Private Equity and Venture Capital

Assignment 8 – 23rd January, 2021

G Bhavana Sravanthi
PGP10083
 Term Sheet Negotiations: Negotiations between investors and entrepreneurs which decides
the further relationship between them based on term sheet
 Liquidation Preference
 If a company liquidates this term determines how VC-held preferred stock is paid
 This term dictates how big of a slice of the pie investors receive in a liquidation
event. The stronger the preference is for investors, the worse are the financial
gains for the entrepreneur
 Board composition
 Boards often include representation from the founder(s), company, investors, and
outsiders brought in for their contacts or expertise. When founders still control a
majority of the board (e.g., hold two of the three board seats), they have much
more control over those decisions than when outsiders control the board
 Entrepreneurs motivated by the desire to exit the venture with a more valuable
slice should be willing to secure more financing by giving up more board
representation, even if it imperils their tenure as CEO
 Drag along rights
 If the majority shareholder of an entity sells their stake, then they have the right
to force the remaining minority shareholders to join the deal
 The issue for a wealth-motivated entrepreneur is whether preferred stock will be
indifferent to an acquisition offer that could benefit the founder’s stock.
Entrepreneurs don’t want investors to block a potentially profitable sale.
 Protective Provisions
 This term includes a variety of extra voting rights reserved for the class of VC-
held preferred stock
 Dividend rights
 This term entitles preferred stock to accrue dividends (often cumulatively) that
will be paid before any other class of stock receives its share of proceeds.
 The control-motivated entrepreneur should focus on the terms that affect the ability of the
founder to guide the company in its future decision-making processes
 VCs often attempt to constrain the founder-CEO with board representation and special
voting rights assigned to their preferred stock. Rich-motivated founders should be more
open to such constraints but King-motivated entrepreneurs should work to minimize these
constraints
 Due diligence is a process of verification/ investigation of a potential deal or investment
opportunity to confirm all relevant facts and financial information, and etc. during the
investment process
 Types of due diligence – accounting, legal, technical, etc.
 The objective of due diligence is to minimise the risk and invest in the company/ go ahead
with the deal