Venture Financing Business Coach

Sample term sheet

Series A convertible preferred stock financing
Indiaco, www.indiaco.com

This proposed summary of the terms for the purchase of shares of Series A Convertible Preferred Stock of THE HOUND IS
LOOSE.COM, INC. (the “Company”) does not constitute a binding contract or commitment but is solely for the purpose of
outlining those terms that may be incorporated into a definitive stock purchase agreement, which must be prepared and
executed by all necessary parties.

Amount of investment Automatic conversion

$1,500,000 The Series A stock will automatically convert into common stock
Securities upon the earlier of (i) the closing of a public offering of the
1,500,000 shares of Series A convertible preferred stock Company’s common stock but only if the gross proceeds of the
(the “Series A Stock”) offering equal or exceed $ 5,000,000, (ii) the vote in favour of
conversion of the holders of at least a majority of the outstand-
Price of series A stock ing Series A stock, or (iii) the Company first becoming subject to
$1.00 per share the SEC reporting requirements.
Shares outstanding, pre-financing
Liquidation preference
10,000,000 shares of common stock
The Series A stock will have a liquidation preference of $ 1.00
Option pool per share, plus all declared but unpaid dividends, that is senior
Stock Option Plan with 3,500,000 shares reserved for issuance to the common stock. After this liquidation preference is satis-
under the plan. fied, all remaining assets to be distributed to shareholders will
Use of proceeds be distributed to all holders of common stock on a pro rata
Proceeds will be used for research and development and other basis. For this purpose, a liquidation will not include a merger,
working capital. consolidation, reorganization, recapitalization, sale of substan-
tially all of the assets or other similar transaction pursuant to
Resulting capitalization which control of the Company is transferred.
The resulting capitalization (assuming the grant and exercise
of all options and the conversion of all Series A stock): Dividends
Shares The holders of the Series A stock will be entitled to receive a
Common Stock 10,000,000 non-cumulative, eight per cent (8%) dividend per annum prior
Series A Stock 1,500,000 to any payment of dividends on common stock, but only when
Option Pool 3,500,000 and if declared by the Board of Directors.
Total 15,000,000
Voting rights
Conversion price
Each share of Series A stock is convertible at any time at the The Series A stock will vote on an equal basis with the common
option of the holders of Series A stock into one share of com- stock on an “as if converted” basis. In addition, the Series A
mon stock, subject to anti-dilution protections. stock will be entitled to vote as a separate class by a majority in
interest to the extent required by law.
Anti-dilution protection
Anti-dilution protection for the Series A stock for changes in Registration rights
capitalization (stock splits, stock dividends, etc.) and mergers, The holders of Series A stock will have “piggy back” registration
consolidations, recapitalizations or other exchanges or substi- rights (i.e., the right to include shares in a registered public
tutions of securities. offering of the Company). Such rights will contain a typical un-
Optional conversion derwriters’ cutback provisions (i.e., a provision requiring a pro-
Each Series A stock may at any time convert part or all of such rata cutback of non-Company shares in the event that the pub-
holder’s shares of Series A stock into shares of common stock lic offering would be adversely affected) as well as other cus-
at the then applicable conversion rate. tomary terms. r
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or buy the Business Coach on CD-ROM at US$ 120/Indian Rs. 5,000.

44 TECH MONITOR l Sep-Oct 2003

Business Coach
Finance for start-ups
Business angels and venture capitalists
What is an angel investor?
Most angel investors are successful business leaders or pro-
fessionals who make significant investments in other compa-
nies, usually early-stage startups. They typically invest in busi-
nesses within their particular area of experience and exper-
tise.
The most important role of an angel investor is to infuse your
startup with cash. But unlike other types of financing — such
as bank loans — angel investors can do more than keep your
company’s coffers full. Angels often take a hands-on advisory
or consulting role in the company, especially when it’s just
starting out.
Angels can be invaluable resources who help you connect
with future rounds of financing, build your executive team,
choose advisory board members and meet potential business
partners.
Keep in mind, however, that an angel investor is just that — an
investor. They expect to turn a profit by owning a part of your
company. Therefore, not only should you have a plan for provid-
ing them with a reasonable return on their money, but you also
need to agree on the details of the plan. Typically, a cash return
within five to seven years is considered reasonable and is
often achieved by selling the company or taking it public.
Step 1
Select the type of venture capital that best suits your compa-
ny’s needs.
Equity Loan
Offer of an ownership position to induce the loan, or can be a
note that has an option to convert from debt to equity.
First-Round Funding
Typically funding that accommodates growth. Company may
have finished R&D. Funding is often in the form of convertible
bond.
Intermediate/Second-Round Funding
Maturing company where a future leveraged buyout, merger or
acquisition and/or initial public offering is a viable option.
For more information, visit: http://www.Business-asia.net
or buy the Business Coach on CD-ROM at US$ 120/Indian Rs. 5,000.
Venture Financing
Rahul Patwardan, Indiaco
Later-Stage Funding
Mature company where funds are needed to support major
expansion or new product development. Company is profitable
or break-even.
Merger and Acquisition
The combination of two companies. If one company survives it
is a merger; if both survive it is an acquisition.
Mezzanine Funding
Company’s progress makes positioning for an initial public of-
fering viable. Venture funds are used to support the IPO.
Seed/Startup Funding
Earliest stage of business; typically no operating history. Invest-
ment is based on a business plan, the management group
backgrounds and market and financial projections.
While I’m looking forward to the capital I might receive and how
my company could grow because of it, I’m also wondering how
much control venture capitalists usually expect over their in-
vestments? What are the keys to working effectively with ven-
ture capitalists?
Venture capitalists are investors. I know that seems obvious, but
it’s important to remember what VCs are — and what they are
not. Venture capitalists are not business managers; they are not
business operators.
In the best of all worlds for venture capitalists, they attend board
meetings periodically, are presented with outstanding reports
and go on to their next deal. The less time they are required to
spend on their investments, the closer they come to meeting
their own personal objectives.
So how do you work effectively with venture capitalists? Make
their life easy. Schedule regular board meetings. Venture capi-
talists will undoubtedly either have a seat on the board or ob-
servation rights. Give them timely information. Avoid surprises
and keep them well informed. Invite their input on a regular
basis when preparing for board meetings. Always hand out a
packet of information about the agenda of the next board meet-
ing a week in advance. And make sure they’re totally aware of
your developments and capital requirements. Venture inves-
tors who already are invested can be your best advocates in
helping you raise additional money when the time comes. r
TECH MONITOR l Sep-Oct 2003 45