Understanding VC Financings

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CONTRIBUTED BY
Anthony Kappus
anthony.kappus@dlapiper.com

This installment of our series Understanding VC Financing examines liquidation preferences.  Along with dividend rights, conversion rights, and anti‑dilution provisions, liquidation preferences are an essential economic term of the preferred stock typically sold in a VC financing.

Liquidation preferences govern how a company allocates and distributes the proceeds from a sale, merger, dissolution, or other liquidation event.  The liquidation preference entitles holders of preferred stock to receive distributions of proceeds from an exit transaction before holders of common stock and other series of preferred stock with a lower preference priority and, in certain cases, entitles preferred stock to participate with holders of common stock after payment of the initial preference amount.Continue Reading Understanding VC Financings – Liquidation Preferences

pic-tyler.jpgCONTRIBUTED BY
Tyler Hollenbeck
tyler.hollenbeck@dlapiper.com

In an earlier post we defined the term “pre-money valuation” and explained how this valuation is used to calculate the price per share at which stock is sold in a VC financing.  Actually determining this “pre-money” or “pre-investment” valuation, though, is often one of the most fundamental terms for founders and investors to negotiate, as it effectively sets the relative percentage ownership levels of the two groups (assuming a fixed investment amount).

Despite this fundamental character, “calculating” an appropriate valuation (or even a range…

Continue Reading Understanding VC Financings – Valuation

Having a basic understanding of key venture capital terms and mechanics can be a great value to entrepreneurs looking to raise capital. In particular, it can be easy to get tripped up by the volume of foreign terminology and acronyms and the speed at which they are thrown around by venture capitalists and startup lawyers. This semantic minefield can put otherwise highly sophisticated entrepreneurs at a disadvantage in negotiating with venture capitalists and can cause them to enter into deals on unfavorable terms or force them to lean too heavily on their attorneys, increasing legal costs.

In this series, we have prepared a form of venture capital term sheet and will be providing commentary on the various deal points (i.e., what they mean, what is “market”, what to watch-out for, etc.).

We will be adding new posts with more detail regarding various key portions of these terms.

Readers may access a Word version of the sample term sheet here: Sample Series A Term Sheet.DOC

The National Venture Capital Association also has created its own form of term sheet.

Continue Reading Understanding VC Financings – Overview and Sample Term Sheet