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WHAT TO LOOK FOR IN
1ST ROUND TERMS SHEETS
I: TYPES OF
TERM SHEETS
1. Vanilla:
Standard documents with terms and post-close capitalization table
Negotiate valuation, Board seats, visitation
rights, size, option pool, type of liquidation preference, special class or
series vote, co-sale rights and payment of legal fees
2. Company
Generated: Pre-empt
family and friends. Equals
company offer with little negotiation. Should
be balanced, full rights as series A to step up in the next round. In small rounds leave out preference and Board seats.
- Investor
Generated: Investors peg value
they will accept, usually requires Board seats.
II: INVESTOR ISSUES
1.
Valuation
- Must
leave incentive for the founders, and room for ISO Plan
- Strategic
investors in same rounds as Angels won’t drive up the value.
- Angels
seeking same return as mid-tier VCs.
First tier VCs seek higher returns creating a
- niche
for angels.
2. Stock
Option Pool/Founder Incentives
§
In the range of 15~25%, Angels typically
want larger pool for issuance as directors, advisors to the Company
§
The Pool is usually less in later stages
§
Typically investor equity percentage is set
on a fully diluted basis with pool already adjusted.
Not unusual for Company and investors to split the dilution.
3. Directors/Advisors
- Lead
Angels for professional angel groups are more involved as
directors/advisors
- Lead
Angels usually demand more shares/options for the additional work (read:
potential conflict)
- Standard
is 1% as director and based on a formula as advisor/consultant (example:
shares per hour, based on Preferred Stock Price)
- Management
should welcome the expertise, but concerned with dilution.
4. Board
Representation
- Professional
angles typically insist on 1-2 seats in a five-member board.
If it takes two seats, Management will want one to resign on
the next round.
- Other
angels may want visitation
rights
5. Other
Investors in the Same Round
- More
investors spread the responsibility.
- A
strategic investor is usually OK id it does not corner the market
(usually OK with 10~15%). It
validates the market, and reduces the need for cash, or provides
critical technology.
- There
is usually a battle between Angels and VCs in the same round in terms of
control.
REFERENCE
InvestorWords
This easy-to-use, comprehensive financial glossary is a must-have for investors,
from neophyte to expert.
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