Understanding Investor Term Sheets

There should be no surprises!

ENTREPRENEUR WORKSHOP:

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Agenda

• Introduction of DMZ – Hilary Green• Overview of Maple Leaf Angels – Hilary

Green• Participant Introductions• Participants goals for This Session• Introduction to Investor Term Sheets• Q & A

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Who Am I• I am Gerard Buckley

– Founder & CEO of Jaguar Capital an Advisory Practice for Growth Companies in Financial Management, Financial Structuring & Governance

– Chairperson of Board of Directors, Maple Leaf Angels Corporation & Investor in eight early stage companies

– Certified Corporate Director of the Institute of Corporate Directors

– Previously Entrepreneur in Residence with Incubes (An Internet Company Accelerator)

– Member of SME Committee of The Ontario Securities Commission

– Investment Committee of MSV University, Halifax, NS– 32 yr. Career with Scotia Capital as a Financial Risk

Management Advisor to Fortune 200 Companies: Rogers, Irving Group, Empire Co., Four Seasons, Bruce Power, OPG, Province of Ontario, Ford etc.

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An Introduction to Term sheets

• A Term Sheet is the basis of a legal agreement between an investor(s) and a company, outlining the terms and conditions of an investment into the target company– Agreement in principle– Non-binding (except non-disclosure and no-

shop clauses)– Commence negotiating early in due-diligence– Complex Term Sheets are seen as Founder

Unfriendly and will deter follow-on investment

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Goals• Hope for the best but plan for the worst• Protect downside risk while maximizing

upside potential• Forms the basis of a legal document• Aligns interests of founders with interests of

investors• Creates the rules to guide the company in

future follow on investment & M&A activity• Establishes corporate governance structure

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Critical Items

• What do you want the deal to look like?• Type of security to be issued• Valuation and amount to be invested• Voting and information rights• Board establishment and representation

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Types of Investment• Equity

– Common– Preferred

• Debt– Straight (Senior, Subordinated or Mezzanine)– Convertible

• Angel investments capture upside reward, therefore Equity or Convertible Debt are instruments used

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Seed Preferred Equity Structure

• Allows upside value capture• Introduces rights available only to

investors– Anti dilution– Investor board seats– Information rights– Redemption rights– Rights related to future investment rounds

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Seed Convertible Debenture Structure

• Allows investor upside value capture with the following typical terms:– Conversion into Series A preferred equity– Median conversion discount: 20%– Median interest: 5.5%– Median maturity: 18 months– Merger premium 2x– Secured against company IP– Often a cap set on valuation

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Seed Convertible Debenture Structure• Introduces rights available only to investors

– Pre-emptive rights on next Financing– No board Seat– Information rights– Right of first refusal– Rights related to future investment rounds– Conversion on exit before financing– Co-sale rights

• Benefits to founders and investors– Defers negotiation on valuation and many pref share

terms– Simplifies legals– Avoids Directors and Shareholders liability– Lender is a creditor, near front of line in a liquidation

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Aligning Interests between Investors & Founders• Identify key value drivers in the investment

– Product launch– IP strategy– Strategic partnerships– Sales targets

• Focus on two or three key metrics• Upon value creation event, management

can claw back a portion of equity if they have demonstrated superior execution

• Warrant structure

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Corporate Governance

• Goal is to achieve a balanced board from the start

• 5 person board minimum – 3 person boards do not work

• Expandable easily to 7– Current CEO– Founder representative– 2 Investor representatives– Independent

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Common Deal Terms• Requirement for a BOD Seat• Anti-Dilution Provision – Pre-Emptive Rights• Share Option Plan 10 – 15% of authorized shares• Drag Along Rights – a majority SHR• Tag Along Rights – a minority SHR• Postponement Agreements• Key officer insurance in addition to D & O• Price protection from a down round• Requirement to buy out investors after 5 years without an

exit• Observer Rights• Reporting Requirements

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Common Deal Terms• CD Valuation Cap• CD Discount to Qualified Financing 15 or 20%• Change of Control Provisions• Representations and Warrants• Covenants• Default provisions• Prepayment• Conversion at next round financing• Governing Law• Conversion on Sale or Optional Conversion• Who pays Legal Fees• Founder Stock Vesting

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Liquidity Preference

• Convertible Debenture – many objectives that include liquidity preference

• There is a lot of discussion around how liquidity preference should be given in a company liquidation vs. sale of company

• Warrant coverage is often and better way to ensure CD protection is given – Equity Kicker

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Unfriendly Terms to Founder(s) or Start-up

• No-Shop Clause• Investor’s Legal Expenses• Confidentiality Clause• Share Ownership• Non-Compete• Security and Covenants

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Financing Innovations – Y Combinator• SAFE (simple agreement for future equity)

Financing Documents is intended to replace convertible notes– Safe Primer– Safe: Cap, no Discount– Safe: Discount, no cap– Safe: Cap and Discount– Safe: MFN, no Cap, no Discount

• Features– Not a debt instrument - No Maturity Date – Standardization - No Security– No interest - It is not a loan– Reduced legal cost - Negotiate one item – Valuation

Cap

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Contact Information

Gerard Buckley, BBA, FICB, ICD.DPresident and CEO Jaguar Capital Inc.(C) 416-884-9522(W) 416-646-6789

g.buckley@jaguarcapital.ca

www.jaguarcapital.ca

Twitter: @jaguarcapital Twitter: @gerardbuckleySlideshare: Jaguar Capital