Tag Archives: Misc…

Financing Term Sheet Basics

Posted by Shane McLean.  Hi all.  I recently posted this on my blog and thought it might be of interest to the StartupOttawa readers:

If you are part of a growing business that requires a source of outside funding, chances are that you will at some point have to review a “term sheet”.  What is a term sheet?  Basically it is a high level summary of the terms on which someone is willing to invest in or lend money to your business.  In this post I am going to discuss financing term sheets only.  There are other circumstances in which you may be on the receiving end of a term sheet — a sale of your company, for example — but those will be left to be discussed in future posts.

Financing term sheets can vary widely in their terms and structure, but there are generally a few areas that are common (or should be common) to most:

Who:  Who is the party (or parties) who will be investing, lending etc.?

What:  What are they receiving in return for their investment?  This might be preferred shares, common shares (if you’re lucky), convertible debt, non-convertible debt or a host of other possibilities.  To give two examples, with high tech startups you’re often talking about preferred shares and with publicly listed companies you are often going to dealing with common shares and maybe warrants.  If your term sheet contemplates preferred shares, debt or other complex securities the term sheet will also include a fairly detailed breakdown of the terms of those shares, debt etc.

How Much:  How much $ will the investor(s) be putting up?

Price:  The term sheet has to include a price per share (or a price per whatever you’re selling).  With private companies this is typically the investor’s best guess (or best offer) of the value of your company.  This could be stated in the form of a “pre-money valuation” which attaches a value to the company before the investment.  If you know the  number of shares you have outstanding prior to the investment you can use this number to determine the value per share.  That’s what the investor hopes to pay.  Less frequently, the price might also be expressed as a post-money valuation.  Just take the aggregate amount to be invested away from this number to reach the “pre-money valuation” and do the math as described above to determine a per share price.  Sometimes the investor will do the math for you and just give a per share price in the term sheet. If you are dealing with a public company the price is probably based on the most recent market price, a discount to the market price or some average of the market price over a recent period of time.  The price or valuation can also tell you how much of the company is being purchased for the aggregate investment amount.  For example, if your pre money valuation is $2,000,000 and the investor is investing $2,000,000 the investor will own 1/2 of the equity in the company post investment.

Timing:  When do the parties hope to close the financing?

Other Closing Deliverables/Conditions:  There will typically be a laundry list of other deliverables and conditions to the closing possibly including: a shareholder agreement, board of director seats, delivery of certain information, amendment to the articles of incorporation etc.  This is where the investor will tell you what, if any, controls they expect to have over the operation of the business on a post closing basis.

Expenses:  Typically the term sheet will describe who is responsible for the expenses incurred by the investor and the company as part of the transaction.  Here’s a hint: It’s almost always the company.  As a company, if you are stuck paying the fees your goal should be to negotiate a cap on investor legal fees.

Exclusivity: Sometimes there will be a commitment to exclusivity — i.e. once you sign the term sheet you won’t talk to other potential investors for some defined period of time.

With the help of good advisers you can often negotiate some of the key points on a term sheet so if you are handed a term sheet you do not necessary have to sign it in the form presented.  If you want to see an example of a financing term sheet you can check out this term sheet generator developed by US law firm Wilson Sonsini, Goodrich and Rosati.  There are a few web based term sheet generators out there similar to this one and they generally get a lot of buzz.  They are definitely neat, but I often wonder whether they have any real life benefit to companies aside from preparing you for the types of things you will see in a term sheet that is handed to you.  Generally speaking the investor is going to present the term sheet to you in the investor’s “standard” form and a sophisticated investor is unlikely to accept or generate a term sheet from an Internet based term sheet generator.

Once everyone is happy with the term sheet, it is signed and the lawyers get to work preparing the definitive documentation to reflect the high level terms agreed on.

Posted by Shane McLean

By James Smith

Does the Emperor Have any Clothes?

Posted by:  Shane McLean

I am prepared to make a confession.  Here goes: 

I don’t get Twitter. 

Phew!  Now that I have that out in the open I feel much better.  I have been carrying this weight around for a while and have been afraid to admit it.  Have you ever seen a movie that everyone absolutely loves but you just don’t get it?  That’s me with Twitter.  Don’t get me wrong, I’ve tried.  I’ve made an effort to attend  events where Twitter was the topic, I have read tons of  articles extolling the virtues of Twitter and making vague claims as to how it is being used in beneficial ways and I signed up for a Twitter account and followed a handful of people and organizations for several weeks (you may remember me from such Twitter handles as McLeanShane (but probably not)).  Unfortunately, I saw very little value (to me) in what people were putting out there.  On top of that, I kept getting notices that people I have never heard of were suddenly following me, even though I never posted a thing.  In frustration I ended up cancelling my account (which, by the way, Twitter made very simple).

Maybe I wasn’t following the right people.  Maybe I’m missing all the good stuff.  I sure hope so.  To be clear, I was following people and organizations using Twitter professionally as a communication tool, as opposed to getting on there with all my friends and gabbing about personal life.  I suppose if you were a regular user of instant messaging with a group of friends, Twitter might provide a useful forum to continue that activity.

The Tweets I saw were mostly non sequitur, train of thought kind of stuff that may (or may not) be interesting to the person posting it but were of questionable value to me.  For the most part, the folks I was following also have blogs on which they posted more detailed and useful articles in parallel with and covering the same topics as their Tweets.  Is there any use in following someone on Twitter if I follow their blog?

 I am fully prepared for an onslaught of comments and/or criticism from Twitter maniacs out there.  Let’s have the discussion.  I am posting this with the hopes that someone can let me in on the secret. My only ask is that you please keep in mind that I am not trashing people who use Twitter.  This is not a personal thing.  If you use it and love it, more power to you.  On the flipside, I would also appreciate hearing from those who agree with me (cue crickets…).  I’m perfectly comfortable if at the end of the day I’m unique in failing to get it, but I am genuinely trying hard to understand the medium and figure out how or why people use it.  Maybe if I can get my head around it, I could even sign up for another account!  


By James Smith

Startups, Get Lucky!

Hey all, via an intro from the consummate startup CFO, Mark Macleod, on Thursday I appeared as a guest in a chatroom broadcast by a Telluride-CO based site, luckystartups.com. The site conducts and stores live interviews with startup founders from around the world, with a pretty heavy digital media focus. They have a regular broadcast schedule, and pretty good reach into some institutional funders like Garage and the like. The experience was pretty cool, and if you want to check out my appearance, here it is. Please note the salmon (some would say pinkish) shirt for the appearance, and the prominent display of my Martin Brodeur Olympic gold medal-winning jersey in the background (take that, Yanks!). Only regrets: no green room buffet, no clip of current film project, and no opportunity to dispel rumours of my May-December romance with Madonna (they are totally untrue, no matter what you’ve heard).

 Seriously, if you’d like to get interviewed on the site, Dannie McLain the site’s co-founder would love to host you. Connect via the site or let me know at js@lwlaw.com and I’ll hook you up. Dannie would also love a moderator or two for regular features on Canadian tech companies – my suggestions to him were Jev McDonald here in Ontario, Austin Hill in Montreal, and Boris Mann out in Vancouver, but weigh in with your suggestions and I’ll pass them on to Dannie Mac.  

By James Smith

Always Look On The Bright Side of Life…

Hi everyone.  Using Jedi mind tricks, James Smith and I have managed to convince the folks at Startup Ottawa that we would be good additions to the blogging team.   This is our inaugural post so for those of you who do not know us, we are partners at LaBarge Weinstein, a business law firm with offices in Ottawa and Waterloo and a particular focus on serving the high tech community.  That said, we promise that we will try not to sound like lawyers  (we like to think we are pretty good at hiding it).  We would love to hear feedback on what you think of our posts so please feel free to leave a comment or contact either of us directly.  Now, without further ado…

How about some good news for a change?  Keeping in line with the many articles and blog posts I have been reading lately, I thought I would focus on some good news.  But I thought I would shift my focus a little bit from the common “how to make the best of a terrible situation” theme and, instead, serve up some items of what I think are standalone genuine good news. I have been keeping an eye out for this kind of stuff recently and have come up with an admittedly random top 5.  My plan is to dole out the good news one item at a time (we can’t have anyone getting too excited all at once ) so please stay tuned.  In the meantime, I invite readers to post comments sharing their own good news.   

Bright Side of Life #1:  There is still money out there looking for great ideas –The economic downturn of the last year or so is just the latest blow to investment following the shrinking of venture capital over the last couple years.   Having said that, there are still quite a few pots of money available in Canada for deployment to the right companies.  Examples of active money include – Blackberry Partners Fund ($150M), Business Development Bank of Canada and Wellington Financial Fund III ($150M) (Wellington has a great blog by the way).  Even the Ontario Government is spending time and money flogging old and new programs in an attempt to help fill the funding void.  There are more sources and they all tend to put out “open for business” announcements so they are not hard to find.

Stay tuned for more…

Shane McLean

By James Smith