Term Sheets for Advanced and Financing Rounds

Transcription

1 Term Sheets for Advanced and Financing Rounds Dr. Christian Wenger Dr. Beat Speck Zurich, Oktober 25, Introduction The Speakers Handouts Raise your voice! Zurich, Oktober 25,

2 Agenda 1. The Big Picture 2. Purpose / Importance of a Term Sheet 3. Usual Content of a Term Sheet 4. Value Drivers 5. Questions / Discussion Zurich, Oktober 25, The Big (Financing) Picture (I) Who finances? 7. Exit: IPO, Trade Sale, Secondary Sale, Buy Back 6. Financing Round N: further outside Investors 5. Financing Round 2: further outside Investors Venture Capitalists 4. Financing Round 1: first bigger outside financing round 3. Incorporation: in cash and/or by contribution in kind Business Angels 2. Seed : from an idea to know-how / IPR / Prototype etc. 1. Business- / Product Idea FFF Zurich, Oktober 25,

3 The Big (Transaction) Picture (II) Preparation Negotiation Execution Definition of Objectives Analysis of the opportunities Selection of consultants Business Plan and Investors Presentation Financial Plan Taxes Valuation Models Preparation of the Due Diligence Preparation of a list of Potential Investors Confidentiality Agreement Preparation of the Information (Executive Summary, Business plan) Negotiation Term Sheet / LOI Due Diligence Customer references Final Negotiations Investment Agreement Shareholders Agreement Further Agreements Signing & Closing 3 Months and more 3 Months and more 1-2 Months 4 to 8 Months 5 2) Purpose / Importance of a Term Sheet 1. Fixing the key figures and clauses for the investment and shareholders agreement 2. Ruling the negotiation procedure (time schedule, exclusivity, costs etc.) Zurich, Oktober 25,

4 3) Usual Content of a Term Sheet (I) 1. Term Sheet 2. Negotiations / Due Diligence 3.1 Investment Agreement 3.2 Shareholders Agreement Rules about - the amount - the preconditions and - the protection of the investment Rules about the relationship between the investor(s) and the other shareholders after the investment Zurich, Oktober 25, ) Usual Content of a Term Sheet (II) Investment Agreement Issues Parties: Company, Investor(s), Founders, Existing Shareholders Invested amount / tranches; funding type Share price and type of shares Cap table; pre- and post-money valuation Milestones / Business Plan Employee Stock Option Plan (ESOP) Representations and Warranties Conditions Precedent (Escrow for shares / share certificates) Use of the invested proceeds Zurich, Oktober 25,

5 3) Usual Content of a Term Sheet (III) Shareholders Agreement Issues Composition of Board / Management Voting rights / Qualified Majorities Preference Rights (Dividend, Subscription, Liquidation, Conversion of Preferred Shares Anti-Dilution Protection Funding / Financial Matters Information Requirements General Transfer Restrictions / Right of First Refusal Exit provisions (Tag- and Drag-along, IPO, Purchase Options) Non-competition / non-solicitation Related Party Transactions Zurich, Oktober 25, ) Usual Content of a Term Sheet (IV) Procedural and General Aspects Timing Applicable Law Costs / Break-up Fee Jurisdiction / Arbitration Clause Exclusivity Binding / Non-Binding Effect Confidentiality Zurich, Oktober 25,

6 4) Value Drivers Pre Money Valuation Size of Investment Round Size of ESOP Allocation of ESOP Liquidation Preference Anti Dilution Protection Representations & Warranties Milestones 11 Example: Financing Round Series A Pre Money Valuation (fully diluted) CHF 10 Mio. Number of existing shares: Number of newly issued shares: New share capital including agio: CHF 3 Mio. Value per share pre and post transaction remains the same: CHF 100 Capital increase Share Capital CHF Shares Pre capital increase Share capital CHF Shares Post capital increase Share capital CHF Shares Pre Money Valuation CHF 10 Mio. CHF 3 Mio. Post Money Valuation CHF 13 Mio. 12 6

7 Pre Money Valuation Pre Money # Shares Value per Share Investment # Shares Total Shareholdings Series A Series A Pre Post Dilution 10'000' ' '000'000 30' ' % 76.92% 23.08% 4'000' ' '000'000 75' ' % 57.14% 42.86% 6'000' ' '000'000 50' ' % 66.67% 33.33% 8'000' ' '000'000 37' ' % 72.73% 27.27% 12'000' ' '000'000 25' ' % 80.00% 20.00% 20'000' ' '000'000 15' ' % 86.96% 13.04% Capital increase Share Capital CHF Shares Pre capital increase Share capital CHF Shares Post capital increase Share capital CHF Shares Pre Money Valuation CHF 10 Mio. CHF 3 Mio. Post Money Valuation CHF 13 Mio. 13 Size of Investment Round Pre Money # Shares Value per Share Investment # Shares Total Shareholdings Series A Series A Pre Post Dilution 10'000' ' '000'000 10' ' % 90.91% 9.09% 10'000' ' '000'000 20' ' % 83.33% 16.67% 10'000' ' '000'000 30' ' % 76.92% 23.08% 10'000' ' '000'000 40' ' % 71.43% 28.57% 10'000' ' '000'000 50' ' % 66.67% 33.33% 10'000' ' '000'000 60' ' % 62.50% 37.50% Capital increase Share Capital CHF Shares Pre capital increase Share capital CHF Shares Post capital increase Share capital CHF Shares Pre Money Valuation CHF 10 Mio. CHF 3 Mio. Post Money Valuation CHF 13 Mio. 14 7

8 Size of ESOP Pre Money # Shares Value per Share Investment # Shares Total Size ESOP Series A Series A Post # Shares ESOP # Shares Dilution Total 10'000' ' '000'000 30' '000 6% 8' % 10'000' ' '000'000 30' '000 8% 11' % 10'000' ' '000'000 30' '000 10% 14' % 10'000' ' '000'000 30' '000 12% 17' % 10'000' ' '000'000 30' '000 14% 21' % 10'000' ' '000'000 30' '000 16% 24' % Pre capital increase Share capital CHF Shares ESOP Capital increase Share Capital CHF Shares Post capital increase Share capital CHF Shares Pre Money Valuation CHF 10 Mio. CHF 3 Mio. Post Money Valuation CHF 13 Mio. 15 Allocation of ESOP (1)??? Founder pays the ESOP ESOP Pre capital increase Share capital CHF Shares ESOP Capital increase Share Capital CHF Shares ESOP Investors pay the ESOP Pro rata Post capital increase Share capital CHF Shares Pre Money Valuation CHF 10 Mio. CHF 3 Mio. Post Money Valuation CHF 13 Mio. 16 8

9 Allocation of ESOP (2) Pre Money # Shares Value per Share Investment # Shares Total Size ESOP Series A Series A # Shares ESOP in percent # Shares Dilution Total Total 15% pre round 10'000' ' '000'000 37' '273 24' % 161' % Reduction of the valuation 15% within round 10'000' ' '000'000 30' '000 22' % 152' % Enlargement of the Financing Round 17 Liquidation Preference (1) Investor receives before common shareholder his investment as liquidation proceed or dividend Pre Money Valuation (fully diluted) CHF 10 Mio. Number of existing shares: Founders/Common shareholders: ESOP Investor Series A: Investment amount CHF 3 Mio. Exit after 3 years Exit value: CHF 20 Mio. Structure of Liquidation Preferences 1x liquidation preference 1x liquidation preference with catch up for common shareholders 1x liquidation preference with 10 %coupon 2x liquidation preference with 10% coupon 18 9

10 Liquidation Preference (2) ESOP Catch up Common Shareholders Investor A Coupon Liquidation preference Investment 1x Liquidation 1x Liquidation 1x Liquidation 2x Liquidation preference preference with preference with preference with catch up for 10 percent 10 percent common coupon coupon shareholders 19 Liquidation Preference (3) - Analysis A Round: Common 10 m Investors A 3 m ESOP 2 m 1 x Liq. Pref: Investors 6.4 m Return 113% Common 11.3 m Return 13% (since Round series A) 1 x Liq. Pref w/ catch up: Investors 4.4 m Return 46% Common 14.7 m Return 47% (since Round series A) 1 x Liq. Pref w/ 10%c: Investors 7.1 m Return 136% Common 10.7 m Return 7% (since Round series A) 2 x Liq. Pref w/ 10%c: Investors 10.2 m Return 240% Common 8.1 m Return -19% (since Round series A) ESOP 2 m ESOP 0.9 m ESOP 2.1 m ESOP 1.6 m 20 10

11 Anti Dilution Protection Protection of Investor A in case of a future down round Full ratchet/weighted average Down round: Pre Money Valuation Series B (fully diluted) CHF 5 Mio. Number of existing shares: Common Series A ESOP New share capital including agio: CHF 3 Mio. 21 Anti Dilution Adjustment Full Ratchet Pre Money # Shares # Shares # Shares Total Value p share # New shares Anti Dilution Common Series A ESOP Adjustment 10'000' '000 30'000 20' ' '000 60'000 Common 100' % ESOP 20' % Series A 90' % Series B 90' % 300' % Significant dilution Of common shareholders Remarks: Value per share new: CHF Investor receives shares (Series A Investment of CHF 3 Mio. divided by the new share price of CHF 33.3 gives of which were already received) Technically shares are either issued or transferred to Investor A 22 11

12 Anti Dilution Adjustment Weighted Average Pre Money # Shares # Shares # Shares Total Value p share # New shares Anti Dilution Common Series A ESOP Adjustment 10'000' '000 30'000 20' ' '000 15'000 Common 100' % ESOP 20' % Series A 45' % Series B 90' % 255' % Remarks: Value per share new: CHF Weighted value per share: (CHF CHF ) /2 = Investor receives shares (Series A Investment of CHF 3 Mio. divided by the new share price of CHF gives of which were already received) 23 Representations & Warranties Milestones Company fails to meet milestones Company violates representations and warranties Reduction of the valuation of the company and the value per share Shares will be either transferred or newly issued 24 12

13 Representations & Warranties Milestones Pre Money # Shares Value per Share Investment # Shares Total Series A Series A Dilution 10'000' ' '000'000 30' ' % Damage of CHF 1 Mio. 9'000' ' '000'000 33' ' % Capital increase Share Capital CHF Shares Pre capital increase Share capital CHF Shares Post capital increase Share capital CHF Shares Reduction of the valuation on a $ by $ basis New Pre Money Valuation CHF 9 Mio. CHF 3 Mio. Value per share: CHF 90 Post Money Valuation CHF 12 Mio. Value per share: CHF 90 Post Money Valuation CHF 12 Mio. 25 Any Questions? Zurich, Oktober 25,

14 Thanks. Dr. Christian Wenger Wenger & Vieli Ltd. Dufourstrasse Zurich Dr. Beat Speck Wenger & Vieli Ltd. Metallstrasse 9b 6300 Zug Phone: 058 / c.wenger@wengervieli.ch b.speck@wengervieli.ch 27 THANK YOU FOR LISTENING! Wenger & Vieli Ltd. Dufourstrasse 56, PO Box 1285, 8034 Zurich Phone +41 (0) , 14