Term Sheet Definitions PE条款清单.docx

Term Sheet Definitions PE条款清单.docx

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TermSheetDefinitionsPE条款清单

TermSheetDefinitions

􀀗gutsofthebusinessdeal

􀀗NOTa“legal”document

􀀗short（~5-8pages）

􀀗VCoffersitstemplate

TermSheetDefinitions

“PreferredStock”

“preferred”becauseit’sgotbetterrightsandprotectionsthancommonstock

􀀗exactdefinitionofpreferencesiskeyfocusofnegotiation（andthiscourse）

􀀗whatFoundersandEmployeesget

􀀗hasvotingrightsbutnotmuchelse

􀀗optionsandrestrictedstock

TermSheetDefinitions

“CommonStock”

􀀗“Pre-money”:

valuebeforefinancing

􀀗“Post-money”:

pre-moneyplusfinancing

Valuation

􀀗VCstakestatedaspercentageofpost-money:

􀀗“4on6”=

􀀗$6Mpre-moneywith$4Mround=

􀀗$10Mpost-money;VCsown40%ofthecompany

Control,Ownership&EconomicPower

􀀗5KeyTermstoNegotiate:

􀀗BoardofDirectors

􀀗Vesting

􀀗OptionPool

􀀗ParticipatingPreferredStock

􀀗Anti-DilutionProtection

Boardofdirectors（continued）

􀀗Notsubjecttopubliccompanyregulations

􀀗Pre-money--usuallyconsistsofemployeesonly

􀀗Post-money--amixofVCs,employees,outsiders

􀀗Compositionpost-money

Aimfor“2-2-1”?

Vesting

OptionPool

Percentageofcompany’stotalstockpost-moneythatwillbereservedforfuturehires

VC’spreferredstockisaddedintocalculationon“as-converted”basis（1:

1）initially

TypicalAround:

15-25%

Poolalwayscomesoutoffounders’,notVC’sshare

Typical“CapTable”post-money:

VC1

35%

Vc2

15%

total

50%

common

founder

35%

opinion

15%

total

50%

Haveyoualreadylosteffectivecontrol?

􀀗Poolisnecessity;don’tcheapout.

ParticipatingPreferred

1.“Liquidationpreference”:

VCsget100%oforiginalmoneybackbeforeCommongetsonepenny

􀀗2.Then,VCs“participatein”（take）proratashareofleftoverswithCommon

ParticipatingPreferred

􀀗Co.has$60pre-moneyvaluation

􀀗VCputsin$40

􀀗Co.has$100post-money

􀀗VCowns40%（4/10）

􀀗2yearslater,Co.soldfor$160...

􀀗$160proceeds

􀀗VCgets:

􀀗$40backrightoffthetop（investmentreturned）,plus

􀀗$48=40%of$120（VC’spercentageownershipofleftoverassets）

􀀗$88total（55%ofCo.value）

􀀗$160proceeds

􀀗Commongets:

􀀗$72=$160-$40-$48

􀀗$40=“VC’spreference”

􀀗$48=“VC’sparticipation”

􀀗$72total

􀀗45%ofCo.value,despite

􀀗60%ofCo.ownership

Anti-DilutionProtection

􀀗VC’sprotectionineventof“downround”sothatARoundinvestors’“conversionratio”isequaltosubsequentinvestors’.

2flavors:

“fullratchet”and“weightedaverage.”

􀀗FullRatchet:

draconian;“ifonlyonenewshareisissued”inBround,allAroundinvestorsentitledtoBround’sconversionratio.

􀀗WeightedAverage:

Lessharsh;takesintoaccountthetruedilutiveeffectofthesubsequentdownround.

•broad-based（founderfriendly）

•narrow-based（almostlikefullratchet）

Broad-BasedWeightedAverage

广泛基础加权平均

一种在企业进行后续发行时保护现有优先股股东的反摊薄条款。

广泛基础加权平均条款适用于所有以往发行的股票及当时进行的发行

Preferredstocktypicallyisissuedwithwhatisoftenreferredtoasstructural（nonprice

based）anti-dilutionprotection,whichprotectsagainsttheeffectsofstock

dividends,stocksplits,reversesplits,andotherrecapitalizations.Thisisthemostbasic

formofanti-dilutionprotection.

Anotherformofnon-pricebasedanti-dilutionprotectionisarightoffirstrefusal

（alsocalledapreemptiverightorarighttoparticipate）.Theseprovisionsallowthe

preferredstockholdertopurchaseaproratashareoffutureissuancesofstockbythe

company（orsalesofstockbythefounders）,therebypermittinganinvestortomaintain

hisorherpercentageownership.Theseprovisionsareparticularlyimportantin

protectinganinvestor’sownershippercentageinan“upround”offinancing.

itiscommonfortheserightstobeaccompanied

byanexceptionforthesaleofstocktostrategicpartners,consultants,employees,or

directors.

Furthermore,in

exchangeforgrantingsuchrights,anentrepreneurmayrequestthattherightbe

reciprocal（i.e.,thatthecompanyorentrepreneurhasarightoffirstrefusalonsalesofthe

preferredstockbytheinvestor）.

Anti-Dilution（pricebased）

Thevaluationofearlystagecompaniesishighlyuncertain.Asaresult,an

investorcouldbeinvestinginacompanywhosevalueadjustsdownwardbeforethe

companystabilizesandresumespositivegrowthinvalue.Forthisreason,investorsoften

seekpriceprotection—thatis,protectionfromthedilutiveeffectsofalaterroundof

financingthatispricedbelowthepriceatwhichtheyboughtintothecompany.There

aretwocommonformsofpriceprotection:

full-ratchetanti-dilutionprotectionand

weightedaverageanti-dilutionprotection.

Full-ratchetanti-dilutionlowerstheconversionpricetothepriceatwhichany

newstockissold.Thistypeofprotectionisgenerallyconsideredtobeasevereformof

anti-dilutionprotectionbecauseitforcesthecommonshareholderstoabsorbmostofthe

dilution.Forexample,assumethattheSeriesAinvestorboughtpreferredsharesat$1.00

pershareand,later,SeriesBinvestorsboughtsharesat$0.50pershare,thenthe

conversionpriceofthepreferredsharesownedbySeriesAinvestorswouldbeadjusted

downwardto$0.50.Ineffect,theadjustmentintheconversionpriceallowstheSeriesA

investorto“pay”thesameforitssharesastheSeriesBinvestor.3Importantly,this

pricingadjustmentoccursregardlessofhowmanysharesareissued（ortheamountof

moneyraised）intheSeriesBround.Thus,acompanyseekingtoissueasmallnumberof

sharesinordertoraisetheneededcapitalwillbeforcedtoadjusttheshareownershipof

allpreferredshareholders.

Table1

Conversion

Priceof

Preferred

Shares

Shares

Issued

（000's）

Common

SharesAfter

Conversion

Percentof

Company

Owned

Capitalization−NoDilutionProtection

FirstRound

CommonShares7,5007,50075.00%

SeriesAPreferredShares2,5002,50025.00%

SeriesAConversionPrice$1.00

SecondRound

CommonShares7,5007,50062.50%

SeriesAPreferredShares$1.002,5002,50020.83%

SeriesBPreferredShares$0.502,0002,00016.67%

SecondRoundCapitalization–Full-RatchetDilutionProtection

CommonShares7,5007,50051.72%

SeriesAPreferredShares$0.502,5005,00034.48%

SeriesBPreferredShares$0.502,0002,00013.79%

WeightedAverageAnti-DilutionProtection

Anotherfrequentlyencounteredformofdilutionprotectioninearlystagedealsis

weightedaverageanti-dilution.Weightedaverageanti-dilution（WAAD）isgenerally

thoughttobemorefavorabletotheentrepreneurwhotypicallyholdscommonshares.As

shownintheformulabelow,WAADadjuststheconversionpriceoftheSeriesAinvestor

byconsideringboththesizeandpriceofthedilutiveroundoffinancing.Statedanother

way,theformulaallowstheconversionpricetobeadjustedaccordingtotherelative

percentageofownershipthatisbeingsoldatthelowerprice.Therefore,ascanbeseen

inTable2,thedilutiveimpactoncommonshareholdersisgreatlyreduced.

Theformulahasseveralformsandwillsometimesincludeforpurposesof

dilutionprotectionthenumberofstockoptionsoutstanding.Whenoptionsaretaken

into

accounttheprotectionissaidtobe“broadbased”andwhentheyareexcludeditissaidto

be“narrowbased.”Anexampleofaweightedaverageformulaisasfollows:

Price-BasedAnti-DilutionProtectionTerms

Investor-Favorable

Middle-of-the-Road

Entrepreneur-Favorable

Fullratchet

Weightedaverage,Pay-to-playprovision

None（structuralantidilution

protectiononly）

NonPrice-BasedAnti-DilutionProtectionTerms

Investor-Favorable

Middle-of-the-Road

Entrepreneur-Favorable

Unqualifiedrightoffirstrefusaloncompanyissueorshareholdersales

Rightterminateson

qualifiedpublicoffering

（“QPO”）5

Mustholdminimum

numberofpreferredshares

（e.g.,15%）inorderto

exerciserightoffirstrefusal

oncompanyissues

RightterminatesonQPO

Mustholdminimum

numberofpreferredshares

（e.g.,25%）inorderto

exerciserightoffirstrefusal

oncompanyissues

Rightterminatesoninitial

publicoffering（“IPO”）

Aqualifiedpublicoffering（or“QPO”）isgenerallydefinedasaninitialpublicofferingwhich

（1）is

firmlyunderwritten,

（2）mustraiseaspecificamountofmoneyand（3）willbeatacertainminimumprice

（e.g.,threetimestheconversionpriceofthepreferredstock）.

LiquidationPreference

Thebasicideabehindtheliquidationpreferenceisthattheholderofpreferred

shares,uponaliquidation,dissolution,orsaleofthecompany,mustbepaidsome

stipulatedamountpriortothedistributionofanyproceedstothecommonshareholders.

Liquidationisusuallydefinedtoincludeaconsolidationormergerinwhichthe

company’sshareholderswillholdlessthanamajorityofthesurvivingentity’ssharesora

saleofsubstantiallyallofthecompany’sassets.Aconventionalliquidationpreferenceis

considereda“single-dip”preference.Withaconventionalliquidationpreference,the

preferredstockholdermustchoosebetweenreceivingtheliquidationpreferenceor

convertingtocommonstockinordertoshareproratainthetotalproceeds.Forexample,

consideraSeriesAinvestmentofpreferredshares,representing50%ofthecompany,

soldtoinvestorsforatotalof$3million.Thepreferredshareshavealiquidation

preferenceequaltotheoriginalpricepaidforthoseshares,or$3million.Sometime

thereafterthecompanyisliquidatedfor$5million.Havingachoicebetweenreceiving

$3millionor50%of$5million,theSeriesAinvestorschoosetheformerandthe

commonshareholdersreceivetheremaining$2million.

Onecanseefromthisexamplethatthepreferredshareholdersreceivevalu