Case 1 - Term Sheet Negotiations for Trendsetter Inc.
Group 3
Priyanshi Garg - PGP/23/102
Samyak Chaudhary - PGP/23/109
Abhishek Gautam - PGP/23/373
Avanish Nagar - PGP/23/381
Term Sheets
Integral part of the entrepreneurial process in the USA and abroad
Each day hundreds of term sheets are proposed and evaluated by entrepreneurs and
those who finance them
Many entrepreneurs are not well versed in term sheets
It is dangerous for an entrepreneur to assume that it will suffice if only his or her
lawyer understands the term sheet
Each entrepreneur should spend time studying term sheets before discussing his or
her own term sheet under pressure in real time
2
Comparison of Term Sheets
If you were advising the entrepreneurs at Trendsetter, and you would not change any of
the terms in either term sheet, which would you recommend?
What are some of the contextual elements of Trendsetter that you consider relevant
for the analysis of the two financing offers?
Typical case; Trendsetter needs capital upfront to develop software
Entrepreneurs have done quite well in creating interest among VCs; seven
presentations and six firms showed interest
Time is of the essence (six weeks of cash left)
3
Comparison of Term Sheets
How do the two term sheets compare?
Clearly there are a lot of issues to compare. How can one sensibly structure the
comparison into categories?
Valuation
Liquidation preference and Anti-dilution
Corporate Governance
Vesting and Employment
Comparison and Renegotiation
International Comparison
4
“Flags” in Term Sheets
Green Flags
Simple language
Little downside protection for investors
Plain vanilla convertible stock
Yellow Flags
Milestones (can lead to short-term optimizing)
Complicated terms
Language that requires negotiations later
“mutually agreeable”
“to be determined”
Restrictive terms regarding appointment of 5th director
Option pool comes out of founders’ shares
Potential conflict: VC may want to award options to newly hired employees
while entrepreneur may resist
5
“Flags” in Term Sheets … continued
Red Flags
Too many milestones
Lengthy exclusivity of term sheet
Complex due diligence procedures
Clauses / milestones that take control from founders
Mezzanine-style provisions in early found term sheets
Other key points
Personal chemistry and reputation can be more important than higher pre-
money valuation
Work with lawyers who have extensive experience
Ask for their VC list and deal list
Specific VC partner matters more than the VC Firm
Which VC partner will be on your board?
6
Differences in the Term Sheets
Alpha Better / Worse from the Mega
entrepreneur’s
perspective
Amount of Investment $5,000,000 = $5,000,000
Pre-Dollar Valuation $7,350,000 if meets hurdle depends $7,000,000
$6,650,000 if does not meet
hurdle
Employee Pool (# of 3,000,000 < 2,500,000
shares)
Implied owner value $4,200,000 if meets hurdle < $4,500,000
$3,800,000 if does not meet
hurdle
Escrow 501,253 shares Non
Issue Price $1.05 if meets hurdle $1.00
$0.95 if does not meet
hurdle
Dividend Noncumulative Cumulative
7.6% if meets hurdle 10%
8.4% if does not meet
hurdle 7
Number of Investors 2 VCs depends 1 VC
Differences in the Term Sheets - continued
Alpha Better / Worse from the Mega
entrepreneur’s
perspective
Liquidation Preference 3X depends 1.5X
1.25 in multiple
0.25 in dividend
Conversion Same =
Automatic Conversion Similar Higher Definition of a
Lower Definition of a Qualified
Qualified IPO ($5 / share; > IPO ($20 / share; total
total offering >=$15M) offering
>= $25M)
Type of Security to be Convertible preferred Convertible participating
issued stock preferred stock
Redemption Rights None > Series A share price plus
unpaid dividends
Anti-dilution Weighted average > Weighted average is sale
between 50% -100% of
price in Series A
Full ratcheted if less than
50%
Voting Rights Super Majority voting as > Super Majority voting as class
class in many specific in instances not specified
instances yet (closing docs)
8
Differences in the Term Sheets - continued
Alpha Better / Worse from the Mega
entrepreneur’s
perspective
Representations & Same =
Warranties
Nondisclosure Same =
Right for First Refusal Given to investors = Given to investors (called
pre-emptive)
Co-Sale Rights Given to investors (p4) < No rights
Information Rights For investors > $250K > For any investor
Board 5 Total < 5 Total
2 VCs 2 VCs
1 CEO 1 CEO
2 Co (1 choice, 1 board) 2 Co (1 choice, 1 board)
Note: last board seat goes
to VC if Co misses hurdle)
Compensation committee Controlled by VCs < None
9
Differences in the Term Sheets - continued
Alpha Better / Worse from the Mega
entrepreneur’s
perspective
Counsel and Expenses Investor choice of counsel - Counsel already chosen by
(but Trendsetter pays investors
<=$20K)
Indemnification Same =
Registration Rights Same -
(but for definition of
Qualified IPO)
Founders Vesting Same base -
Founders Acceleration 6 months acceleration in depends None
termination (to be negotiated as part of
Accelerated vesting employment contract)
(double trigger) in change of
control
Misc Termination 6 months salary if fired Depends None
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