Alvin Donovan
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Whether you are a company thinking about an Initial Public Offering (IPO), seeking private equity investors, thinking about a capital raise there are a few important things to consider.
Having been around the investment banking and public listing arena in the USA, Australasian markets, or the Frankfurt Stock Exchange (Deutsche Boerse or DAX) has taught me a few things.
The purpose of this article is discuss venture capital deal terms from private equity investors for IPO or capital expansion.
I will be discussing Venture Capital Deal Terms from two different perspectives, Business Venture Capital and Angel Funding. As I go through each subject below I will point out the nuances of dealing with each type of investor. Some of the differences are minor others are significant.
Keep in mind that not all private equity investors fit the same mold. There are great differences in
deal structures from one Angel investor to the next, and likewise with VC firms.
1. Term Sheet. At the end of your Business Plan you may want to include a Term Sheet with the Deal Terms that your Management Team is comfortable with. Better to include the Term Sheet when you are talking with Angel Investors. It is not necessary to include one when dealing with a Business Venture Capital Firm. They will usually dictate the terms and financing structure anyway.
Investors will not commit to a Term Sheet without conducting due diligence. So don?t try to get them to commit, just use it to weed out investors who may waste your time. Try to prevent potential investors
from conducting extensive due diligence on your company, for their own benefit.
For instance, maybe they funded one of your competitors and are simply on a fishing expedition.
If your company has been operating you need to determine its book value. Ask your accountant to help you with this. Then offer Angel investors a percentage based on the book value and the amount of funding
you are seeking.
If your company is a pure start up then focus on the percentage of the company you are willing to sell for X dollars, rather then a number of shares. Your Management Team needs to be in agreement on what they are willing to give up if they get the full amount of funding they are looking for.
Here are some questions the Team needs to agree on:
Will they give up voting control?
Will they agree to accept another Director to the Board?
Will they agree to the funding being secured by all the assets of the Company? Will they agree to an anti-dilution clause?
Will they agree to a reverse merger and become a public company in six months?
2. Anti-Dilution Clauses. If the Management Team feels that strongly about its business model or the company?s revenue potential, offer investors an ?Anti-Dilution? clause. I would not offer it to a typical Angel Investor unless it was able to close the deal and get you the funding. In other words, use it as
a carrot to close the deal.
On the other hand, most Venture Capital investors that provide the first round of financing will probably demand an Anti-Dilution clause. If you offer it first, it will show your confidence in carrying out your business plan and achieving success.
Don?t put it in the Term Sheet though, hold it until you are fairly certain they may fund. Then you can offer it, or at least not be so surprised, when they require it for investment protection.
3. Super Preferred Stock. Use a Super Preferred Stock issuance to give your Management Team voting control. If a Venture Capital firm requires majority stock ownership, you may be able to maintain voting
control. Make the Super Preferred non-convertible into common stock.
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