Term Sheets & Valuations: A Line by Line Look at the Intricacies of Term Sheets & Valutions (Bigwig Briefs)

FIGURE 4 (2) Liquidation Preference: Investor Favorable: In the event of any liquidation or winding up of the Company, the holders of the Series [A] Preferred shall be entitled to receive in preference to the holders of the Common Stock a total liquidation amount equal to [three] times the Original Purchase Price per share plus any declared but unp

Often board members representing preferred stock or a majority of the shareholders of a class of preferred stock (the shares that venture investors typically purchase) will expect to give approval in the event that the company contemplates such actions as taking on debt above certain modest levels, say $250,000; making significant management hires;

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 th

To determine the pre-money valuation, one must examine the Post-Financing Capitalization section and multiply the total number of shares—excluding the number of New Securities Offered shares but including the number of options and warrants issued—by the Proposed Purchase Price Per Share noted in Figure 2. To ascertain the post-money valuation or To

2. Limitations to the Scope of a Syndicate Another red flag is investors who try to dissuade an entrepreneur from opening a round or increasing it in size in order to accommodate other interested VCs.

But it is wiser for entrepreneurs to seek funding which will last them 12 to 18 months in competitive financing environments. This does not mean that financing for this period of time need necessarily be secured in one payment up front.

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

However, the entrepreneur has to be careful to ensure that the manner and way in which revenue will be recognized is stipulated.

Figure 3 highlights the type of clauses that are likely to detail the economic effect that Dividend Provisions can have in increasing the value of preferred stock over time. Dividend provisions are one of the critical tools that allow VCs to protect their investment and to get out of an investment with at least some prospect of a return in the even