinginacompanywhosevalueadjustsdownwardbeforethe
companystabilizesandresumespositivegrowthinvalue.Forthisreason,investorsoften
seekpriceprotection—thatis,protectionfromthedilutiveeffectsofalaterroundof
financingthatispricedbelowthepriceatwhichtheyboughtintothecompany.There
aretwocommonformsofpriceprotection:
full-ratchetanti-dilutionprotectionand
weightedaverageanti-dilutionprotection.
Full-ratchetanti-dilutionlowerstheconversionpricetothepriceatwhichany
newstockissold.Thistypeofprotectionisgenerallyconsideredtobeasevereformof
anti-dilutionprotectionbecauseitforcesthecommonshareholderstoabsorbmostofthe
dilution.Forexample,assumethattheSeriesAinvestorboughtpreferredsharesat$1.00
pershareand,later,SeriesBinvestorsboughtsharesat$0.50pershare,thenthe
conversionpriceofthepreferredsharesownedbySeriesAinvestorswouldbeadjusted
downwardto$0.50.Ineffect,theadjustmentintheconversionpriceallowstheSeriesA
investorto“pay”thesameforitssharesastheSeriesBinvestor.3Importantly,this
pricingadjustmentoccursregardlessofhowmanysharesareissued(ortheamountof
moneyraised)intheSeriesBround.Thus,acompanyseekingtoissueasmallnumberof
sharesinordertoraisetheneededcapitalwillbeforcedtoadjusttheshareownershipof
allpreferredshareholders.
Table1
Conversion
Priceof
Preferred
Shares
Shares
Issued
(000's)
Common
SharesAfter
Conversion
Percentof
Company
Owned
Capitalization−NoDilutionProtection
FirstRound
CommonShares7,5007,50075.00%
SeriesAPreferredShares2,5002,50025.00%
SeriesAConversionPrice$1.00
SecondRound
CommonShares7,5007,50062.50%
SeriesAPreferredShares$1.002,5002,50020.83%
SeriesBPreferredShares$0.502,0002,00016.67%
SecondRoundCapitalization–Full-RatchetDilutionProtection
CommonShares7,5007,50051.72%
SeriesAPreferredShares$0.502,5005,00034.48%
SeriesBPreferredShares$0.502,0002,00013.79%
WeightedAverageAnti-DilutionProtection
Anotherfrequentlyencounteredformofdilutionprotectioninearlystagedealsis
weightedaverageanti-dilution.Weightedaverageanti-dilution(WAAD)isgenerally
thoughttobemorefavorabletotheentrepreneurwhotypicallyholdscommonshares.As
shownintheformulabelow,WAADadjuststheconversionpriceoftheSeriesAinvestor
byconsideringboththesizeandpriceofthedilutiveroundoffinancing.Statedanother
way,theformulaallowstheconversionpricetobeadjustedaccordingtotherelative
percentageofownershipthatisbeingsoldatthelowerprice.Therefore,ascanbeseen
inTable2,thedilutiveimpactoncommonshareholdersisgreatlyreduced.
Theformulahasseveralformsandwillsometimesincludeforpurposesof
dilutionprotectionthenumberofstockoptionsoutstanding.Whenoptionsaretaken
into
accounttheprotectionissaidtobe“broadbased”andwhentheyareexcludeditissaidto
be“narrowbased.”Anexampleofaweightedaverageformulaisasfollows:
Price-BasedAnti-DilutionProtectionTerms
Investor-Favorable
Middle-of-the-Road
Entrepreneur-Favorable
Fullratchet
Weightedaverage,Pay-to-playprovision
None(structuralantidilution
protectiononly)
NonPrice-BasedAnti-DilutionProtectionTerms
Investor-Favorable
Middle-of-the-Road
Entrepreneur-Favorable
Unqualifiedrightoffirstrefusaloncompanyissueorshareholdersales
Rightterminateson
qualifiedpublicoffering
(“QPO”)5
Mustholdminimum
numberofpreferredshares
(e.g.,15%)inorderto
exerciserightoffirstrefusal
oncompanyissues
RightterminatesonQPO
Mustholdminimum
numberofpreferredshares
(e.g.,25%)inorderto
exerciserightoffirstrefusal
oncompanyissues
Rightterminatesoninitial
publicoffering(“IPO”)
Aqualifiedpublicoffering(or“QPO”)isgenerallydefinedasaninitialpublicofferingwhich
(1)is
firmlyunderwritten,
(2)mustraiseaspecificamountofmoneyand(3)willbeatacertainminimumprice
(e.g.,threetimestheconversionpriceofthepreferredstock).
LiquidationPreference
Thebasicideabehindtheliquidationpreferenceisthattheholderofpreferred
shares,uponaliquidation,dissolution,orsaleofthecompany,mustbepaidsome
stipulatedamountpriortothedistributionofanyproceedstothecommonshareholders.
Liquidationisusuallydefinedtoincludeaconsolidationormergerinwhichthe
company’sshareholderswillholdlessthanamajorityofthesurvivingentity’ssharesora
saleofsubstantiallyallofthecompany’sassets.Aconventionalliquidationpreferenceis
considereda“single-dip”preference.Withaconventionalliquidationpreference,the
preferredstockholdermustchoosebetweenreceivingtheliquidationpreferenceor
convertingtocommonstockinordertoshareproratainthetotalproceeds.Forexample,
consideraSeriesAinvestmentofpreferredshares,representing50%ofthecompany,
soldtoinvestorsforatotalof$3million.Thepreferredshareshavealiquidation
preferenceequaltotheoriginalpricepaidforthoseshares,or$3million.Sometime
thereafterthecompanyisliquidatedfor$5million.Havingachoicebetweenreceiving
$3millionor50%of$5million,theSeriesAinvestorschoosetheformerandthe
commonshareholdersreceivetheremaining$2million.
Onecanseefromthisexamplethatthepreferredshareholdersreceivevalu
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