Venture Capital The Business of Innovation Kellogg-Recanati International Executive MBA Tel Aviv, March 2017 Session 5 Izhar Shay
VC 101 Investment Venture Capital Returns Year 1 Year 7
Investments Carry Venture Capital Org Structure: Capital Flows Great VC Management (M.C.) Inc. (Delaware Company) Management Agreement Great VC (GVC) GP L.P. (Cayman Partnership) GP GP LP Manager1 40% Manager2 LP 20% Manager3 LP 20% Manager4 20% Management Agreement Great VC (GVC) (Cayman), L.P. (Cayman Partnership) LP Limited Partners Distributions Capital Calls Portfolio Investments
Shareholders Value Creation
Venture Capital Funding - CAP Table
Distribution of Proceeds - CAP Table Waterfall Company sold for $$$ - who gets what? Typical Waterfall: 1. Loans and credit lines paid off 2. Investors Preferred Shares, LIFO (Sometimes with interest) 1. (Example: B Shares A Shares Common) 3. Common Shares and Preferred As Converted Typical Preferred Terms: Participating, Participating with a CAP, Non Participating
CAP Table Comments Different classes of shares: Investors Preferred Shares Common Shares Employee Stock Options Plan (ESOP) Investors: Earlier investors pay less for higher ownership Later investors pay more but their risk is reduced Financial Preference can overpower CAP table holdings Investors and Founders dilemmas: Valuation - Shareholders Value Dilution - What s in it for me by the end of the day? Control - Who is going to call the shots here? Financial outcome of CAP table
Building Syndicate Investments Considerations: Share the risk More deep pockets around the table Enhanced network of contacts Value add investors Strategic investors Different types of investors Choose carefully the right combination of investors Alignment of interests is crucial Too many investors can become too much Co-opetition
Venture Capital Funding - Deal Mechanics Day 0 Timeline: Initial contact with investors First Pitch to investors Additional meetings and discussions Business Due Diligence Negotiations of Terms Term Sheet Exclusivity and No Shop Period Final Contracts Negotiations Legal / Financial Due Diligence Legal Docs: SPA, IRA, AOA, DS, Legal Opinion Signing and Closing Day 30 / 90 / 180
Main Term Sheet Provisions Deal Terms: Class of Shares Amount of money invested Valuation (Price Per Share), other considerations Financial Preferences of Shares: Preference definitions and distribution waterfall Anti Dilution, Preemptive rights Conversion of shares Rights for holders of Preferred Shares: Voting Rights, Veto Rights First Refusal, Co-Sales, Bring Along General: Conditions for Closing Confidentiality No Shop, Exclusivity
Term Sheet Provisions
Term Sheet Provisions
Term Sheet Provisions
Due Diligence
Main Due Diligence Topics (I) Personal References: Founders Management team, key employees Key operational areas: Target market analysis Competitive landscape, SWOT analysis where applicable Business: Model, Sales, Partnerships, Pipeline, Churn Technology Intellectual Property Legal: Corporate documents, Shareholders, Board Litigation Financial: Audited financial statements Reports, plans, budget, financial model and actual results Commitments, liabilities
Main Due Diligence Topics (II) General: Regulatory issues, compliance Property Human Resources Tax matters Environmental insurance Detailed Due Diligence findings to be listed in the Disclosure Schedule
Board of Directors
Board of Directors Source: http://delcode.delaware.gov/title8/c001/sc04/
Board of Directors Main responsibilities: Setting corporate governance policies Setting strategic goals and tracking management s execution Hiring / firing, supporting and reviewing performance of CEO Approving and monitoring company s annual budget Financial planning for adequate funding resources Setting compensation packages for company s managements Setting compensation policies for company s employees Overseeing Employee Stock Options Plan (ESOP) Representing the interest of all stakeholders in the company Board members: Shareholders representatives Common shares representatives (founders, CEO) Independent Directors
Board of Directors
VC 101 Investment Venture Capital Returns Year 1 Year 7
Thank You! January 2016