Ideas|Products|Startups|VCs

Many promoters and budding entrepreneurs have some notions about termsheet, some treat it as the scariest piece in the investment process and for some getting a termsheet is a milestone.

In simple words, termsheet is a guideline document for entrepreneur issued by the investor. If you are playing a game no fun without playing with rules and regulations. So treat this investment process as game of scaling the venture. I have come across term sheets ranging from $200k-$20M, good news is most of the clauses are common irrespective of size of investments.

Lets look at the most common clauses in a tech investment termsheet i have come across:

Vesting of Founder’s shares :

The shares held by Founding team will be locked for 3 years; subsequently they will unlock in equal annual installments over a period of 3 years. If any of the founding team decides to leave the company at a time before such period , the locked share would have to be sold at par to the existing shareholders of Company and Investor will be given the first option to purchase the said shares. Should Investors decline to purchase the shares, such shares will be sold to other shareholders in proportion to their shareholding. Such shares at the investor discretion can be placed in ESOP Pool.

ESOP Shares:

The company will create an ESOP pool of 6% prior to investment.

Tag Along Rights:

Subject to the lock-in provisions herein contained, in the event the Founders sell their shares to a 3rd party investors would have a right to sell its shares on the same terms to the same party. The tag-along shall be a pro-rata right so long as the total number of shares transferred by the founders is less than 50% of their share holding in the company. If any shares in addition to the above are proposed to be transferred, the investor shall have the first option to sell their shares to proposed purchaser.

Right of first Refusal:

Start up killers are those said statements that may lose the funding for the entrepreneur. When pitching to investors about the new product and business proposition, there is some moment when you know that you have lost your listener. One misspoken comment and everyone wants to leave as soon as possible. Lets look at few turn offs

No Competition

There is always competition. In some way customers are fulfilling their needs today. Competition can be as simple as continuing to do things as they are doing them today. Never ever say there is no competition. Investors look for proven and tested market which is growing. Investors may not be keen to invest in saturated markets like OTAs in India because they often require too much capital to overcome the incumbents, not because they are not viable.

Being Conservative

Majority of the Indian entrepreneurs i have met seem to believe that VCs want to hear that their numbers and estimates are conservative.  As an entrepreneur you should know Investors know that backing a start up is a very risky business, and conservative isn’t what they are interested in, nor is it what they expect.  There are plenty of conservative, less risky investment vehicles like Post Office schemes, MF available to investors.

Missing the Detailing

If you are entering entering into a market and not understanding the nuances of the business will cause failure. Do your homework and establish a process to get all the details and nitty-gritty of an industry and customer that make a product successful. For instance if you want to start an e-commerce company make sure you have detailed out all of flows/vendor relationship involved in it. Investors want to know the startup has experience in the market.

Break Through Technology

Seriously! as an entrepreneur if you say to investor you have developed a break through technology, then be prepared to say immediately why. Most investors will not believe you and it is generally considered as Myth.

Negative Attitude

Remember Investors invests on Entrepreneur and not on idea, they would like to see, assess entrepreneur attitude. So appear coach able, Every time an investor asks a question, they are impacting valuable information.  Not listening or addressing their concerns is a start-up killer. Becoming defensive when they ask questions is negative as well.

Disregard for Investor Money

Having an apparent disregard for the investors money will often sink a deal or make investors wary of what is to come of the startup in the future.  Recently i came across a pitch where two co-founders presented to angel investors and when one investor asked what if the start up encountered problems and hit the roadblock, they immediately replied they would just go back to their old jobs.

-Hitesh, vcBytes.com

Off late i have come across couple of instances where VCs have not invested after signing the term sheets and really put startup and entrepreneur in back foot by their ‘No Shop‘ clause in the term sheet. Signing a term sheet with a no shop agreement is likely to send you back a month or more if the VC doesn’t end up funding the company.  I can see the insistence of no shop language in larger M&A deals but see no place for them in early stage rounds.

So what is a No Shop Clause?

In simple words ‘No shop’ clause, prohibits the entrepreneur from speaking to other investors while the VC completes his due diligence.

No Shop/Confidentiality provision is one of the two provisions in the term sheet that is usually “binding” on the company and the investors – meaning it is enforceable even if the rest of the contemplated financing is never completed.

The implications of the No Shop provision are very straightforward. The “No Shop” portion requires the company to refrain from actively pursuing any other investment or any sale of the company for a set period of time after the term sheet is signed. Most of the time the only point of negotiation is the length of the No Shop period. This ranges from 30 to 90 days, but is typically 45 or 60 days.  Once the term sheet is signed, both sides are usually anxious to get the transaction closed as quickly as possible.

This is an important issue because if your VC walks away after you sign the term sheet (which happens from time to time), your company may be considered damaged goods and it will be difficult for you to find another investor.  Accordingly, if you get any indication that your VC is getting cold feet, you want to be able to move quickly to re-kindle discussions with other investors, if possible.

If you believe in your startup and aiming at large market and have a lot of leverage (such as many VCs interested in your company), you may be able to knock this provision out entirely.  Remember: every clause in a termsheet is negotiable.

-Hitesh, vcBytes.com

Continuing its efforts to strengthen the Indian entrepreneurial support system and to fund promising start-ups, Indian Angel Network, India’s largest network of angel investors announced a series of start-up boot camps. To be held across Bangalore, Mumbai, Pune, Hyderabad and Delhi, these boot camps endeavor to bring together prominent angel investors and mentors and emerging and established entrepreneurs. These interactions serves as good learning ground for entrepreneurs by participating in engaging panel discussions on different facets as also pitch for seed-funding.

Further, in order to inspire a start-up culture and to engage a larger community these boot camps will bring simulate activities like online voting to short-list ideas as well as set up an ‘Ideas Marketplace’. This simulation will allow participants to validate the new venture ideas in an educative and fun way.

The entries to bootcamp open from 6:00 PM on March 2, 2011 at www.boot-camp.in. Named ‘The Baap of all Bootcamps’ – the event is powered by Springboard Ventures – an emerging start-up enabler which launched crowd-funding (http://india.growvc.com) as well as business plan advisory and development platform (www.mybplan.in).

Each of the bootcamp will be packed with knowledge-led sessions, including:

· IAN Showcase: Featuring some of the successful investee entrepreneurs of IAN on how to pitch to investors and what support to expect from IAN.

· Ideas Marketplace: Top ten shortlisted ideas in each city get an opportunity to make an elevator pitch to other participants in three minutes. Participants with top four ideas will get to meet angel investors, get incubated by IAN Incubator. They also get assistance making their business plan by MyBPlan.

· The Earthy Entrepreneurs : Special showcase and panel discussion on challenges and funding opportunities for social enterprises

· The Early stage Investment saga: Leading entrepreneurs and IAN members come together to discuss the challenges of early stage investments

· Start-up Pitch: Shortlisted eight start-up ideas in each city make detailed presentations to the investor members of IAN. Top two start-ups selected from each city compete with others at the grand finale at Delhi.

– Hitesh, vcBytes.com

What is Pre-money valuation? Pre-money valuation refers to the valuation of the company before an investor injects capital into the company. The post-money valuation of a company refers to the valuation of the company after an investor has injected capital into the company. Therefore, the post-money valuation of a company is always equal to the pre-money valuation plus the amount of capital injected by the investor.

In equation form -

1. Post-money valuation = Pre-money valuation + Investment amount

2. Purchase price per share = Pre-money valuation / Number of fully-diluted shares before investment

3. Number of new shares issued to investor = Investment amount / Purchase price per share

Example:

Corbyn Tech Ltd. currently has 5,000,000 common shares held by its founders, being 100% equity of the company.

It is agreed between Corbyn Tech Ltd. and Investor A that in the forthcoming Series A round, 1,000,000 common shares will be set aside for ESOP.

Therefore, the number of fully-diluted shares of Corbyn Tech Ltd. before the Series A round is 5,000,000 + 1,000,000 = 6,000,000.
Pre-money valuation:
Before financing, Investor A gives Corbyn Tech Ltd. a valuation of US$5,000,000.

Therefore, the pre-money valuation of Corbyn Tech Ltd. is US$5,000,000.
Purchase price per share:

Each share is valued at $5,000,000 / 6,000,000 = $0.83 (calculated on a fully-diluted basis).

-Guest Post by Ananth, Ananth is a Senior Analyst with a leading PE firm based out of Mumbai