Buzz Archive:
The 21st Century Term Sheet - Part 2

by Joseph W. Bartlett, Founder of VC Experts.com, 10/9/2007

Assume the following hypothetical: A promising company is soliciting a Series A round from top decile venture capitalists and the lead investment fund has agreed to a notional pre-money valuation of, say, $50 million.

The VCs then propose a $20 million investment, the terms including an uncapped participating preferred with a 12% coupon for 28.6% of the company, reverse vesting on the founder's stock, a put back to the company after four years; a milestone staged schedule for the $20 million commitment, based on the issuer's projections. Issuer's counsel retorts with a 3x cap on the participating preferred, an 8% cumulative dividend, no milestones, weighted average anti-dilution protection.

The parties are able to agree on the governance procedures and pre-money valuation; but the deal terms become extremely controversial as the Samurai law firms duke it out over what is "fair" and what is "market" vis-a-vis the terms. The partner of the lead venture firm is constrained because she is a junior member and will be embarrassed if she goes back to the committee, which votes unanimously and is dominated by long time VCs, with deal terms they view as naive a product of her less than first rate negotiating skills. The founders and her fellow board members, on the other hand, are confused by the swirling rhetoric even after consulting the Fish & Richardson/VC Experts Series A deal terms survey. They are unsure of what they are giving up in real economic terms when--shazam! the new term sheet model comes to the rescue.

Is putting the deal terms discussion getting the cart before the horse? The 21st Century term sheet can be much simplified--a model of clarity. In the second of a two-part series, Joseph Bartlett, formerly Of Counsel at Sonnenschein Nath & Rosenthal LLP proposes a different model and seeks feedback, criticism or kudos.