How To Find A Venture Capital Investor and Negotiate a Term Sheet | John Colley | Skillshare

How To Find A Venture Capital Investor and Negotiate a Term Sheet

John Colley, Digital Entrepreneurship jbdcolley.com

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20 Lessons (2h 4m)
    • 1. Course Introduction - And Why This Course Is For You!

      3:50
    • 2. Can You Find Me The Right Investor?

      17:48
    • 3. Where do VCs Source their Deals?

      3:10
    • 4. How do you find Angel Investors?

      3:52
    • 5. How to Find Venture Capital Investors?

      2:13
    • 6. How to Find a Venture Capital Investor for your Technology Startup

      10:17
    • 7. The Investment Process

      5:16
    • 8. How to Manage Your Investment Process

      4:07
    • 9. What is a Term Sheet Part 1

      8:26
    • 10. What is a Term Sheet Part 2

      11:08
    • 11. Key Concepts in Term Sheets

      9:37
    • 12. What is a Term Sheet Trying to Achieve?

      9:35
    • 13. Key Components of VC Term Sheets 1 - 5

      4:10
    • 14. Key Terms in Venture Capital Term Sheets 6 - 10

      4:12
    • 15. 26 Key Components of VC Term Sheets 11 - 15

      4:27
    • 16. 26 Key Terms in VC Term Sheets 16 - 20

      4:25
    • 17. 26 Key Terms of VC Term Sheets 21 - 26

      5:38
    • 18. Negotiating Venture Capital Investment Entrepreneur’s Perspective

      4:07
    • 19. Negotiating Venture Capital Investment VC’s Perspective

      5:48
    • 20. Negotiating Venture Capital Investment Mutual Issues

      2:00

About This Class

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Finding Venture Capital Investors is hard enough but then you have to negotiate your Term Sheet with them.  This course is designed to help you to address both issues. 

In over 30 years of investment banking, I have worked on dozens of capital raising mandates, successfully taking early stage businesses through this process.

Everyday entrepreneurs negotiate with investors. The problem is that the entrepreneurs are often novices but the investors are hardened professionals and in the negotiation that follows, they win most of the key points. Its time to level this playing field up and help entrepreneurs like you strike a better deal!

In this course you will discover:

  • How to find the right VC or Angel Investor
  • Where VC's source their deals
  • How the investment process works and how to manage it
  • What exactly is a Term Sheet?
  • The key concepts in Term Sheets
  • What a Term Sheet is trying to achieve
  • 26 key details of Term Sheets - Step by Step
  • How to negotiate the Term Sheet - from the Entrepreneur's perspective
  • How to negotiate the Term Sheet - from the VC's perspective 
  • How to negotiate the mutually important issues

Don't forget the course project which is to identify the key issues which are most important to your business. Create a check list to be ready for your negotiation!

Don't forget to follow me here on Skillshare to make sure that you get informed about all my new courses as soon as they are published!

I can't wait to get started with you!

See you in the course!

Best regards

John

**********

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Transcripts

1. Course Introduction - And Why This Course Is For You!: Hello and welcome to this class. How to find a venture capital investor and negotiate a term sheet. My name is John Colley. I'm a 30 year senior investment banker. Andi, I'm delighted to have this opportunity to share with you some of my knowledge and experience. Now, before we get started, don't forget to click on the follow button straight away to make sure you don't miss any off my skill share courses. Now this Kearse's aimed at entrepreneurs, CEOs, business students. In fact, anybody who is in business on who thinks or who wants to raise capital from outside investors because everything you're gonna learn in this course applies to whether you're dealing with friends and family, angels, venture capitalists or even later, down the road private equity investors. So it's going to be good for everybody because the core principles are valid. Now, every day, entrepreneurs are negotiating with investors on the big problem with a lot of these negotiations is that the entrepreneurs are novices. And of course, the investors have done this time and time again, and they are hardened professionals on my goal in this course is start 11 up that playing field a little bit in your favor. Now, this course is good for all levels of students. There really is something in it for everybody. But don't be afraid. If you're completely new to the topic, I want to achieve two things in the course. First of all, I want to help you at least get an initial understanding about how you can go about finding angels and venture capital investors. But much more importantly, I want you to discover the contents, the structure and the importance off term sheets because these effectively set the deal that you're gonna negotiate with your investors. They are a critical document in the investment process. Now I've seen invest in entrepreneurs, go into meetings with investors without a clue about what a term sheet is on. They get presented with this, and then they sort of turned to their advisers or their lawyers or their message back advisers or their their board. If they haven't got the advice, is with them and sort of shrug their shoulders and say, Well, you know what's important here, What do we do on they actually then get taken to the cleaners by the investors, and I don't want that to be you. Now, at the end of this class, you will understand the 26 key issues to be addressed in a term sheet. Now, I know there will be others because every term sheet is unique. But if you get the grasp of this course structure, then you're going a long way to mastering the essence of what a term sheets all about. I'm also gonna help you to understand the negotiating position off both sides, and that will make you much stronger in presenting your case when you're arguing with the investors. Forewarned. After all, it's four armed now in the class assignment. I want you to take an outline, turn cheat on, bring your business to it. Don't create a draft, but go through the key steps that we cover in the course and identifies the issues which are important to your business. By the end of this class, you'll have an idea about at least an initial idea about finding investors, and you'll also understand what a term sheet looks like. And it's core calm content. Now we've got lots to cover in this course. I'm really excited about it. I know you're going to get a lot from it. So come on, let's jump in and get started. I cannot wait to share this with you. How to find a venture capital investor and negotiate a term sheet. And you've got me to do it with you. And I really look forward to working with you. 2. Can You Find Me The Right Investor?: Hello. I'm John Colley. I'm the six minute Strategist. Can you find me the right investor? I was asked this question the other day by a perspective client who is looking to raise capital from venture capitalists for his growing business. Andi He was nervous about engaging with on intermediary because all he wanted to do was speak to people who had investors up their sleeve who they knew would want to invest in his business. So he wanted to short cut the whole process and come up with a very simple and easy solution. Well, I've prepared this presentation because I don't think that is possible. You might get lucky on meet somebody who has got such an investor. But in nearly 20 years off working in this business, I haven't met something like that yet. So I want to take you through today, this presentation, which will help to explain to you the complexities off the process on why it's so difficult to find investors. But hopefully we'll give you some encouragement that by taking a systematic approach, investors can be found on deals can be done. So let's get on with the presentation. This is not a dartboard process. You can't just know that the one investor is right for a business. You do actually have to be a lot more systematic about it and build a funnel. You need to feed in all the V, C s and P firms and all the criteria I'm going to go through with you in this presentation . And if you're lucky, a few potential investors drop out the bottom. Let's look at some crunch based statistics. This is a free online database off technology deals, and it gives you some idea of how big the market is and therefore how difficult it is to find the right investor. The Crunch based state based goes back to about 2000 Andi. It has got over 100,000 companies on it. Over 8000 financial organizations, 133,000 people, more than 4700 service providers, over 30,000 funding Ryan's and more than 7000 acquisitions. Now this is a global database, but predominantly it's a U. S and European database. So what do these funding rounds looked like? Well, there's over 6000 seed rounds, 2600 angel rounds over 6000 series A. You can see the stats on the screen, but over 9000 them have actually unattributed, so it's not as easy as that to pick out. You know, the various investors from the rounds and I should add. Although the crunch based databases an excellent database, the search functions on it are not very sophisticated, says quite difficult to do very detailed laser dyke searches to try to find individual investors can't see the wood for the trees. Well, this is what I want to try to help you understand the process you need to go to and the family you need to build in order to find investors. Let's start by looking at the various different types investors you might address. And obviously you can start with the existing founders and the management because they may put some more money and you've got friends and family and high net worth. Individuals and those that sort tend to be the people who fund angel rounds and seed rounds . You can always look to your existing shareholders if you know whoever they may be. But if you go outside then for new investors, you're really talking about family offices, venture capital and private equity. Now the whole issue about sector is a very complex one because each of these investors have their own sector preferences. I thought about giving another slide, which just shows you the text sub sectors and there are as many different text sub sectors as you see for sectors here. So narrowing down the areas that funds want to invest in is actually quite difficult, and this is for two reasons. Firstly, they'll be quite broad on their website and you'll see why later in the presentation. But secondly, at any particular time they'll be a little subsector that they really want to invest in because they think as a result of some internal research they've done or paper they've written also meetings. They've been to that. It's it's an area they want Teoh place a bet in. So it's a very complex question, this area of sector and you can't just pull it off any your website. The question of stages came up when you saw the crunch crunch based database and you need to differentiate here essentially between venture capital BC's on private equity, which peas and you can see that the venture firms are largely earlier stage investors for growth companies, it was to take them through the life cycle to an I. P O. Private equity is Maura about dealing with established businesses, and you can see the list of terms on the on the screen on day are looking to do different types of deals with in a more mature business environment, and on the whole, they tend to operate in the larger deal sizes. So when you were trying to identify an investor, you need to be very clear which markets he's playing in. So what round do you doing? And I think it's worth saying that if you're looking for VC money and this is true of the UK, it's much less true of the U. S. If you're looking for VC money and you don't have a £1,000,000 in revenues, then you really need to go look in the angel on high net worth market. But you need to address the type of round you're doing to the type of investor you're looking for. What about deal size then? Well, for any particular institution, this will be a factor of their fun size, and if you want a rule of thumb. Look at the size of the fund and divided by 20 and that'll give you the sweet spot of where they like to invest. And this is true for pounds or dollars. I break it down into six different categories. You can split it. How you like, but essentially under 100,000 is a seed round or very early stage. Round under 500,000 is really an angel. Round between that and two million is Siri's. A. The below 10 million Siri's be on. Actually, once you get above 10 million, you're really into the overlap with private equity, although you do get particularly in the US rather than the UK some very large Siri's de any rounds done by venture capitalists, which could be hundreds of millions of dollars. So what risks are they looking to take? And you need to understand this in relation to your own business, because venture capitalists do draw the line quite specifically. If you've only got a prototype and you're asking them to invest in that, then you don't even have a working product, and you need to get your your business to the product stage and then investors of that stage are investing in whether your product works. The next stage after that is whether you can actually find any customers for your product. And if you can find more than one customer, that means there might be a market for your product. Once you've got a number of different customers, then it's about scaling your business and whether you can actually scale it up to address that market demand that you've identified in the previous phase. And then finally, it's about expansion capital to try to grow the business out once you proved you can scale it Now, Basie's tend to want to invest in the latter stages of this process, not in the earlier stages of this process. So you do need to understand what sort of risk you're asking them to take. Geography, as ever, is an issue. First of all, many funds have limitations on what do geographic areas or indeed, regions they can invest in. The location of your business is important because you need to have some sort of proximity to your investors on the rule of thumb here. Is that the earliest stage deal, the close of the investors like to be. And then finally, there will be geographic preferences on markets. So, for instance, although fun may be able to invest in the European market, they may be feeling that because of the problems in Greece, they don't want to invest in the Greek markets. So you need to understand the geographic implications off your invest in your company and your own potential investors. Look at the investor's portfolio. Does your company fit with sorts of businesses they've invested in? And very importantly, does it compete with any of the businesses they've already invested in? Because if you go and show all your brilliant business plan to an NBC, they may be genuinely interested. Or indeed, they may be on a fact finding mission for one of the existing companies. So look very carefully at the portfolio, and this is a very important screening step that is often missed. So one of the B C specific odds in a particular year a V C will typically look at around 500 deals, and they might invest in five. So that gives you, at best, a 1% chance of getting invested by any particular BC and part of the skill and part of the the value that I think we bring to the whole table is the ability to understand all these complexities and try to improve those odds. And, in the justice importantly, when you're were completely wasting your time to cut your losses quickly and not waste often time talking to a VC who at the end of the day is never going to invest in here. So let's look at some investment criteria that they apply, and this is still fairly broad brush, but it is worth looking at first of all, the the financial development. Your business is a very good indicator as to whether a B C will look at you. Are you pre or post revenue? If your pre revenue the answer is almost certainly no have you yet reached carry cash flow break even? And are you profitable? And, of course, is it is a different step between those two. Are you looking for a single investor? Do they have a preference to be the sole institution investor or because they like investing with either another group of experts in your sector? Or they've got some some limits on their firepower are you looking to put a syndicate together? B. C's will have minimum deal sizes below there, which they won't go, and they'll also have maximum deal sizes, but which they won't go on. We've talked in the earlier slide about this sweet spots that mestas like. Are you asking them to take a minority position, or are you prepared to concede a majority of the equity to the investor again? Very broad rule of thumb that veces will often take minority positions. Private equity firms will seldom take minority positions and prefer majority positions. Look very carefully at their investment style. Are they very hands on? Do they interfere it on a day to day basis? Do they bring lots of good networking contacts to the table? Ah, good way to check this out is to ask to speak to some of their existing investing companies . But this is a two way street. Their stars got to suit your culture and you've got to suit their their investment style on . The whole issue of board seats isn't very controversial, but you do need to be aware that a VC is very almost certainly going to insist on a board seat on def. You gotta syndicate. Then you need to try to have one representative to take that that board seat rather than suddenly grow your your board from five people to perhaps, you know, 10 or 15. Let's look at some specific deal criteria and these appoints you need to put across to the investors when you're marketing them the deal, you know, And I mean, you can read the screen as well as I can, and understand that this is all about how you position your business, what it can achieve, how it's going to compete against the opposition, how you're gonna exit what sort of returns you're gonna make for investors. So deal criteria need to be thought through. And if you can't take nearly all of the boxes for the investors, they will use the same criteria as a good excuse to screen you out. Because, as you've seen already, if they're looking at 500 deals on, they're trying to do five. They're looking for reasons to put your deal off the table and into the bin. If it doesn't fit very closely with the criteria there looking for this can be a very time consuming exercise, first of all, going using all the criteria we've been discussing. We need to identify the investors, approached them and get a meeting with them. And ideally, with that meeting, you want to be talking to a senior member general partner off the investing firm, not just a junior analyst. Once they met with you, they'll have an internal discussions of the review, the investment internally, and they may do some informal due diligence on the customers, the market, your proposition from the competition. They may well ask you for further information on def. That's all satisfactory. Then you can expect to be issued with a term sheet, which will then have to negotiate. Once that's agreed, you could go through formal due diligence, which will again get a conditional internal approval from the B. C on the documentation relating to the sale. The investment agreement on the shelled agreement about how the whole thing is gonna be managed on once all that's agreed. Then they'll give you formal approval and you can close the transaction. See, as you can see, it's a what I've gone through it very quickly. It's a very involved and complex process. Let's look at some of the documentation you'll need to prepare and toe have in hand. In terms of actually approaching the investors, there are three core areas. One is the elevator pictures. Usual two minute, very pithy, concise description of your business. A two page execs summary, which describes what your business does, which is the initial marketing document, and then a management presentation, which should take about 20 minutes in order to present the case at your first meeting. Behind that, you'll need a detailed business plan. You'll need a detailed financial plan. You'll need to have to handle the management information that you run the business with. Aziz. Well, as although market research that you've put together to back up your business and financial plan on then all the Judi logins materials that the investors want to see A so they go through the documentation process towards close. So what about the term sheet, where there are three areas to focus on on the term sheet on? This is again very important because the criteria that investors will insist on may be unacceptable to you, but you can split them down into the 33 areas and the two first to one's a key, the economic conditions around, who gets what the control conditions about, who could do what to whom, and then there's a Siris of other conditions. But be well aware that you're gonna be presented with quite a complex term sheet, particularly from BC's. You need to be aware of this concept of deal flow. The VECES will cast their nets as widely as they can because they want to see is many deals as they can. On Part of this is about you know what's hot on what's going on. It's also about being able to demonstrate to their investors that their screening very thoroughly lots of deals. But you don't want to be going into a meeting with a B C purely because he wants to see you as part of his deal flow. You need to be fairly convinced that he's serious about thinking serious about wanting to invest in your business before you actually start committing loads of time to him. Now, when you're putting all this this together and trying to decide who the right investors that are, be aware that you do have a range of conflicting interests around your own business clearly , between the founder's existing shareholders, your board of directors, other people in the management team, in your employees you'll all have different agendas. And then the new investors come from stage right, and they've got their own agenda, and you've got to fit that in somehow. So to sum it up, you really gotta kiss a lot of frogs before you can find the right investor. So let's get back to the first question. Can you find me the right investor? And my answer is, I'm sorry we don't have time for short cuts. They take too long. So I'm not an experiment of the dartboard throwing method I amon exponents of building a systematic funnel on working through that to screen out as aggressively as the VC screen you out to make sure that we do narrow down to a small group of potential investors who are likely to want to invest in your business. 3. Where do VCs Source their Deals?: I'd like to talk to you for a few minutes about where veces source their deals from now. There's a very good reason for this, and that is because it will help you to think about who you know and what routes you can devise to get warm introductions to these veces. The first of these are accelerators and incubators. Thes are organizations who basically bring together very early stage businesses and get them started on. Of course, that's fertile ground for BC's. Events are a great place to meet veces, particularly if they're startup or venture capital. Focus. So if you see something coming up in your area, it's definitely worth getting along to those on getting around and networking with us. Many BC's as you confined. In addition, top colleges and universities are great sources for entrepreneurs who maybe have an idea they've created a startup. Maybe they've got some very clever research or some sort of intellectual property, which they developed at the university as a as a professor rather than as a student, which can then be exploited. So if you have bean educated at university, it's worth checking back with your alma mater to find out whether they've got any particularly good contacts with venture capital. Large tech corporations are on the whole great sources of opportunity for BC's, because very often they spin off businesses that they don't want Teoh internally develop. So if you've got relationships with senior people in large tech firms, then they are very likely to have relationships with veces. And it's worth exploring that avenue. They obviously have their own proprietary neck work off entrepreneurs. But again, you can flip this around. If you know some entrepreneurs find out from them which feces they know, and they can make an introduction for you clearly industry leaders and experts when it depends what level you're at. But we don't all know all the industry leaders or experts, but they are our people. The BC's turn to for Ideas for Deals They Obviously, the veces obviously have their own network through their employees, their clients and partners. So maybe you know somebody junior V C. That's a way in. And, of course, they network amongst themselves. Other BC's seed funds Angels Angels groups, particularly if you're a B C. You want to a Siri's A, then you'll be looking quite closely at what angel groups and angels are investing in. You'll be looking at the sea funds and seeing what they're investing in to see whether there's anything coming out of there that you might want to invest in. So you need to look at this as a whole investing ecosystem and try and see where you can tap into it. And, of course, you can check out. You know how good your relationships are through linked in, but I talk about that later on in the course. So they were that where BC source their deals from And if you understand that, then you may be able to reverse engineer it in order to get your own warm introductions to venture capitalists. 4. How do you find Angel Investors?: I want to talk to you now about how you go about finding angel investors on without being too serious about it. Actually, the answer is with difficulty, because these are private, high net worth individuals, often very successful business people in their own right. Andi, part off their investment profile is basically they don't want to have one. They want to keep below the radar. They want to keep as anonymous as possible. Eso It can be very difficult. I also would add that you need to be prepared for them to ask for anything between for between 10 and 50% off the equity. But don't initially be put off by that. Let's concentrate on how you go about finding them. The obvious place to start if you're well connected is friends and family. Although bear in mind, it can be very difficult asking friends and family to invest money in your business when there's a very good chance they're going to lose. Every cent of it on that can cause all sorts of difficulties with your friends and family. So think hard before you do that. One of the places you can look, particularly if you've got a good network on LinkedIn is in your second degree connections I e. People who are known to somebody you already know and who can therefore give you a warm introduction. Now you may need to use the suggestions I'm gonna make in the next few slides in conjunction with one another and cross reference and check people. But bear in mind that that Lincoln is not really very free anymore. There's a lot of the facilities you've got to pay for by signing up as a member. But that's just a fact of life. Most things are becoming paper player pay to play now. Bear in mind. If people don't know you, it will be an issue. So getting a warm introduction is really important. One of the places where angels do hang out. But again, it's difficult to get The abductions is on Angel list, which is The link is shown on the screen. Angel dot Co andare a lot of angels on that you can follow them. You can try and engage with them, and you can also cross reference them with crunch base. And the link is also on the screen crunch based dot com because in crunch base. When they show deals and they show companies which which have had investment made into them , you can see the investors and you can see who those investors are. And if you go to those investors, you can also find out who they invest with and therefore the the web of people starts to grow so you can get one warm connection. You may be able to get several more connections to people they know and build your network from there. It's really helpful from a historical point of view to see what people like to invest in. So you want to try and find people who are comfortable investing in your sector, and subsector and crunch base will give you a lot of that information. Now, don't forget that there are a lot of angel investor groups around where people have come together, toe work together to do co investments. The best suggestion I have is to basically Google angel investor groups and and try and find the ones which are closest to you. Geographically. You can then make an approach to the group, and very often they run investor pitching events and evenings, and you can get yourself on the list and go along and make a pitch to them, and that's a good way to get into angels. There's also the Angel Capital Association, The links on the screen on That's a very good way to find Mawr Angel networks in the area that you live in. So there's some suggestions on how you go about finding angel investors. I can't be more prescriptive for that because it is so dependent on where you are and what your business 1000 the sector and subsector that urine. So the best I can do is give you a few pointers, as I've done in this lecture and wish you the very best of luck on your hunt for an angel investor. 5. How to Find Venture Capital Investors?: in this lecture. I want to help you with some resources that would enable you to find potential investors planter, venture capital investors, particularly for your business. So the question is, where can you look? And you can look quite a lot of places online, but I have to be clear. Many of these platforms are not free. So some of the reference I'm going to go to you, I'll pay to play. But I give you wanted Teoh lists and a few resources which are free and you can use without paying anything. The one I like the most, which has recently gone behind a paywall, is crunch base, and I've talked about it quite a lot in this course on the link to it is on the website. You can still do individual searches on crunch base, and I recommend you do that when you have names you want to investigate. But it's certainly an excellent resource. Angel List also is a good place to look. It does tend to be focused very much more, though on angels and individuals on then there are two other sites, pitchbook and CB insights. The links are there, both of which of those are pay to play. The National Venture Capital Association is the United States Form Forum, the United States trade body, if you like for venture capital on there is the link on the screen, and then you want the BBC A the British Venture Capital Association. But again, if you want to get lists of members, you actually have to buy them from those two particular resources. Now there's a couple of other resources which you could use, which will be helpful if you go to this link for Bogar lists. It actually gives you further lists, resources or blister venture capitalists, so you can actually use this to find quite along this, and it does give you both regional and sector specific. So it's not about place to make a start. Another useful free resources. My capital on the again. The link is here, and this is Ah, searchable directory, which you don't have to pay for over 3000 B. C's and angels, so I hope you'll find those resources helpful. I will try and see how many links I can get into the links section off this lecture, so they're easy to click on. But there's some places where you can go and hunt for venture capital investors 6. How to Find a Venture Capital Investor for your Technology Startup: Hello and welcome to another one of my videos today. I want to show you how easy it is to identify a potential investor for a technology company . That particularly when you're using the is okeyo ominous scope. Now, the objective in this case is a very simple one. I want to show you how I'm going to use the data I have on the ominous scope to identify potential investors for a particular technology business. Now, in the normal course of events, this is a bit like looking for a needle in a haystack because there are over 30,000 investors out there globally, there are over 66,000 technology companies. There have been over 114,000 rounds of investment on. There are over 168,000 investments made, and I have whittled this all down to over 100 and 58 over 850 categories. And all this data originates form, crunch base. But I've been doing quite a lot of work with it in spreadsheets and in the army scope in order to bring it into some sort of very usable and interactive format. So let us look at the criteria that is potentially involved. And actually it's not very difficult because if you're a particular company, then there are really a very few key criteria that you need in order to come up with your short list. The first of these, obviously the sector or the category that you operate in Andi with eight over 850 categories, you will probably cross over more than one of these, which just means that you can explore the data in order to find a group of potential investors. Because don't forget on Investor will not want to invest in a directly competing company, but you want to identify people who are interested in the area that you operate in. Secondly, geography is really important. Obviously, you are going to be located somewhere in the world, probably in a major city. London, New York, San Francisco Where ever happens to be Andi in particular? In the early stages, you will want tohave investors who are close by you or rather, the investors will want to be relatively close to you. So finding investors are in your area is a very good way to start, and clearly there are clusters of investors in San Francisco and Silicon Valley, obviously in Chicago, New York, Boston, London, etcetera. Berlin's a great hub. So there's There's a lot of potential to look for people who are local to you, and therefore you can cross over. But you will find that that particularly in the later stages, there are investors who are headquartered outside of your area, sometimes not even on the same continent. But they will still find your business very interesting and will want to put money into it on then. Finally, you've got the funding stage, and this can be very important. It's obviously critical whether you're at the angel stage, and the data I have predominantly does not work very well with angels. It's not really focused on angel investors. It's really venture and private equity funding upwards, so you might have the seed stage. Then you're looking at Syria's A through to B E, and whatever it is pre I p o. On trying to find the investors at the right stage, and you will find that some investors will cover more than one stage. They don't just invest in Serie B or Visa. The early stage guys who are investing in seed stuff may not go much beyond a But if a guy invests in a, the chances are he'll investor away through, certainly up to see and beyond. So that's the sort of investors you need to look at in terms of getting your funding stages right on. What I want to do now is take you over to the data in the on escape that I've put together and I'm gonna to work. A very simple example on that is I'm gonna look for a company which is into three D printing on. I'm assuming that my business is on. Therefore, I'm looking for investors and I'm going to say I'm in New York. I'm going to say I'm looking for a Series B investment. So let's go over to the on the scope now and I'll show you the data on I say how much data there is on, actually, how very easy it is to identify a short list of potential investors. So here we are, in the on the scope, and you can see in the top right hand corner. I have got four million, 215,000 records in this data set, which is about four times the number of records you can get into excel at any one time. Now, don't worry about the apparent duplication in this data set, because what I have done in order to create this data is combined. Aunt tagged a Siri's off different data sets on, brought them all together to make sure I've got maximum search ability when I want to run them. And you can see the complexity off what I put together. So don't don't be to put off by all this. The whole idea is to end up with a data set where you can really drill down and find the key data that you need very, very quickly. So let's now conduct our search. The first thing I want to do is I want to find businesses which are three d printing or involved in three Olympics, and I can do this 12 ways. I could put search all, or I could just go down to the category level one, which is the single category search functions. I'm just gonna put three D printing in here on day. You can see I've now got 1000 and 12 records from the 4.2 million straight away. The next thing I want to look at is New York City on. I'm going to go down and I want the city for the the company to be New York City. So I'm gonna come down to here, um, put in New York and now I have got just 102 companies. So here we can see that the companies that have had investment in the three D printing area are only four in number. But what's gonna be more interesting is who has made the investment. So if we come across and have a look at who's being doing the investment on what we need to do is to look at investor named Festival, So I sort that Andi, that needs to be looked at in combination with this column here, which is the funding round. But you can see that the names off the people who were involved are some well known ones. Andrius and Horowitz, Hewlett Packard Ventures, I lab accelerator index ventures, etcetera. So there's your short list straight off, but you want to look at also what? Who's been funding at what level on you can see from this that in the venture rounds we can go from a to D on. We can identify who the investors are there, but there's also seed grant debt financing rounds by other people. And we can also bear those in mind because some of those might be useful now one of two little things here. It's quite interesting to see that I Lab accelerator is based in Brisbane. Index ventures are based in Geneva. Textiles are based in Denver, Colorado. So you haven't got a complete match off investors from the city. But you've actually got a start here. And of course, you can look at other permutations off printing and three D printing and search for other category names. And of course, you can wide in the geographic area as well. Maybe have in New York State rather New York City, to see what is going to be helpful to you. So I'm going to get back to the presentation. I'm going to summarize the results we've got so you can see exactly what's come out on. Hopefully understand how easy it is when you've got the data in this shape and form to really start to identify some useful data from it very, very quickly. So just recap off the 4.2 million records I've got. When we put in three D printing, we got down to 1102 when we added New York City as the location for the investigative firm . We ended up with only 102 on. When we looked at how those investors broke out, there were three angel investors, one provider of debt finance, one provider of grants, four seed investors to Siri's, a three Siri's be three Serie C and five Siri's D on off those A to D. Some of them invested in multiple times so they actually are duplicated. But of course you can then start to play around with this. Geographically, you can play around with it. The funding stage. You can look at the location of investors rather than location of Comey's. There's lots of different ways of scanning this. The key thing is, the data is there, and it's very, very easy to search. Obviously, once you've got that data, you need to then start to look in more depth at those investors and you need to start to reach out and make contact with them and take the process on from there. But starting with a short list off, maybe 10 12 maybe even 20 from 30,000. And you know that they're interested in the the category of the sector that you're operating, you know that they're in the right sort geographic area. You know that we're inviting investing at the right funding stage, and you've got that information very, very quickly that I think, is incredibly powerful. So if you would like to discuss with me how you can get some help to find potential investors for your business than Semin, email technology investors add, send it to John at j. B d Cali dot com on Go, Let's get on Skype and have a chat to see how I can help you and how we can work together to help your business go forward. So that's it. How to find a technology investor. As you can see, if you've got the data and you've got something really smart, like the on the scope, you can go a long way forward very quickly toe identifying potential investors for your business 7. The Investment Process: I'm going to talk to you about the investment process that you are likely to go through when you've contacted to BC on. Do you want to actually engage with um, now? The first thing to say is that don't expect this toe happen overnight, as you'll see from the diagram they're going to run you through. This is a 2 to 3 month process, and you need to be aware of that. But if you understand the basic steps, then I think you'll find it much easier to deal with. I have to stress that this is only illustrative. Every investor will have its own process. They require more meetings or less meetings. They may do the due diligence in different ways. At different times. They may do reference cause in different ways at different times. So don't take this a set in stone, but it'll give you an idea of what's going to go on and give you an idea of the key steps that you're gonna have to go through in order to get an investment for the B C. And it starts off when they receive the pitch deck on there. Have a look at the picture check on. Take a view as to whether this is a business that they want to learn more about. On. This is one of the early screening processes where they probably get rid off about 80%. I should think it not mawr off the proposals that hit their desks because unless they screen ruthless like this, they would simply get overwhelmed by the number of proposals they typically received. You would hope that within a week, if they're interested, they would have got somebody, hopefully an investment partner, not a junior associate, to set up a call with you on that will typically be a sort of one on one call with the CEO . It's an opportunity for you to make your pitch, and if you can get to a management meeting where you could go face to face with them, so much the better, and you can make your 20 or so minute pitch to them. You can hear what they have to say in return, and then you can have your Q and A. And that's what a lot of the preparation for the management presentation really is all about. They will then typically review it Andi. Very often these firms have an investment committee. That investment committee probably meets once a week. And so whichever investment partner you met up with, will then report to the investment committee and recommend either go or no go. Is this something we want to go into a more detail, or is it not? I've given this seven days, but it just really depends on the timing off the next investment committee. Then, if they do, give it the go ahead, you're going tohave another meeting with them, and this time it's likely to be with the whole investor team on at this meeting, I would recommend if you can get more of your management team along, been just the CEO, then so much the better, because it's important that they get a chance to meet you all because at the end of the day they are investing in a management team. If that meeting is successful and now you've got some real momentum and some traction with them, then they are likely to ask you for a whole load off important documents. Now I haven't talked about N. D. A's, and I don't really want to bring it into the timetable because some investors won't sign NBA's and other investors will sign NBA's at different stages. So let's just leave the nd a question out of it for the moment and concentrate on the process. So at this point, they will be asking for a lot more data about your business. And they will be carrying out their own internal analysis and probably building a returns model and trying to evaluate for themselves what they're likely to be getting out off the deal. And in order to facilitate that and to deal with any questions or issues that may arise, they may well ask for further meetings with you and your management team so they can deal with any outstanding issues that they have. Once that is dealt with, then they're likely to issue you with a outline term sheet, which is going to have to be negotiated on. Getting this negotiated and 14 days is probably a little on the optimistic side. As soon as you get lawyers involved in the thing, everything takes a lot longer, but it's important to get it right and they will probably do some preliminary due diligence . Before they signed the term sheet, and they will probably want Teoh Teik references on you and your management team, at least the founders of the business. And they will probably want to take some customer references at this point as well. So you get your term sheet, agreed. That's great. And now we go into the heavy duty, legals and due diligence where they actually negotiate with you and you finalize the investment agreement on. They will also do their full technical, commercial and legal due diligence on you on. They will also want to talk to your investing. Existing investors on day will probably want to do further customer due diligence. And then finally, your sign, the Investment Investor agreement and you are done. So that is a step by step outline of what the process looks like. They say it is only illustrative, but it'll give you the framework you need to understand how this process works, so that's it for the investment process. I hope you found that helpful, and you can row reference this in your mind when you're actually in your own process and you'll have some idea of where you are on what you have to expect coming forward 8. How to Manage Your Investment Process: If you are running a complex investment process, then you need a couple of simple tools toe hand to make the process manageable. And that is what this video is all about. So what I've prepared for you is too simple spreadsheets and these air spreadsheets that I use every day all the time. One is a project management sheet. On the other is a cool this sheet. With the project management sheet on, there's a template attach for you to use. It's very simple. You can track which veces you are speaking to you so you can see all of them on one list on my normally start by ranking them all at one on. Then, as I'm screening them out, if they don't fit the criteria tall and I, I really don't want sort of a mature that they fit. Then they get ranked us five, and I normally make that five box red box. It stands out if I think they're hot to trot, and they're really interesting that I rank them as one people who are. I'm not sure about our two on. Then you've got three and four if you want to use them for other criteria. But essentially, you're looking at ones twos and fives. So what do I look at? Well, you start off with the rank, which we've talked about, then you record the date you last had contact with them. Their name, their company, their telephone number, their email, the project. Now I do this because in the next log you might be running more than one project. So, you know, you want to be able to search on the individual project on then the subject I use If I do have a particular subject that I've been talking to them about, that I can record it there. And then any comments about conversations can be updated, and I normally put a date in when that come. That comment was had so can end up with a little script of different at numbers on dates and comments in that field. The U R l for their company website there, cos address any other comments you want to make, um on. Then you've got progress. Have you sent them the one pager? Have you sent in the pinch tech? Maybe there's a newsletter to send them on. Then if they're interested to review the opportunity, whether you do a management call and then possibly a management meeting that you can take that on as the process gets mawr complicated. Andi suits you, but the last ones I normally put the from one page onwards. I normally put a date, which shows when they were sent the information, so you can see that at a glance on the call sheet. It's a lot simpler, but the whole purpose of this is toe log, every call and every email that you make to anybody regarding your deals. And again, I have attached a template on. Of course, if you want to, you can combine these sheets in one into one spreadsheet to make it easier to manage on these, and you'll recognize thes feels all for this course sheet. All I have is the date I made the call, the name of the person, the company, the number, their email, the projects subject of the email or comment on then the comment that you make, and I copy the email into the comment lock, stock and barrel. Now, of course, your recognize that those the data in the course she matches exactly the fields and the project sheets, so it makes it very easy to copy and paste between the two. When you make a call, you just go to the Project Sheet person. Copy that line, pop it into the core sheet, and then you can add the information about the call. It makes it much quicker. Don't forget in the call sheet. The date is the date of the call in the project management sheet. The date is the date of last contact, so you can see at a glance who you need to follow up on if you haven't spoken to somebody for a long time. So that's it. A little too simple spreadsheets to help you manage your investment process. I find this works for me very well. Is very simple to keep up to date, but you do record All the data on some of these core lists can be hundreds off rose. So it's really well worth being meticulous about this because then you contract back all your conversations with any particular investor, and you always know exactly where you are. 9. What is a Term Sheet Part 1: in this video. I'm going to talk to you about the basics off a term sheet, and I'm going to split this into actually two parts because there's quite a lot to cover. But to start off with, I just want to take you through the various sections of it, so you understand what you can expect in a term sheet. Now a term sheet basically provides you with an outline agreement, a heads of terms, a letter of intent, if you like, which sets out the structure or the proposed structure off the deal. They are going to strike with your investors. And this is really a road map for the lawyers to make sure they get all the terms correct in the investment agreement. So you negotiate the big points, and that should make it easier with her. There's always negotiation to be done should make it easier for the lawyers to do the drafting. And you should remember that at this stage this agreement is not a binding agreement. However, the confidentiality and the exclusivity terms in it are, and that's normally quite clearly spelled out. The idea is that you get your term sheet agreed on that will enable you then too put together structure negotiated and signed the investment agreement on. If it's a series a round, you may well need new articles of association as well. Now this is something which you do have to get lawyers involved in. This is not something you can do yourself, and none of this is meant to be legal advice. I'm just explaining to you the outline off the agreement. The first thing you're likely to see it relates to the price on the numbers off shares. And this is all to do with the valuation that's being put on the company on, therefore the basis on which the investors are making their investment. Now the terms pre money and post money valuation are going to be banded around. The pre money valuation is the price per share very often, including warrants and options before the investment is made on. Then, on that basis, the the investors make their investment on the total off the pre money valuation, plus the money they put in leads to the post money valuation. Now you can negotiate that the or they will try and negotiate that the investment is made on a fully diluted basis, which basically means that any outstanding options and warrants are basically priced into the shares held by existing investors. They will also almost certainly require you to provide a number of shares for the option pool, typically 10 to 20% before they make their investment. And that's it for exactly the same reason. So that you as the existing investor, the founders, the entrepreneurs, you take the dilution hit on the option pool on. They don't. So what are they investing, or what form will they make their investment in? Let's look at the investor's shares. They may simply invest in a class of shares, which is exactly the same as the shares you have. So they may go into the common stock or common equity or the ordinary shares. It's not unusual have over for them to. Even if it's common common stock, they may have a different class of share. So you may have common stock class A class because see, or a completely different class on name of shares all together. So it's quite usual for this to happen so that the investors can have different rights associated with those shares They have to remember that, of course, that investors that come after them will look back to see what they've done and will want to protect themselves over there. The initial You know, the initial Siri's investors so the whole thing can become quite complicated. So if you can keep your share classes as simple as possible, it will make life a lot easier in the future. They may, of course, want convertibles so effectively they have rights of debt on. They have priorities on the equity on any money in the event of a liquidation at which, but the convertibles can then combat toe orderly stopped in bear circumstances normally honor ah, liquidation events such as a unipolar or a trade sale. So if you have a new class of shares, one of the implications well, they will almost certainly require the revision off the articles and the sorts of things to look out for are these. The first of all is all about the liquidation preferences, and this is really the right to Capitol. In the event of a liquidation event on in liquidation event or those normally assumed to be a negative event. It can also be a positive in such as a trade sale on this basically says that they get their money back if it's a one times liquidation preference before out the other investors . Now, if there If it's a trade sale and they're just selling their shares, that's fine. But if there's a real problem and there's an under value, and not everybody's going to get their money back, this is protecting the investors who get first grabs on the money. So if it's a liquidation preference, one times they just get their original money back. If it's two times before anybody else gets any money, they get twice their money back. Now, these liquidation preferences can be participating or non. Participating on what that means is that if they're participating, not only do they get their money back one or two times, but they also then pro rata participating. Whatever is left or turns of it, that's nonparticipating. They have no further entitlement to any capital, so they get their money back on. Then the remaining shareholders split the balance of the proceeds. So you need to be very careful and think about how you can negotiate that on what's most appropriate for your business. Essentially, these liquidation preferences are there to provide downside protection for the investors. And investors in these agreements are always looking to protect their downside. Of course, if they do have a convertible or some sort of other class of share, they may well have a right to convert toward re shares any time on a 1 to 1 basis, in which case the liquidation preferences fall away. Let's talk about rights to dividends and distributions. Now they may have a preference, preferential rights, which means that they get a fixed dividend every year. And if that's not paid, then it may be cumulative, so it may roll up. So they get that attacked extra benefit. They may have redemption writes on their shares and enhance voting rights on their shares. All of this can be negotiating, negotiated and should be negotiated. But you have to decide what's gonna be most important. Typically, investors will look for board seats at least one per investor per round, and you've got to be quite careful on how you get the balance of your board right so you don't end up with a tide board. If there's a syndicate and investors. They may well have a right of one seat, but they may also have the right of observation. Having a new observer at the board, somebody who can participate in the meeting but can't actually vote you will almost certainly at this point have to reorganize your board so that you get the balance between the new investors, the existing investors on the founders, on the entrepreneurs. And again, this is something which is down to each individual company at its time. If there are bored fees to be paid to these people, then these should be spelled out in the term sheet and agreed. Now, typically, investors may come in at this in a Serie Zahra, Siri's B, and they will be a minority investor. But their classes of shares may well have what are called swamping rights, so that under certain certain circumstances, they get extra rights so that they can effectively control certain situations where effectively they will want a veto on anything fundamentally major to again to protect themselves. So although they have a minority equity position, they will have a majority voting position under certain circumstances. So that is part one off this video what is a term sheet and I'm going to go on explaining the key aspects of the term sheet in Part two. 10. What is a Term Sheet Part 2: in this video. I want to continue our discussion about what is a term sheet on the sorts of things we're gonna find in it and what they mean. So we're going to resume by looking at some of the positive undertakings that investors will want to be able to enforce Now, typically, these will be spelled out in detail in the investment agreement. It may be something that's come up in due diligence, and they specifically want to be rectified. But if there is something major than they may well spell it out in the term sheet itself. Now there are also consent matters, which are things that must not be done without the consent off the investor on these air. Normally material corporate actions such as increases in shares or an agreement to sell the company, or whatever it is that the investors will want tohave effectively control over. Now you may find in the term sheet that they simply refer to the customary consent right rather than detail ing the more out. If that is the case, it is worth. If you're not sure what these mean, asking your lawyer to explain them and then seeing between you and your attorney. Whether there's something in that that you're particularly uncomfortable with the sorts of things they will want to cover is changes to the capital structure. Any changes to board composition, any changes to borrowing limits, control over capital expenditure and hiring of key employees. So these are pretty fundamental milestones, and none of this is terribly unusual. The next thing they will include in the term sheet is what are called information rights, and this is basically saying, Look, we're investors, but we're shareholders. We want toe have a right to regular access to information which may, under other circumstances, only be available to the members of the board. So they will specify things like the annual accounts monthly management accounts, maybe a quarterly capitalization table statement. Regular access, probably monthly to bank statements on regular updates on views off the company's business plan. And again, you may find these referred to in the term sheet as customary information rights. If you're unsure what they mean, speak to your attorney and make sure you get clarification that you're happy with what's going to come be coming up. Let's talk about vesting because this could be a really contentious issue because what the investors may require is for that the fount for the founders to basically agree to re invest their equity. And this basically is an incentive to keep the founders focused on and on on exclusively spending their time on the company. And the vesting means is that the the right toe have the shares only a cruise over time to the founder. So even though they founded the company, they may be asked to basically start again and earn their shares back. Now if the founders leave early, shares could be brought back at a nominal price or indeed be converted toe worth the shares , and they actually lose their right. So this is a pretty hot potato, and there needs to be a pretty good reason why they want to put this in now. The shares confessed on either a cliff basis or just on a straight for the cliff basis. Me. It basically means that a large proportion or a proportion of them invest at a certain date , and thereafter they accrue on a monthly basis on. They may also tie the vesting process into the achievement off specific milestones. So if vesting is going to be an issue. You really do need to look at this very carefully. Let's look at some of the as the factors behind whether or not they will ask for vesting. If it's a relatively mature business, this is less likely to happen. If the business is already revenue generating, then it's very possible they may not be so keen. The investors may not be so keenness to ask for re investing equally there. Look at what founder investment has been made in the company today because if they found us heaven but any equity and it's all been sweat equity, they may actually asked for this. And, of course, if there's already bean in, invest around at the he, The founders may have really gone through one vesting process already and will be understandably reluctant to have to repeat the whole exercise for the next set of investors . So these are some of the things to look out for. Let's talk about good lever and bad, Liber, because basically what this is trying to do is to say that if you're a bad lever, if you leave under circumstances which may be your in breach of your contract or you get sacked or whatever it is, then it enables the compulsory transfer of your equity position away from U. S so that you don't disappear off with a whole trunk off the equity. And that is normally done for a very nominal amount of money. Now resignation depends very much on the circumstances, and those will be set out in the investment agreement. But basically, a being a bad lever means that you basically lose your equity position on unvested shares in that event that you do leave and you're badly they are automatically worth us. If again you see in the term sheet the term customer reliever provision, you should definitely get clarification on this and understand exactly what they're proposing and under what circumstances and speak to your lawyer and your attorney and take their advice. Let's talk now about anti dilution ratchets. These are in the event that there is a down round and a down round is when there is another round of investment. But it's done at a lower value to the previous one so that people are going to start suffering, dilution and what the investor will try to achieve is that they basically have their dilution mitigated by these anti dilution wretches by receiving additional shares at a nominal consideration on this will automatically then averaged amount to a lower price per share, so they don't feel they don't actually suffer any dilution. Now there are different ways off measuring this. You can have a full ratchet when basically, they get pound for pound dollar for dollar back on their their Their position is made good , but you can calculate a weighted average ratchet, and I won't go into the maths here. But basically, if I explained that this means that in the event it's a relatively small down round, then the impact will be averaged out on. It'll be less off a dilution they i e. The investors will get less shares than if it was a major round. Now these weighted average ratchets just to keep it more interesting, can be either narrow based, which means they just refer to the issued equity. Or they can be broad based, in which case they cover also the warrants and the outstanding options as well. On. There may be another rinky dink in this, which says that they may be paid to play, which means that the investor will only benefit from the anti dilution ratchet if they participate to their entitled level of entitlement in the round. In the down round, that's following. So there's quite a lot around anti devolution matches that you need to understand. And again, this is where your attorney and your sister are gonna end their money. Let's talk about drag and tag drag along, tag along on Let's first of all talk about drag. This basically means that when 50% or Mawr of the shareholders agree to sell, the shares shall sell the company they condone, drag the remaining shareholders to the table and force them to take the same price in the same terms i e. The minorities don't have a hold out against the majority to block the sale of the company , and this is something BC's definitely will want control Off. The other side of this is the tag along, which says that as a minority shareholder, if there is a sale, I will have the right to enforce the same terms for my shares as the majority so the majority won't be able to sell their shares on, then leave the new controller of the company arguing and offering unless a deal to the minority. There's one other circumstances which eyes camp can be quite complicated, and it does make me nervous when I see it. And that is what's called SCO sale rights on this is when some shareholders decide to sell a proportion off their shares, but not all of them to 1/3 investor. And if if the other investors have co sale rights, then they can ask for the same deal alongside, so they all get something off the table at that time. This can get quite complicated, and it can lead to a prevention of liquidity events. Prior debates it. So from that point of view, it may be a good thing, but it really does determine depend on the the the arrangements you have in your business on the investors you have in the business as well. Now let's just talk about the term sheet in terms of what's legally binding and what's not legally binding because at the top of the term sheet you will in certainly in the UK will see a term that says subject to contract but near the bottom of it, you will see a couple of paragraphs to say these paragraphs are legally binding and they relate to confidentiality, which basically says, You're not going to go and tell anybody else you're in negotiation. And secondly, exclusivity, which basically allows the investor toe have a period when he's just talking to you and nobody and you're not talking to anybody else so they can negotiate the whole investor agreement and they can do their due diligence. And when they're doing that, there will be spending money, and they want to have a window of opportunity to close that deal with you without having a competitive element. Turn up eso it will cover. The confidentiality will explain the terms of confidentiality on Did. You won't be able to talk about the deal that the deal terms or indeed the existence off the fact that a deal is being negotiated. So that's these important to understand that confidentiality and excerpts suitability are legally binding now it's often debated how long they should have for exclusivity on duty. Long period basically locks you up and stops you being able to do anything. If it's too short, they may not have time to get the deal done. Typical periods range from 2 to 6 weeks, so that's what you don't to is actually quite short, but 4 to 6 weeks is normal, and you might even go out as far as eight weeks. Sometimes you see break fees, which cover legal and other costs, but definitely get advice from your sinister your attorney before you agree to these. So these are the key points that you can expect to find in a term sheet on, I hope by giving you that framework, at least you got some idea off what's there and why. It's there, of course, at what you agree to is something which is entirely down to you and your legal advisers. 11. Key Concepts in Term Sheets: I want to use this lecture to reinforce some of the key concepts that you're going to find in your term sheet, and hopefully it will help these concepts to stick in your mind and you'll understand them better. The first of these is all about the valuation on the total amount off finance being provided, and this is typically represented by the pre money valuation on the postman evaluation. So the pre money valuation establishes the starting point for the value of the shares on the price of the shares at which the investors are going to make their investment. And, of course, the postman evaluation is a pre money valuation, plus the financing amount that is provided now. You're also when coming up with the valuation look at things like multiples of earnings trailing revenues, which is basically the revenues of the business in the previous period, up to the point off the investment. They'll also look and want to focus on the team's experience with size of the market and the growth off the growth prospects for the company. So these are the factors that will be raised, argued and defended when coming up with the valuation of the business, because when you're dealing with a on early stage business where there may be no earnings at all, it's very difficult to put a number on the value of the business. And if you do use ah, forward looking forecast, such as a discounted cash flow that, of course, is very heavily dependent on the assumptions made in the the future forecast. Going forward term sheets will spend quite a lot of time looking at the board and the management off the company on one thing in particular, which can be quite complicated. Is the allocation off board seats. Now Having a VC on your board is actually quite a good thing because they have a lot of experience not only off helping companies grow, but there have typically a lot of industry experience and contacts and networks, and they should bring some real value added, and you want to make sure they do real value added to your board. But of course, if you end up with a too big aboard or too unwieldy aboard, it gets very difficult. So typically at this point in the company's history, you may well have to reorganize the board so that some of the original founders actually step back from the board, freeing up seats for the investors to come onboard. And you may have to accept as a founder that you may at this point actually lose majority of control off the board. But that's just that something which will be particular to your deal and something you'll have to give serious consideration to do. Choose very carefully who you get on board as an investor. It is not all about the money. It is very much about the contribution they could make to your business on. Do you really want to have the best possible quality people on the board that you can? Couple of other tips? You should really try to have an odd number off people on your board so that when you put something to a vote, you're not constantly deadlocked on referring it back to the chairman. Another quite good thing to have on a board is on independent director or directors, people who are not founders, people who are not representatives off the investors and but who may still have a lot of industry and expertise and experience who can bring a lot of value to the board. But who will then be able to see both sides off the coin when any issue is being discussed in particularly its contentious now, liquidation preferences are all about how much money the investors get back when things go wrong, okay, and what they're looking to do from an investor point of view is to say, Well, look, I'm going to make 10 investments in this fund. I know that several of them are not going to do terribly well, and hopefully a few of them will do really well. But for the ones that don't do terribly well, I want to try to get back as much of my original investment as possible. On that is what the liquidation preference is designed to do now. Typically, they asked for one times liquidation preference, and they're trying to get for each dollar they put in there trying to get a dollar out, and that's before anybody else in the N. B. In a shareholders wise gets any money now. Sometimes you do see them asking for two times liquidation preferences, which means basically, for every dollar they put in, they get twice their money back, and there has to be a very good reason why you're prepared to concede this. Their preferences may be participating or non participating and what this means again. It's relatively simple. If they're nonparticipating, they get their their one times or two times money back, and they don't participate in any further distribution off what's left. If it's participating, not only do they get their one times or two times back, but they also get their program to share off the rest of the money as well. So you need to be aware of the differences there pretty well. One times is standard on anything else really needs to be looked at very hard. But again rely on your sisters and your attorneys on their experience in this regard. Now, voting rights and changes of control can be quite contentious, and the very often they're built into the term sheet agreement and they're built into the classes of stock on the structure off the equity, and that is often reflected in the articles of association. So typically, the common stock is held by the founders and the employees, the ordinary shares in the UK parlance, But the preferred stock maybe the kids a convertible. This a separate class of share is held by the investors, and those shares have different rights, which will give them voting rights. Vetoes, swamping, writes. Change your control rights. Drag along whatever it is, give them different rights to the ordinary shareholders, and you need to understand very clearly what is being proposed in this new class of share and how it compares to the common stock and therefore what you're giving up. So each class stock taking forward each stock class can actually have a separate Siri's. So if you have a serious a investor, he can have, you know, a serious a preferred stock. And then you can have a Series B preferred stock for the theme the next round of investors to come into the business. Of course, the Siri's be will look back to the Siri's A and try to make sure they protect themselves not only against the common but also against the Siri's A. And the best way to get around that is to try not to have separate Siri's, but to get them or going into one Siris in each stock class so you can see how quickly. Things could get very complicated if you have a whole Siri's off different rounds. So the preferred stock has its protect. Put protective provisions for the investor. But you must understand these because they can have very material impacts on the control off the business and on the rights that management have within the business. So definitely make sure you understand the differences between them now founder and employees vesting, which I will keep on talking about because it's such a contentious issue, basically protects the investors by ensuring that the founders basically have to earn their stock back. And there are different again clauses and details in these But one or two things to put out on Be Aware Off is that if you have a reverting writes, basically it means that from the company's point of view, if a key per person in the management is sacked, then the company has the right to basically repurchase their shares at very often a pretty nominal value to keep the equity back into the company. And so you need to be aware from a manager and from an entrepreneur or from a founder's perspective, exactly what you're surrendering here and decide with your turning your sister whether you're happy about it. Typically, you do get standing standard vesting terms. They may. That may be the clause you see in the term sheet, and if it is, you definitely want to make sure you understand what it's referring to now. There are sometimes capitalization changes prior to the investment, and these are not unusual. And they can be in everybody's interests, particularly if you've got a founder who's now no longer active in the business and still has a significant block of shares. You really want to bring these back in so that the people who are working in the business get the benefit on some passive and totally inactive original Founder doesn't hold on to a whole stack of value, which fundamentally he's walked away from and is not earning. So it's not unusual to see these equity stakes being bought back before Thean vestment is made, and that would be set out in the term sheet. So these are some of the key things which you should be looking out for. It is a complex process. It is a complex document. The whole idea of the term sheet is to make the investment agreement more simple and easy to understand. But nonetheless you need to make sure you get your term sheet right, because once that's agreed, it's very difficult to change it and to re negotiate things in the investment agreement afterwards. 12. What is a Term Sheet Trying to Achieve?: I want to talk to you about what a term sheet is trying to achieve, because it's important that you understand the objectives off both the investors on the entrepreneurs in the business on this will help you to get the right balance in any discussions about terms in your term sheet. They're typically three key areas in a term sheet, the air sections that refer to issues to do with the funding. Then there's the governance of the company afterwards. And then basically, there's what happens if things go badly wrong. And these are the conflicting areas that need to be resolved and agreed when you're putting a term sheet together and an investment. So let's talk, first of all, about the goals off the investor. The whole idea, from the investor's point of view, is that they want to maximize the proceeds. They're going to get out of the business when a it is finally sold and they realize their investment on. They typically do this by using convertible preferred shares, or indeed at using a separate class of shares, which give them different rights to the ordinary shares. And you have to bear in mind that I'm trying to give you an overview. But things differ in the way they're done on a technical basis in the UK and in Europe compared to how they done in the U. S. So there are quite significant what? That the principles are the same. But the detail of the execution does vary, so you need to just bear that in mind in your background. But clearly, from an investor's point of view, the whole idea is to put his money in and get the most money he can out now. The other side of that coin is that if things don't go as well as they hope, then the investors want to be able to protect their downside as much as possible. Andi have provisions in there which will actually give them mawr off. The downside exit, then, is exactly proportional to the equity that they hold, because in those scenarios it's very likely they actually won't be getting all their money back. So they're trying to get as much of their money back as possible to the expense off the other shareholders. Now they also want to have a degree off, say and control, even though very often they will have a minority position in the company so they don't want to be in a position where other investors can gang up against them on, undermined their position or dilute them or do things which fundamentally, they're not in agreement with on. Therefore, they have provisions in there which give them vetoes over certain corporate governance issues. Now they also want to be able to force again, even though they're in a minority position, a sale of the company at the point that suits them so that you may find a situation where the existing founders or other of shareholders actually want to keep going. But an office put on the table on the institution and best of the Serie Zale, the Serie B investor thinks Yes, I'll have that, thank you very much, cash in hand on They want tohave provisions in the investor agreement and therefore in the term sheet, which will enable them to do that. Another thing they were keen on is to make sure that the founders off the company and the key management are very much tied in to and focused on the business so they don't want them running any other ventures. They do want to try to make sure that maybe their shares have to re vest. Whatever the circumstances are. It will be a key objective off the investors to make sure that the founders and the key management are working extremely hard to make them lots of money and not getting diverted on to other projects. Let's take a look at the term sheet now, from the perspective off the entrepreneur, What are they trying to achieve? Well, of course, they're trying to get as much money raised without suffering too much dilution without giving up too much off the company on. Therefore, they're looking for us as high a pre money valuation as they can get away with, so that the share price is high. Therefore they be investors get less shares, and they suffer less dilution. They also want to balance get this balance off protections for the investor without giving up too much off the upside at the same time, so that if the investor is able to protect their downside, so they have a disproportional perfection for protection of the house, they they shouldn't be in a position where they get a disproportional upside so there's a balance in that in that term. So in return for getting on dilution or liquidation rights or whatever it is, then they are. The existing founders are trying to make sure that they get a fair crack off the upside for the risk they're taking against protecting the investors on the downside and by using nonparticipating preferred stock. Then what it basically says is that the investor can get their money back. Maybe it's one times occasion. It might be two or more times, but once they've got their money back, they don't participate any further in the proceeds from the liquidation off the business off course, they want to keep as much control. This investor is, after all, a minority investor. So they will be looking to negotiate down Ah, lot off these vetoes, And these control writes that the investors will be asking for. And this is something that as an entrepreneur, you should take advice from your attorney or your system from of course, they will want to protect their own individual positions because if they basically get sacked and bad lever provisions are applied against them, then they're going to lose their equity lose their investment and all their hard work. Putting this business together is going to be wasted. So looking for their own personal downside protections is going to be quite important to the entrepreneurs. The pound is the key managers in the business when the term sheets put together. Now, of course, that's the two sides of the coin. But the other part of this whole negotiation is you really want to end up with an agreement which aligns the interests of both parties so that they're not pulling against each other because they've got different incentives to get a different result. So you really want to try to align the founders in the key management with by giving them options on may be found to share so that they've got an upside from these warrants or options or whatever it is, which encourages them to really keep working hard on the business. The vetoes on the dragon long tag along are really there to try to make sure that nobody can force the sale of the company before really sufficient value is being created to give everybody a good return. So if you got one dissenting shelled and it may be the institution Shelda. He may have, ah, separate agenda. For some reason, you really want to try and have these checks and balances so that they can't actually do that to you now. The vesting schedule is designed to try to tie in the important founders and managers the companies so that they stay committed to the business. If they've got all their shares and they can walk away with them or they suddenly decide they want to exit, you know they want to try to force a set of the company early, then that may not be in all shareholders interests. So again, there is a purpose behind some of these mechanisms other than just on the face of it, looking like they're penalizing one party over the other. The whole purpose of the intellectual property assignment is to ensure that the founders the intellectual property, is in in the company. It's not in the hands of the founders, and therefore they are focused on the company. They're not focused on running their own agenda, and again, this is very important in terms of getting the alignment right now, don't forget, a term sheet is a negotiation If you get yourself for a situation whereby you're running out of cash and you only got one investor at the table, then clearly he's gonna have the upper hand in the negotiation. If you can put yourself in a position where you have multiple term sheets on the table and you can choose between them then as an entrepreneur, as a founder, as a management part of the management team, then clearly the the power the balance of power in the negotiation is going to be on your side of the table. But at the end of the day, my advice is generally speaking, not to get too greedy and to try to find an agreement where everybody feels they're happy with it. Because if you go into an agreement typically in the system of any agreement where one side feels they being penalized and haven't got sufficient value for themselves out of the agreement, you're gonna have a very unhappy relationship going forward. So those are that there's the points that I want you to really sort take on board because if you understand what the term sheets trying to achieve, hopefully you'll have a more objective view when it comes to the negotiation off the detail 13. Key Components of VC Term Sheets 1 - 5: in this video, we're going to take a look at the 1st 5 key terms off venture capital term sheets. The terms of going to look at are the type off share valuation and milestones, dividend rights, liquidation preferences and deemed liquidation and redemption type of share. Eventually, Capital Investor will normally only subscribe to a preferred class of shares. These are shares to which certain rights attached that are not shared with ordinary shares being held by the founders and others. French capital investors require these additional rights because in most cases they are investing much larger sums than the founders, whose investment usually takes the form of good ideas, time and a small amount of seed money on and at a much higher valuation, valuation and milestones. The venture capital investors will agree with the company on evaluation for the company prior to the new investment round. The pre money valuation. The pre money valuation is used to determine the price per share to be paid by investors on the completion off the new investment round the purchase price. Quite often, venture capital investors will not wish to make all of their investment on completion. Instead, they will invest in tranches, subject to various technical and or commercial targets. Milestones being met. The's milestones will be set out in the subscription agreement. Failure to meet a milestone does not automatically mean that the investors will not provide the additional money, but it may mean that they will seek to negotiate different terms for these amounts. Dividend rights. Venture capital investors often invest in early stage companies that are at an intense gross phase. The objective is to grow the business and its value and to realize a return on investment are oi typically targeting a multiple of the amounts invested on exit. In most cases, such companies should be reinvesting all profits without which a dividend cannot be paid to continue growing the company rather than paying dividends to shareholders. Sometimes there is a prohibition on the payment of any dividend, which may be for a limited period of time, liquidation preference and deemed liquidation. The liquidation preference is a right which can be required by venture capital investors in recognition of the risk they bear on their capital contribution. While there are many variations, the liquidation preference typically provides that in the event the company is liquidated or subject to a deemed liquidation. The preferred shareholders will receive a certain amount off the proceeds before any other shareholders. This preference amount may be equal to the amount of the preferred shareholders investment or a multiple of IT redemption. The right of redemption is the right to demand, under certain conditions that the company buys back its own shares from its investors at a fixed price. This right may be included to require a company to buy back its shares if there has not been an exit within a predetermined period. Failure to redeem shares when requested, might result in the investor's gaining improved rights, such as enhanced voting rights. So that's it for the 1st 5 terms in our key terms from bench Capital Term sheets. And in the next video, we're going to look at numbers 6 to 10. 14. Key Terms in Venture Capital Term Sheets 6 - 10: Now we're going to take a look at the next's five key terms in a venture capital term sheets that we're looking at. Number 6 to 10 on. We're going to cover conversion rights. Automatic conversion, off share class anti dilution Founder shares preemption rights on new share issues. So those are the next five points, which we're going to cover on. We're going to start with conversion rights Conversion mites Where venture capital investors hold a preferred class of shares and it is permitted to convert these two ordinary shares, they generally require the right to convert them at any time. That's an initial compression ratio of 1 to 1. Conversion is normally delayed until exit so that the investors are able to avoid losing rights attached to the preferred class of shares. Automatic conversion of share class. In most cases, investors will be required to convert all of their shares into ordinary shares prior to accompany listing its shares on a publicly traded exchange. Venture capital investors often require an automatic conversion mechanism for all share classes, effective immediate. Prior to an I PO investors will only want this conversion mechanism to work where I po is likely to provide a sufficient opportunity for them to dispose of their shares liquidity after the expiry of any lock up periods. Anti dilution Venture capital investors often require anti dilution protection rights to protect the value of their stake in the company if new shares are issued at evaluation, which is lower than that at which they originally invested a down round. This protection usually functions by applying a mathematical formula to calculate a number of new shares, which the investors will receive for no or minimal cost to offset the dilutive effect off the issue off cheaper shares. Founder shares founders and senior management are usually central to the decision of venture capital investors to put money into a company. Having decided to put money behind a management team they have confidence in, investors are usually keen to ensure that they remain in place to deliver their business plan. Therefore, it is often the case that founders and key managers and sometimes all shareholders and employees who leaves the company within a certain period of time are required to offer to sell their shares back to the company or to other shareholders. The price paid for the shares may depend on the circumstances of departure. It may be at market value if the founder stroke manager is deemed to be a good lever. Or it might be considerably less in the case of a bad lever, a bad lever, maybe someone who has breached his contract of employment. Or it may also be someone who resigns from the company within a particular period. The board often retains the right to determine whether to implement the bad lever provision preemption rights on new shares If the company makes any future share, Offering a venture capital investor will require the right to maintain at least it's percentage stake in the company by participating in the new offering up to the amount of its pro rata holding under the same terms and conditions as other participating investors. This pre emption right is automatically provided for by law in the UK and most continental European jurisdictions, although it can be waived. So those are numbers 6 to 10 in these key terms in venture capital term sheets. Andi. In the next video, we're going to look at numbers 11 to 15 15. 26 Key Components of VC Term Sheets 11 - 15: in this series of videos. We're looking at the 26 key terms off venture capital term sheets, and now we're going to take a look at numbers 11 to 15. These are number 11 the right of first Refusal cosa and tag along rights number 12 looks at drag along number 13. We discuss representation. Zand warranties on number 14. We're going to take a look at voting rights and then finally, for this video number 15 The Protective Provisions and Consent Rights I E. Class rights Right of First Refusal Co sale and tag along rights. These are contractual terms between shareholders, which are usually included in the articles of association. If one shareholder wishes to dispose of shares that is subject to a writer first refusal rof are it must first offer them to those other shareholders who have the benefit of the roo fr. There are usually certain exceptions to the R A f R, such as the right of individuals to transfer shares to close relatives on trust and investors to transfer shares freely to third parties, each other or within investors group the requirement to go through a rof. Our process may had several weeks to the timescale for selling shares. Drag along a drag along. Prevision, sometimes called bring along, creates an obligation on all shareholders of the company to sell their shares to a potential purchaser. If a certain percentage of the shareholders or of a specific class of shareholders vote to sell to that purchaser, often in early rounds, drag along rights can only be enforced with the consent of those holding. At least a majority of the shares held by investors, Thies writes, can be useful in the context of a sale where potential purchases will want to require 100% of the shares of the company in order to avoid having responsibilities to minority shareholders after the acquisition. Representation is and warranties venture capital investors expect appropriate representation. Zahn warranties to be provided by key founders and management Andi in jurisdictions where it is allowed the company. The primary purpose off the representation of warranties is to provide the investors with a complete and accurate understanding off the current condition of the company and its past history, so that the investors can evaluate the risks, are investing in the company prior to subscribing for its shares. The representation of warranties were typically cover areas such as the legal existence of the company, including all share capital. Details, the company's financial statements, the business plan assets in particular, intellectual property rights, liabilities, material contracts, employees and litigation. Voting rights. Venture capital investors will have certain consent and voting rights that attached to their class of shares. Preferred shares may have equivalent voting rights toe ordinary shares in a general meeting there. It is also possible that they may carry more than one vote per share under certain circumstances in jurisdictions where it is allowed protective provisions and consent rights . CLASS RIGHTS The venture capital investors in an investment round normally required that certain actions cannot be taken by the company without the consent of the holders off a majority or other specific percentage off their class or Siris of shares. Investor MAJORITY Sometimes these consent rights are split between consent oven investor majority consent off the investor directors or consent of the board. So that's it for numbers 11 to 15 on. We're going to continue this Siris in the next video. We're going to look at numbers 16 to 20 off these 26 key terms in venture capital term sheets 16. 26 Key Terms in VC Term Sheets 16 - 20: Now we're gonna take a look at the next five key terms off VC term sheets. Thes air number 16 to 20. These include at number 16 the Border directors or board observer. Then Number 17. We're going to look at information rights number 18 Exit 19 registration rights and finally , number 20. Confidentiality. Intellectual property assignment. Andi management Non compete agreements says quite a lot of cover here, and we'll get crack straight home with Number 16 Board of Directors Board Observer Venture capital Investors require that the company has an appropriate board of directors in accordance with what is regarded as UK corporate governance. Best practice investors usually prefer the board toe. Have a majority of non executive directors i e. Directors who are not employees of the company. Although a majority of the non executives may be impractical for small companies, it is usual. For such companies, Toe have at least one or two non executives. One or more off The non executive directors will be appointed by the investors under rights granted to them in the investment documentation information rights. In order for venture capital investors to monitor the conditions of their investment. It is essential that the company provides them with certain regular updates concerning its financial condition and budgets, as well as a general right to visit the company and examine its books and records. This sometimes includes direct access to the company's orders and bankers. The's contractually defined obligations typically include timely transmittal of audited annual financial statements, annual budgets and unaudited monthly and quarterly financial statements. Exit venture capital investors want to see a path from their investment in the company leading to an exit, most often in the form of a dispose of it shares following an I PO or by participating in a sale. Sometimes the threshold for the liquidity event or conversion will be a qualified exit. If used, it will mean that the liquidity event will only occur and conversion of preferred shares will only be compulsory if on AIPO falls within the definition off. A qualified exit registration rights registration rights are a U. S securities law concept that is alien to many European companies and investors. Such rights are needed because securities can only be offered for public sale in the US with certain exceptions if they have first being registered with the Securities and Exchange Commission SEC. The registration process involves the companies who shares to be offered, providing significant amounts of information about its operations and financial condition, which can be time consuming and costly confidentiality, intellectual property assignment and management. Non compete agreements. It is good practice for any company to have certain types of agreements in place with its employees. For technology startups, this generally includes confidentiality agreements to protect against loss of company trade secrets, know how, customer lists and other potentially sensitive information. Intellectual property assignment agreements to ensure that intellectual property developed by academic institutions or by employees before they were employed by the company will belong to the company and employment contracts or consultancy agreements, which will include provisions to ensure that all intellectual property developed by companies employees belongs to the company. So there we are. That's another five key terms from VC term sheets. I hope you're beginning to build a picture now off the sorts of things that veces find important when structuring the deals and why they put these clauses into the agreements 17. 26 Key Terms of VC Term Sheets 21 - 26: So now we come to the fifth and last video. In this short Siri's, we're going to look at 26 key terms, or BC term sheets, and these are numbers 21 to 26 of the last six. These terms cover employee share option plans, transaction and monitoring fees, confidentiality, exclusivity, enforceability and at number 26 conditions. Precedent. So let's go straight now, and we're gonna look at number 21. Employee share option plan. An employee share option plan. ESOP is a plan that reserves and allocates a percentage of the shares of the company for share option grants to current and future employees off the company and certain other individuals at the discretion off a management committee. The intention is to provide an incentive the employees by allowing them to share in the financial rewards resulting from the success of the company. Investors typically want 10 to 20% of the share capital of the company to be reserved in any stop creating an option pool transaction and monitoring fees. Venture capital investors. He usually paid a fee by the company to cover internal and external costs incurred in connection with the investment process. Some investors may require on an annual monitoring fee to compensate for the level of their involvement with the investing company, in addition to the usual compensation for travel and out of pocket expenses. With relation to the investment management confidentiality, all exchanges of confidential information between potential venture capital investors on the company need to be subject to a confidentiality agreement. This agreement should be executed as soon as discussions with the company about a potential investment begin. If this has not being done, then a confidentiality restriction should be included in the term sheet exclusivity. Once a term sheet is signed, venture capital investors will undertake various types of do diligence on the company any or all of technical, commercial, legal and financial. They will usually provide the company with a list of areas which they would like to cover, an information which they would like to receive. The process can take several weeks or even months on. The investors may also use third party advisers to a system with the process e g lawyers, accountants and consultants. This will involve expense on the investors will not want to discover that while they're incurring this expense, the company accepts investment from other investors to protect themselves, some investors will ask for an exclusivity period during which the company is prohibited from seeking investment from any third party. A breach of this obligation will result in the company and founders incurring a financial penalty. Enforceability, with the exception, of course, is dealing with confidentiality, transaction fees and exclusivity. The provision of a signed term sheet will not be intended to be legally binding. It should, however, be noted that in some continental European jurisdictions, there is an obligation to act in good faith when deciding not to proceed with an investment either at all, all on the terms set out in the in term sheet. If so, it might not be possible for the investors or the company toe walk away from or unilaterally seek to change the term sheet without a justifiable reason. Conditions precedent A full list of conditions to be satisfied before investment will be included in the term sheet. A venture capital investment will usually be conditional on not only the negotiation of definitive legal documents but the satisfactory completion of Judah logins and approval by the Investment committee off each of the venture capital investors satisfactory Completion of do diligence can include conclusion of commercial, scientific and intellectual property, due diligence, a review of current trading and forecasts, a review of existing and proposed management service contracts, a review of the company's financial history and current financial position. Either a full legal review or one targeted on specific areas. Andi if it is not already in place, obtaining key man insurance and satisfactory references and checks on key employees. So that concludes our review. Off the 26 key terms off B C term sheets. It's been quite a long Siri's. There are 26 key terms. You don't need to understand them in great detail, but you do need to be aware of their existence on understand why they have bean put on the sheet. And if there's anything in the term sheet that you're not happy with, then you should consult with your solicitor or attorney on. Have a discussion with the BC about it. But you need to understand these terms. And that's why I've created this list on this series of videos covering 26 key terms off B C term sheets 18. Negotiating Venture Capital Investment Entrepreneur’s Perspective: every fundraising experience with venture capital is a negotiation, and I want to take a look at some of the key issues which should be important to you as an entrepreneur. So don't forget, just because they put a term sheet on the table, it doesn't mean to say you can't go back and negotiated, and you need to understand the terms in the turn sheet. And you need to understand what your investment needs are because they will pitch the term sheet at you with their key investment criteria leading the agenda. So as a start up entrepreneur, what should you focus on? Firstly, you need to be very wary off the loss off management controls because the in the agreement you're gonna have a whole Siri's off voting rights, which they will basically have vetoes over. And it does mean that you're gonna have to be very careful about what you concede in this area. Some of the things you're not gonna be able to negotiate, but other things you are, and you need to turn to your advice is particularly your lawyers to make sure that these are kept in balance. Of course, you're also going to suffer a dilution of your management. Shareholding on this is partly a factor off the scale of investment, but it's also a factor off things like the valuation of the company, the size of the option pool, that sort of thing. So you need to understand completely what the pre money and post money cap table is going to look like. The good leave own Band lever provisions can leave you very exposed. Basically, it can give the company but led by the veces the ability to buy your stock off you in circumstances such as your termination of your employment, your retirement or your resignation. Now the board, but again led by the B C's, will happen. We will take the view as to whether you're a good lever or bad lever, but you need to be very careful about how the wording is drafted to ensure that you've got as many protections as you can. You'll want to know that after the deals concluded, the company has got adequate finance, so you're looking normally for at least in 18 months, runway off capital and that it's possible that there will be tranches put down. There will be milestones expected to be met, but you need to be clear that you're raising enough money and that the VCs are prepared to put enough money on the table to take you through to your next projected funding round. And don't forget you want to start raising for that funding round at least six months before you need the money. You'll also need to be aware of what security interests the veces air, taking over the assets of the company to protect their downside. So, for instance, if the company owns a large property, are they gonna have a first charge over that so that if anything happens, they'll get the proceeds from the property if the company has to be liquidated? So be very aware of what security interests are being taken. You'll need to be very careful about your understanding of the future capital requirements of the company. And what is that is likely to mean for the dilution off founder and management equity over time, Because every time there is a investment round, if you're not putting your money, your slice of the pie is getting smaller and smaller and smaller. There are on the upside, intangible and direct benefits off having BC involved and you need to explore and understand these on. These are typically the fact that they may have key industry contacts that they can bring to help you grow your business and get more customers on their ability to participate in future funding rounds, which is going to be very important to the business. So those are some of the issues that you need to be aware of when you're negotiating the heads of terms with the VECES to make sure that your interests as an entrepreneur are protected. 19. Negotiating Venture Capital Investment VC’s Perspective: when a venture capitalist puts the term sheet in front of you, he is putting a document forward that has got an agenda written into it that is really focused on his important criteria, and you need to understand what these are. Don't forget. Every negotiation has two sides running agendas against each other on the veces, particularly who experienced to doing lots and lots of deals will come at this with their own set off issues and concerns. First and foremost, the BC's will be keen to make sure that the current and projected valuation of the business is right. And for them, that probably means it's as low as they can negotiate it sensibly. But of course, don't forget that for every pound they reduce the value. There are also increasing their steak for the percentage given a fixed amount of investment , so it's in their interest to have a lower evaluation if they can get it. They'll also want to understand that the projected valuation is going to give them the return on investment that they want on delight to this, that it will be achieved. This exit value will be achieved in a time scale that fits the the objectives off their fund, and this is normally a 4 to 6 year time scout. They will be very concerned about the level of risks BC's Look at downside all the time, and most deal documents are written to protect the downside, because if it's all upside that takes care of itself, so they will be very sensitive about the level of associative, the level of risk associated with this investment. And at the same time they will be comparing the level of risk with their existing portfolio companies and as well with other opportunities that they're looking at. At the same time, their fund will have specific objectives and criteria, and your company has to meet these criteria because if it doesn't, then they won't invest in you. And some of these issues are around the amount that they want to invest, because if you've got a fund of 100 million, you want to be investing in charges of probably 5 to 10 million, not in chances of 500,000 because you'll never get the fund invested. The timing is important. When a fund is raise, the 1st 4 to 5 years are the period in which the fund is invested on DSO. They will want to know that they're investing at the right point in time for their fund and that your deal is going to get them in exit before the fund finishes at the normally at the end of 10 years. The investment they're making your company must also balance with other investments they've got on that. You want to make sure that they will be particularly sensitive to make sure that your company is not competing with any off their existing portfolio companies, because if it is, they simply won't invest. They'll be very sensitive about the financial modelling and the projected levels of return on investment on, they'll run lots of model simulations to see what happens if the assumptions you're making about the upside don't turn out on how sensitive the businesses to downside scenarios, so expect to have lots of questions in that regard. The liquidity of the investment is important. If everything goes wrong, are they going to get their money back? Are they going to be able to sell the either the assets, the intellectual property, whatever it is and recoup their investment? So that'll be a sensitivity one. The security interests on their exit strategies in the mental distress or failure are all tied up in this. So if the company has got assets, they're going to try and take charges over whatever physical assets can be got. They'll probably try and take charges or try and take rights over the intellectual property in the event off a business failure on that May may maybe invite by buying that ass out of the business or whatever, but you need to be aware that they will be looking to protect their downside with the business assets. It's all about downside protection. They will want to protect their ability on the upside to invest in future investment rounds so they will obviously want to maintain, if not increase, their interest in the company. If everything's going well, even if it means at a high evaluation, so they will want the right off first refusal in any new funding around at least to maintain their steak. They will also want registration rights in the event of an I P o. They will want to be able to ensure that all the shares are properly registered with the sec in automate the AIPO. Go ahead. This involves cost the disclosure of quite a lot of detailed financial and company information, And it also means ensuring that all shareholders agree to this. And there's not some blocking minority who stopped this happening because it will prevent an i. P o the S. I've already mentioned the right of first refusal fighting future funding. They will want to know that they can at least match their investment pro rata. So they maintain their holding in a future funding round so that if you do have another round and it's led by a different investor that you still have a right to go in and invest for their program to slice of the deal. So that is. Some of those are some of the aspects off a VC investment, which are important to BC's. They're the sorts of things they will be looking to negotiate with you when the term she's put on the table there looking to draw up an investment agreement, and you need to understand where they're coming from so that you're ready with your arguments to protect your interests. In that negotiation, 20. Negotiating Venture Capital Investment Mutual Issues: in any investment deal. They will be issues off mutual interest to both sides on Let's take a look of these. The first of them is thier retention off key members off the management team. U S. A leader off a startup team will want to know that your guys are going to stay for the duration, that they're sufficiently motivated and incentivized to do so on that 1/3 party investor coming in doesn't turn them all off when they all leave and from the manager appointed. From the investor's point of view, they'll want to know that the management team are in it for the whole trip because that's essentially who they are investing in. You will both need to look at the balance of experience on the competence of your management team, identify any key missing people on, then sure, that you align your interests on recruit for those missing roles. Secondly, however, the the investment is structured or however much money you raise, you will both have a mutual interest in the financial off the financial strength of the company after the investment, and this is to do with not taking on too much debt if It's purely an equity investment that sufficient money is being raised. To achieve that, mile stands that need to be achieved before you can either exit or reach the next funding stage. You'll also want to be aware, and I'm not a tax expert. I'm just flagging this up that there may well be tax ramifications off the proposed investment. You need to get your specialist advisers to understand these, to make sure you're not hit with a big tax bill or that the structure off the deal doesn't enable you to optimize your tax going forward. Enough said. On that, Just be aware that there are potential tax ramifications any deal, and you need to get specialist advice on that. So that's just a few points off mutual interest between you and the venture capitalist that you need to be aware of when you're negotiating a term sheet