3. Milestones Milestones can be a reasonable approach to constructing a term sheet; they can also be a serious red flag.

The most Investor Favorable clause implements what is called a full ratchet, which means that the effective cost and ownership percentage in the company for the preferred investor who invested at a given price in a prior round adjusts so that the cost and ownership percentage to the old investor is as if that investor invested in the new round

The higher number of times the original purchase price at which an investor states he will be comfortable converting is really a way for the investor and the investor class to protect itself and to make sure that the IPO will generate liquidity of a certain multiple. It is difficult to generalize, but depending on the investor, investors are

In the event that a company is struggling to raise that round, existing investors who float a term sheet will do so under terms that are attractive when compared to prior rounds, called a down round, or represent a round at the same price as the prior round, called a flat round.

The Total Common Equivalent assumes that preferred stock and common as well as options and warrants are treated equally in valuing the company. This approach to valuing the company is factually accurate at the time of a financing but may not, when considering preferred stock, reflect the value of preferred stock if converted to common at some point

FIGURE 9 (8) Protective Provisions: Investor Favorable: The consent of the holders of at least two thirds of the Series [A] Preferred shall be required for any action that (i) alters or changes the rights, preferences, or privileges of the Series [A] Preferred; (ii) increases or decreases the authorized number of shares of Series [A] Preferred;

as more investors become involved, their expectations will need to be represented. The degree to which management is executing becomes increasingly under greater scrutiny by the investors.

FIGURE 14 (13) Right of First Refusal: Investor Favorable: The Investors shall have the right in the event the Company proposes to offer equity securities to any person (other than securities issued pursuant to employee benefit plans or acquisitions, in each case as approved by the Board of Directors, including the director elected by holders of

Essentially, founders see themselves getting diluted during each subsequent financing. Although dilution is a typical part of each subsequent round of financing, they sometimes want to be awarded options for their role as employees. If they do, the founders should be prepared to raise the bar and tie additional options awards to improved