Private Equity and Venture Capital

Assignment 7 - 16th 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
 During early stages of financing in start-ups, decisions taken would influence outcomes
that determine their ability to increase their value and control over the company
 Founder’s dilemma – whether to increase wealth or have control over the company
 Higher priority to control and lower priority towards ability to grow – King founder,
while the Rich founder – vice versa
 Term sheet functions:
 Summary of financial and legal terms related to the transaction
 Quantifies the value of transaction
 Future legal documents governing the transactions between investors and entrepreneurs
would be affected by initial term sheet
 Investors want to see good returns, minimize their downside risk, create an exit from the
investment
 Investors are concerned about economics and control while investing
 Entrepreneurs need capital for growth of the company and need expertise and contacts
 Key terms in Term sheet:
 Valuation
 Option Pool
 Liquidation Preference
 Anti-dilution protection
 Dividend rights
 Board composition
 Protective Provisions
 Drag along rights
 Valuation
 Entrepreneurs search for investors who can provide highest valuation, while
investors look for lowest price and gain highest percentage of ownership
 Higher valuation means more equity with founder – rich founder
 Give up financial gains in order to maintain control over the venture – king
founder
 Option Pool
 This affects the founder’s equity and the employees quality
 Anti-Dilution Protection
 Full ratchet method, Weighted Average Method
 Full ratchet : Assume that company is going for 2 nd round of financing (series
B), then full ratchet is only in interest of series A investors, but not of founders
and next round of financing