Emerging & High Growth Companies Presented by: Chad Bayne & - - PowerPoint PPT Presentation

Osler, Hoskin & Harcourt LLP

Presented by: Chad Bayne & Jamie Rosenblatt

Early Stage Term Sheets 101 for Emerging & High Growth Companies

Agenda

About Term Sheets 101

• Getting to a Term Sheet
• Structure of a Term Sheet
• Choosing an Investor
• Investor Red Flags
• Best Practices

Q&A Resources

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

About

Chad Bayne Partner @ Osler Jamie Rosenblatt Investor @ Golden

• Canada’s leading venture capital and emerging companies lawyer
• Co-Chair of Emerging Companies Group at Osler, Hoskin & Harcourt LLP
• Deals Include work w/ Hootsuite, Wealthsimple, Sensibill, Creative

Destruction Lab, and the Next 36/Next AI

• LL.B., Univ. of Ottawa, B.A.Sc. (Computer Engineering), Univ. of Waterloo
• Head of Biz Dev @ Avid Life
• Corp Lawyer @ Osler, Hoskin & Harcourt LLP
• Corp Dev @ O'Leary Ventures
• JD/MBA, Univ. of Toronto, B.A. (Phil.), Univ. Western Ontario

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Golden Ventures

‐ Institutional Seed ‐ Highly concentrated ‐ Founder Empathy

Investing in extraordinary entrepreneurs building transformative businesses.

Investment Approach Focus

‐ Initial Cheque: $500,000 – $1.5M ‐ Reserve Ratio: 2:1 ‐ Typically Lead ‐ Sector &Business Model Agnostic ‐ Value Add / Network ‐ Disruptive/Frontier Tech

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Portfolio

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Term Sheets 101

Getting to a Term Sheet

As a founder…

• Network
• Build relationships early -- VC’s invest in lines, not dots
• Coffee chats, investor updates, etc.
• Prepare diligence materials
• Craft your narrative -- Invest the time to make the deck/pitch compelling
• Setup a data room w/ basic biz/legal materials (deck, financial model, cap table etc.)
• Define your parameters/expectations
• How much do you want to raise? What is the use of funds?
• What are you looking for in an investor?
• Do you match the stage/investment thesis of a potential investor?

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Getting to a Term Sheet

Red flags for investors…

• Cap Table Issues
• Inverted Cap Table (i.e., dead weight on the cap table -- avoid giving up too much, too soon)
• Reverse vesting for founders helps mitigate
• Team
• One person teams are very difficult to invest in (What happens to MRR when you get sick?)
• Conduct
• Misrepresenting Information: Protect your reputation above all else, assume everything you say will be

referenced (i.e., if you claim to have a term sheet from Investor X, assume we will be checking)

• Other
• Asking for an NDA: VC’s aren’t looking to steal your idea.

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Getting to a Term Sheet

Investment Process at the Seed Stage

*Note: Process changes significantly depending on financing stage.

• Evaluation Criteria
• VC’s are looking for a combination of team, market, product/traction
• Importance of market size, venture scale returns
• Process
• Networking / Screening  Meeting #1 (Associate/Principal)  Meeting #2 (Partner)  Diligence Q’s 

Meeting #3 (All Partners)  Decision  Term Sheet

• Diligence often involves customer calls, technical review, background checks
• Timing
• Varies. but 4 – 12 weeks (Closer to 6 months when relationship/company building included)
• Survey of 500 VC’s (Source): Average was ~40 days
• 80% were able to close <60 days
• 41% had closed in <30 days

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Getting to a Term Sheet

Golden Ventures Funnel

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

• A term sheet sets out the conditions of an investment. While not legally binding, it is the roadmap

for the final legal documents:

‘Think of it as a blueprint for your future relationship with your investor’ – Brad Feld

• Key provisions generally relate to issues of economics or control
• Terms are typically set/negotiated with your lead investor
• Negotiating the term sheet is an excellent chance to codify

alignment with your investors, and set expectations early

• Understanding what is, and is not, ‘market’ is crucial

Structure of a Term Sheet

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Economic Provisions

Valuation/Price

• Determinants: Stage, Investor Type, Investor Interest, Team, Traction, Economic Climate
• Function of dilution & ownership allocation (Venture Math and generating venture scale returns)
• Highest Price =/= Best Price; expect 20-35% dilution per round.

Founder Vesting

• Essential; Protects founders as much as investors
• 4-year vesting, 1 year cliff

Type of Security

• Priced: Pref Shares
• Non-Priced: SAFE/KISS/Convertible Note

Source: Capshare.io

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Economic Provisions

Option Pool:

• Contains the shares set aside by the company for hiring and retaining employees.
• Investors will often negotiate for a large option pool early; Avg. 10-15% (Capshare)

Liquidation Preference

• Sets out how are proceeds shared following a liquidity event (i.e. sale, acquisition)
• Preference: multiple of original investment returned to investors ahead of common shareholders (1x)
• Participation: full, capped, none

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Control Provisions

Board of directors

• Purpose: Set strategic direction for the company, keep management accountable.
• Composition: Founder(s), Lead Investor, Independent
• Early on a company should have a founder controlled board.

Protective Provisions Information/Inspection Rights Pro-Rata Rights

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Choosing an Investor

Qualities to look for

• Investors who look to add value early and often
• Pre-Term Sheet: Feedback, guidance, customer intro’s
• Post-Term Sheet: Syndicate composition
• Post-Investment: Strategy, recruiting
• Well Networked/Domain expertise/Fund Reserves

Setting Expectations

• Raising from a VC entails certain expectations around scale and speed of growth, make sure you are on

the same page early.

How to diligence

• Reference them w/ other founders, advisors, and existing portfolio companies

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Why it matters

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Investor Red Flags

• Non-Market Terms
• Terms may be unusual (i.e. warrants) or predatory (i.e., >1x liquidation preference)
• Low Value Add
• Unhelpful / Unresponsive
• References poorly
• Minimal diligence
• Investment History
• Failure by former investor’s to follow-on can create signaling risk (particular worry when raising from a

lifecycle VC)

• Strategic Investors
• May try and extract unfavourable business advantages (i.e. exclusivity)
• Can have a cooling effect on attracting additional investment

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Additional Thoughts

• Get good counsel, someone to watch your back and that will guide you through the

process

• Could be another founder, your lawyer, other investors etc.
• Over communicate and be transparent.
• Hiding an issue never makes it easier to solve
• Establish a trust and good communication habits (i.e. monthly reporting) early
• Building a great company is the goal.
• Fundraising/receiving a term sheet is simply the means to an end.

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Resources

Resources

Online

‐ Captable.io ‐ Capshare.com ‐ Venture Hacks ‐ AVC.com (Fred Wilson) ‐ Feld.com (Brad Feld) ‐ How Do Venture Capitalists Make Decisions? ‐ SAAS Funding Napkin ‐ The Twenty Minute VC

Offline

‐ Your VC ‐ Your Lawyer ‐ Brad Feld (or, if unavailable his book)

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES

Q&A

Thank You!

cbayne@osler.com jamie@goldenvp.com

EARLY STAGE TERM SHEETS 101 FOR EMERGING & HIGH GROWTH COMPANIES