E V C T S: Valuating Enture Apital ERM Heets
E V C T S: Valuating Enture Apital ERM Heets
DATE: 10/8/20133
After a year of intense work on a shoe-string budget, John Stevens and Edward Lopez breathed a
sigh of relief. They had just received term sheets from two elite venture capital firms for their
startup, Universal MobileApps, Inc. (Universal). Securing this funding would give them the
runway they felt they needed to fully develop their product.
As they looked over the term sheets, they realized that they were unfamiliar with the terms of
these offers, and that there were differences between the two. Neither Stevens nor Lopez had
ever raised venture funding before, so they needed to come up to speed quicklyone term sheet
expired in three days, the other in four.
UNIVERSAL MOBILEAPPS
Edward Lopez had been fascinated with computers for as long as he could remember. He grew
up in New Jersey, but from the time he started high school, he knew he wanted to move to
Silicon Valley and work on the cutting edge of computer technology. As a student in Stanford
Universitys computer science department, he had helped develop several commercial
applications, and had gone on to work at Google.
William Gornall, Theresia Gouw, David Hoyt, and Professor Ilya Strebulaev prepared this case as the basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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Evaluating Venture Capital Term Sheets E-460 p. 2
As he talked to programmers developing apps for mobile devices, he realized that there might be
a good business opportunity if someone could develop a way for people to easily program and
manage apps across multiple platforms, allowing apps on different devices, using different
operating systems, to talk to each other. He began to work on this idea in his spare time.
Lopez had met John Stevens several years earlier. At the time, Stevens was an investment
banking analyst focusing on the mobile industry, with a particular interest in apps. They had met
at a conference, and had a long discussion of the industry and its future.
Lopez and Stevens worked hard to network in the tech community and in late 2011 they began to
talk with angels about the possibility of seed funding. On December 10th, they took an
investment from Lagunita Angels, a well-known angel group, in the form of $300,000 in
convertible notes. (See Exhibit 1 for the angel term sheet.) They used this money to hire a small
staff, and develop software that demonstrated proof of concept on some devices and apps. They
then formed technical partnerships with several mobile device manufacturers, including
Samsung, Google, Microsoft, and Apple.
They also began searching for new funding; their seed money would run out soon, and they
estimated that they needed $3 million, possibly more, to achieve their next major milestone.
They did not want to raise money from their technical partners, as this would tie them too closely
to the investing manufacturer(s). However, their ability to partner with such a diverse group of
companies, including some bitter enemies, impressed the venture capital (VC) community,
leading to interest by several top tier VCs.
On June 10, their efforts were rewarded when they received term sheets from two VC firms, Top
Gun Venture Partners, and Red Baron Venture Capital. (See Exhibits 2 and 3 for term sheets.)
Top Gun was a premier venture capital firm located on Sand Hill Rd in Menlo Park, California
that was known for its successful investments in the past and that had recently raised a large new
fund. Red Baron was a smaller, more recently established venture capital firm with less of a track
Evaluating Venture Capital Term Sheets E-460 p. 3
record. However, Julia Allen, the Red Baron partner Lopez and Stevens had been in
communication with, was well known in the mobile application space as the founder of a
prominent social media app that was recently sold for over $100 million. There were some
obvious differences: Top Gun wanted to do the entire deal, while Red Barons proposed a
syndicated round with Green Hornet Partners, another small VC firm. The valuations also
differedTop Gun offered a post-money valuation of $9 million, valuing the company at $5
million before the new investment. Red Barons post-money valuation was $10 million, implying
a value of $6 million before the new investment.
They scanned the terms, and realized that evaluating these offers, and deciding how to proceed,
would not be easythis was the first time either of them had been in this position. They would
need to consult their attorney, but they wanted to understand the offers in detailthey were
selling a substantial part of their business, and were uneasy about agreeing to terms that they did
not fully understand.
They began to review the two term sheets, item by item. What were the items they should focus
most carefully on? How did the various terms impact their return if the company did well? How
were the venture capital term sheets affected by the outstanding convertible notes? What was
missing from these term sheets? If they ran into trouble, how would they fare under each of the
offers? And how, if at all, should they negotiate these terms?
With only a few days before the term sheets expired, what should they do?
Evaluating Venture Capital Term Sheets E-460 p. 4
Exhibit 1
Term Sheet: Lagunita Angels
This Summary of Terms represents only the current thinking of the parties with respect to certain of
the major issues relating to the proposed private offering and does not constitute a legally-binding
agreement. This Summary of Terms does not constitute an offer to sell or a solicitation of an offer to buy
securities in any state where the offer or sale is not permitted.
Issuer: Universal MobileApps, Inc., a California corporation (the Company)
Type of Security: Convertible notes (the Notes).
Amount of Financing: Up to $300,000 of Notes may be issued.
Purchase Price: Face value.
Interest Rate: Annual interest rate of 10%, payable at maturity.
Term: All principal, together with accrued and unpaid interest under the Notes,
is due and payable one year after the initial issuance of the Notes (the
Maturity Date).
Prepayment: The Notes may not be prepaid without the prior written consent of
holders of the Notes that hold at least 66 2/3% of the aggregate
outstanding principal amount of the Notes.
Automatic Conversion: In the event the Company consummates, prior to the Maturity Date, an
equity financing pursuant to which it sells shares of its preferred stock,
which are expected to be Series A Preferred Stock (the Preferred
Stock), with an aggregate sales price of not less than $2,000,000,
including any and all indebtedness that is converted into Preferred Stock
(e.g., the Notes), and with the principal purpose of raising capital (a
Qualified Financing), then the Notes will automatically convert all
principal, together with all accrued and unpaid interest under the Note,
into the Preferred Stock and common stock. The conversion price will be
a price per share equal to the lesser of (i) 90% of the price per share paid
by the other purchasers of the Preferred Stock sold in the Qualified
Financing and (ii) an amount obtained by dividing (x) $5,000,000 (the
valuation cap) by (y) the Company's fully-diluted pre-money valuation.
Evaluating Venture Capital Term Sheets E-460 p. 5
The total combined number of shares of the Preferred Stock and common
stock to be issued upon conversion will equal (x) all principal, together
with all accrued and unpaid interest under the Note, divided by (y) the
applicable conversion price. Of those shares, the number of preferred
shares will equal (x) all principal, together with all accrued and unpaid
interest under the Note, divided by (y) the price per share paid by the
other investors purchasing the Preferred Stock in the Qualified
Financing. The remaining shares will be common stock.
Voluntary conversion: If the Company consummates a preferred stock financing that does not
constitute a Qualified Financing, the Notes will be convertible into the
preferred stock issued in the financing at a conversion price equal to the
price per share paid by the other investors in the financing. If the
Company does not consummate a Qualified Financing prior to the
Maturity Date, the Notes will be convertible into common stock at a
conversion price equal to the lesser of (i) $1.00 per share and (ii) an
amount obtained by dividing (x) $5,000,000 (the valuation cap) by
(y) the Company's fully-diluted pre-money valuation.
Liquidity events: Upon a change of control or an IPO, the Notes will be convertible into
common stock at a conversion price equal to the lesser of (i) $1.00 per
share and (ii) an amount obtained by dividing (x) $5,000,000 (the
valuation cap) by (y) the Company's fully-diluted pre-money valuation.
Upon a change of control or an IPO, the Note holder will have the option
to have the Note instead be repaid with a premium equal to 20% of the
outstanding principal.
Other: This Summary of Terms is intended as an outline of certain of the
material terms of the Notes and does not purport to summarize all of the
conditions, covenants, representations, warranties and other provisions
that would be contained in definitive documentation for the Notes.
Non-Binding: The undersigned acknowledge that this Summary of Terms does not
constitute a binding agreement.
This Summary of Terms reflects our mutual intentions as a basis for proceeding toward negotiation of
definitive agreements.
Evaluating Venture Capital Term Sheets E-460 p. 6
Exhibit 2
Term Sheet: Top Gun Venture Partners
I. SUMMARY
Option Pool: Post-closing the Company shall have a 25% pool available.
D. Voting Rights: The holder of each share of Series A Preferred will have
the right to that number of votes equal to the number of
shares of Common Stock issuable upon conversion thereof.
E. Protective Provisions: The consent of the Preferred Majority will be required for
any action that:
I. Information Rights: For so long as at least 20% of the originally issued Series A
Preferred is outstanding, the Company will provide
inspection rights as reasonably requested by the holders of
Series A Preferred and will deliver to the holders of Series
A Preferred or Common Stock issued upon conversion
thereof:
Evaluating Venture Capital Term Sheets E-460 p. 11
(i) within 120 days after the end of each fiscal year,
annual financial statements, audited by a nationally
recognized public accountant selected by the Board
including the approval of a majority of the Preferred
Directors;
(ii) within 30 days after the end of each month and each
quarter, monthly and, as applicable quarterly, unaudited
financial statements;
(iii) within 30 days before the end of each fiscal year, the
financial plan of the Company for the next fiscal year; and
M. Board of Directors: The board will initially have three (3) members. TGVP
shall be entitled to designate one board member, initially
Andrew Liekerman. Common shall be entitled to designate
2 board seats, one of which will be CEO of the Company.
Any additional board members in the future shall be
mutually agreed upon by both TGVP and the Company.
The Company shall reimburse all Board members
reasonable and actual out of pocket expenses incurred in
attending Board meetings.
The Company agrees to pay for all reasonable legal and due diligence fees and expenses
of TGVP counsel listed below and consultants up to $30,000 upon the closing.
V. NO SHOP
Upon reaching agreement on this Summary of Proposed Terms and Conditions, neither
the Company nor any of their directors, officers or agents will entertain discussions with any
other investor or consider any other investment or acquisition proposals for a period of 30 days
without the prior approval of TGVP.
VI. CONFIDENTIALITY
This Summary of Proposed Terms and Conditions and any related correspondence from
the Investors are to be held in strict confidence and are not to be disclosed to any party, other
than the Companys legal and financial advisors, without the prior approval of TGVP.
VII. EXPIRATION
This Summary of Proposed Terms and Conditions shall expire at 5:00 pm US Pacific
Time on June 14, 2012 if not executed by the Company and TGVP by such date.
Evaluating Venture Capital Term Sheets E-460 p. 13
This Summary of Proposed Terms and Conditions is only a statement of the present intentions of
the parties hereto and is not a binding contract, commitment or agreement, with the exception of
Section V (No-Shop) and Section VI (Confidentiality) which Sections shall be binding upon the
parties, and shall be superseded in full by any definitive agreement the parties may enter into
with respect to an investment in the Company. If the parties do not enter into an agreement with
respect to an investment in the Company on or before the expiration of the No-Shop period
described above, the provisions Section VI (Confidentiality) shall remain in full force and effect
for one (1) year from the date of such No-Shop expiration and be enforceable by specific
performance.
By: By:
Title: Title:
Date: Date:
Evaluating Venture Capital Term Sheets E-460 p. 14
Exhibit 3
Term Sheet: Red Baron Venture Capital
TERM SHEET
FOR SERIES A PREFERRED STOCK FINANCING OF
UNIVERSAL MOBILEAPPS, INC.
JUNE 10, 2012
This Term Sheet summarizes the principal terms of the Series A Preferred Stock Financing
of Universal MobileApps, Inc., (the Company). In consideration of the time and expense
devoted and to be devoted by the Investors with respect to this investment, the No
Shop/Confidentiality provisions of this Term Sheet shall be binding obligations of the Company
whether or not the financing is consummated. No other legally binding obligations will be
created until definitive agreements are executed and delivered by all parties. This Term Sheet is
not a commitment to invest, and is conditioned on the completion of due diligence, legal review
and documentation that is satisfactory to the Investors. This Term Sheet shall be governed in all
respects by the laws of the State of California.
Offering Terms
Price Per Share: $1 per share (based on the capitalization of the Company set forth
below) (the Original Purchase Price).
Pre-Money Valuation: The Original Purchase Price is based upon a fully-diluted pre-money
valuation of $6,000,000 and a fully-diluted post-money valuation of
$10,000,000 (including an employee pool representing 15% of the
fully-diluted post-money capitalization).
Capitalization See Addendum A for the pro forma capitalization following the
proposed offering.
CHARTER
First pay one times the Original Purchase Price plus accrued
dividends on each share of Series A Preferred. Thereafter, Series A
Preferred participates with Common Stock pro rata on an as-
converted basis until the holders of Series A Preferred receive an
aggregate of 2.50 times the Original Purchase Price (including the
amount paid pursuant to the preceding sentence).
Voting Rights: The Series A Preferred shall vote together with the Common Stock
on an as-converted basis, and not as a separate class, except (i) the
Series A Preferred as a class shall be entitled to elect two (2)
members of the Board (the Series A Directors), and (ii) as
required by law. The Companys Certificate of Incorporation will
provide that the number of authorized shares of Common Stock may
be increased or decreased with the approval of a two-thirds majority
of the Preferred and Common Stock, voting together as a single
class, and without a separate class vote by the Common Stock.
Optional Conversion: The Series A Preferred initially converts 1:1 to Common Stock at
any time at option of holder, subject to adjustments for stock
dividends, splits, combinations and similar events and as described
below under Anti-dilution Provisions.
Anti-dilution Provisions: The conversion price of the Series A Preferred shall be subject to
adjustment in the event of any stock split, stock dividend,
combination or similar recapitalization or change with respect to the
Companys Common Stock. The conversion rate of the Preferred
Stock shall be subject to a broad-based weighted average anti-
dilution adjustment in the event of issuance of equity securities at a
price less than the then-effective conversion price for each
applicable series of Preferred Stock, except for the issuance of
securities described below:
Conditions to Closing: Standard conditions to Closing, which shall include, among other
things, satisfactory completion of financial and legal due diligence,
qualification of the shares under applicable Blue Sky laws, the filing
of a Certificate of Incorporation establishing the rights and
preferences of the Series A Preferred, and an opinion of counsel to
the Company.
Counsel and Expenses: Investor counsel to draft closing documents. Company to pay all
legal and administrative costs of the financing, including reasonable
fees (not to exceed $40,000) and expenses of Investor counsel.
Registration Rights:
Registrable Securities: All shares of Common Stock issuable upon conversion of the Series
A Preferred will be deemed Registrable Securities.
Demand Registration: Upon earliest of (i) four years after the Closing; or (ii) six months
following an initial public offering (IPO), persons holding two-
thirds of the Registrable Securities may request one (consummated)
registrations by the Company of their shares. The aggregate offering
price for such registration may not be less than $10 million. A
registration will count for this purpose only if (i) all Registrable
Securities requested to be registered are registered and (ii) it is
closed, or withdrawn at the request of the Investors (other than as a
result of a material adverse change to the Company).
Registration on Form S-3: The holders of 20% of the Registrable Securities will have the right
to require the Company to register on Form S-3, if available for use
by the Company, Registrable Securities for an aggregate offering
price of at least $2.5 million. There will be no limit on the aggregate
number of such Form S-3 registrations, provided that there are no
more than two per year.
Evaluating Venture Capital Term Sheets E-460 p. 18
Lock-up: Investors shall agree in connection with the IPO, if requested by the
managing underwriter, not to sell or transfer any shares of Common
Stock of the Company for a period of up to 180 days following the
IPO (provided all directors and officers of the Company agree to the
same lock-up). Such lock-up agreement shall provide that any
discretionary waiver or termination of the restrictions of such
agreements by the Company or representatives of the underwriters
shall apply to Investors, pro rata, based on the number of shares
held.
Management and Information A Management Rights letter from the Company, in a form
Rights: reasonably acceptable to the Investors, will be delivered prior to
Closing to each Investor that requests one.
Right to Participate Pro Rata in All Investors shall have a pro rata right, based on their percentage
Evaluating Venture Capital Term Sheets E-460 p. 19
Future Rounds: equity ownership in the Company (assuming the conversion of all
outstanding Preferred Stock into Common Stock and the exercise of
all options outstanding under the Companys stock plans), to
participate in subsequent issuances of equity securities of the
Company (excluding those issuances listed at the end of the Anti-
dilution Provisions section of this Term Sheet. In addition, should
any Investor choose not to purchase its full pro rata share, the
remaining Investors shall have the right to purchase the remaining
pro rata shares.
Matters Requiring Investor So long as the holders of Series A Preferred are entitled to elect a
Director Approval: Series A Director, the Company will not, without Board approval,
which approval must include the affirmative vote of both of the
Series A Directors:
(i) make any loan or advance to, or own any stock or other
securities of, any subsidiary or other corporation, partnership, or
other entity unless it is wholly owned by the Company; (ii) make
any loan or advance to any person, including, any employee or
director, except advances and similar expenditures in the
ordinary course of business or under the terms of a employee
stock or option plan approved by the Board of Directors; (iii)
guarantee, any indebtedness except for trade accounts of the
Company or any subsidiary arising in the ordinary course of
business; (iv) make any investment inconsistent with any
investment policy approved by the Board; (v) enter into or be a
party to any transaction with any director, officer or employee of
the Company or any associate (as defined in Rule 12b-2
promulgated under the Exchange Act) of any such person except
transactions made in the ordinary course of business and
pursuant to reasonable requirements of the Companys business
and upon fair and reasonable terms that are approved by a
majority of the Board of Directors; (vi) hire, fire, or change the
compensation of the executive officers, including approving any
option grants; (vii) change the principal business of the
Company, enter new lines of business, or exit the current line of
business; (viii) sell, assign, license, pledge or encumber material
technology or intellectual property, other than licenses granted in
the ordinary course of business; or (ix) enter into any corporate
strategic relationship involving the payment contribution or
assignment by the Company or to the Company of assets greater
than $100,000.00.
Non-Disclosure and Each current and former Founder, employee and consultant will
Developments Agreement: enter into a non-disclosure and proprietary rights assignment
agreement in a form reasonably acceptable to the Investors.
Evaluating Venture Capital Term Sheets E-460 p. 20
Board Matters: The Board of Directors shall meet at least quarterly, unless
otherwise agreed by a vote of the majority of Directors.
Stock Vesting: Stock owned by John Stevens and Edward Lopez will be 25%
vested and the remaining 75% will be subject to repurchase by the
Company or its designee at the original issuance price, in the event
of a termination of the holders relationship with the Company. The
repurchase right shall last for 36 months from the date of Closing
and will lapse monthly. All stock and stock equivalents issued after
the Closing to employees, directors, consultants and other service
providers (including the option grants to Founders) will be subject to
vesting as follows: 25% after one year, with remaining vesting
monthly over next 36 months.
Key Person Insurance: Company to acquire life insurance on Founders John Stevens and
Edward Lopez in an amount satisfactory to the Board. Proceeds
payable to the Company.
Right of first Refusal/ Company first and Investors second (to the extent assigned by the
Right of Co-Sale: Board of Directors,) will have a right of first refusal with respect to
any shares of capital stock of the Company proposed to be
transferred by Founders, with a right of oversubscription for
Investors of shares unsubscribed by the other Investors. Before any
such person may sell Common Stock, he will give the Investors an
opportunity to participate in such sale on a basis proportionate to the
amount of securities held by the seller and those held by the
participating Investors.
VOTING AGREEMENT
Board of Directors: At the initial Closing, the Board shall consist of five (5) members
comprised of (i) Julia Allen as the representative designated by
RBVC, as the lead Investor, (ii) the representative designated by
GHC, (iii) the first representative designated by the Founders who
will then serve as the Chief Executive Officer of the Company, (iv)
the second representative designated by the Founders, (v) one
person who is not employed by the Company and who is mutually
Evaluating Venture Capital Term Sheets E-460 p. 21
OTHER MATTERS
Expiration: This Term Sheet expires on June 13, 2012 if not accepted by the
Company by that date.
By: By:
Title: Title:
Date: Date: