Dit document bevat een uitwerking van de eerste opdracht voor het vak inleiding ondernemingsrecht van Tilburg University. Elk aspect van de term sheet wordt behandeld en tot in details - in het Engels - uitgelegd. Deze term sheet is beoordeeld met een 9,1 en behoort tot de 3 hoogste cijfers die in ...
duurzaam ondernemen onderdeel ondernemingsrecht antwoorden van de vragen uit het boek
De kern van het ondernemingsrecht SAMENGEVAT
De kern van het ondernemingsrecht SAMENGEVAT
Tout pour ce livre (56)
École, étude et sujet
Tilburg University (UVT)
Bachelor / Premaster Rechtsgeleerdheid
Inleiding Ondernemingsrecht
Tous les documents sur ce sujet (3)
Vendeur
S'abonner
quinnijdam
Aperçu du contenu
Quin Nijdam
SNR: 2080637
Quin Nijdam
Warandelaan 2
5037 AB Tilburg
The Netherlands
ATTN: Bruno François
Egos Ventures Inc.
3423 Piedmont Road NE
Atlanta, GA 30305
United States
Tilburg, March 13 2022
Subject: modified clauses for term sheet regarding cycloramic investors
Dear Mr. François,
First and foremost, I would like to congratulate you on receiving such a great deal. In
order to formally close this deal, you’ll have to sign a so-called ‘term sheet’. You had some
questions about the practical meaning of a term sheet and if the terms noted would be
favorable to you. I’ve read the term sheet that was handed to you carefully and I noticed some
clauses and conditions for which I would advise you to continue the negotiation with the
counterparty. In this letter I will walk you thru the entire term sheet presenting my findings and
possible counterproposals to you. Before we go in deeper on the term sheet it is important to
know what a term sheet is, why a term sheet is introduced by a venture capitalist and what a
term sheet merely includes.
Although not being a commitment to invest, a term sheet outlines the basis for the
more detailed, legally binding contract. The term sheet is not a legally binding document, apart
from two clauses: the exclusive dealing and the non-disclosure clause. These are binding and
I’d strongly suggest you follow these. Despite not being a legally binding which will make
enforcement of the document hard, the most important part in closing a deal is trust between
parties. By breaking with the terms in this term sheet you’ve agreed on you’ll acquire big
reputational damage, which won’t be beneficial in attracting future investors. The reason a
venture capitalist introduces a term sheet is because usually, authority in a company can only
be exercised if you have a majority stake. A term sheet changes this by giving the investor the
ability to exercise authority within the company whilst having a minority stake. The authority
can be exercised thru the stock that is issued to the venture capitalist: a ‘Series A preferred
stock’. The word preferred already implies that this stock has rights that holders of Common
Stock do not have. Those exclusive rights are the clauses that are being proposed to you in
this term sheet. A term sheet merely only includes the broad lines of the conditions. This is
just a minor practicality so conditions in the actual contract can be specified more. By only
noting the term merely it leaves a bit of negotiation space for both parties if the more detailed,
legally binding contract is drawn up.
At first glance, a term sheet might look really messy. Everything looks to be placed in
there at random, but a term sheet does indeed have a set structure. Almost all term sheets
consist out of three types of provisions: a control provision – the so-called governance –, a
Downside Investment Protection provision – the protection –, and an exit provision – the exit
–. The governance provisions look after the control of your company. It arranges things like
the board structure, the voting rights and some subjects on which the venture capitalist has a
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veto right. The protection provisions include the Right of First Refusal, the Right of Co-Sale
and the Drag-Along rights. The exit provision manages things like the liquidation preference.
Each of the above will be addressed in this letter of advise.
To start, I’ve summed up some base information about your company. You’ve
managed to attract two investors: Mark Cuban and Lori Greiner. They will have a joint share
of 15,00% for $500.000,00: both Mark Cuban and Lori Greiner will be contributing $250.000,00
for a 7,50% stake in your company. By making this investment, Mark and Lori (next: venture
capitalist) will be entitled to a ‘Series A Preferred’ stock. The preferred means that they’ll have
certain rights – stated in this term sheet – that Common Stockholders do not have, as already
explained. The ‘A’ in ‘Series A Preferred’ tells us that this is the first round, sometimes referred
to as the seed round, of Preferred Stock that will be issued.
Now that we know that the total amount raised – $500.000,00 – accumulates to
15,00%, it is possible to determine both your post- and pre-money valuation. Your post-money
valuation is equal to ($500.000,,15) = $3.333.333,33. This is the amount of money your
company is said to be worth after the investment by the venture capitalist. Having calculated
that number, your pre-money valuation is equal to $3.333.333,33 minus the $500.000,00
investment, equaling $2.833.333,33. Your pre-money valuation is the valuation that the
venture capitalist thinks your company is worth before he invests. Important to know is that
your pre-money valuation will include a 15,00% option pool. What this means for you will be
explained broadly later on in this letter. With what we know now, we can construct the following
two capitalization tables:
The start of cycloramic
Holder Common Stock Percentage when fully diluted
Founder 2,833,333 100%
Total 2,833,333 100%
*At this point the founder – you – is the only stockholder for cycloramic, meaning that he owns
100% of the company. At the actual capitalization, as can be seen in the table below, an option
pool consisting out of 15,00% of the total equity is taken up into the capitalization table as well
as the 15,00% of equity demanded by Mark and Lori. Because you’re the only shareholder,
this 30,00% total will come out of your wallet. At a pre-money valuation of $2.833.333,33 with
2,833,333 shares outstanding, the current price per share is $1,00.
Actual Capitalization of cycloramic by Series A
Pre- Post-
money money
Common Percentage Series A Total Percentage Value
Stock of total Preferred diluted
Founder 2,333,333 85,00% 2,333,333 70,00% $2.333.333
Mark 250,000 250,000 7,50% $250.000
Cuban
Lori 250,000 250,000 7,50% $250.000
Greiner
Option 500,000 15,00% 500,000 15,00% $500,000
pool
Total 2,833,333 100% 500,000 3,333,333 100% $3.333.333
*After the pitch, this is a basic visualization of what the capitalization table would look like.
Since the price per share is $1,00, Mark and Lori are each entitled to 250,000 shares. In this
case the pre-money valuation is made up of the founder’s stock and the option pool. After the
pre-money valuation, Mark and Lori are added, causing a dilution to your stocks. Your 100%
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of equity has diluted to 70,00% because of the addition of Mark and Lori, both demanding
7,50% of equity plus the creation of a 15,00% option pool.
We now know both you pre- and post-money valuation and we have a visual of what
the capitalization tables will look like. As I just briefly explained, Mark and Lori are only willing
to make the investment stated above if you comply with the clauses in this term sheet.
Although the term sheet is not legally binding, after signing it, it leaves little rooms for
negotiating the terms. This has mainly to do with the trust part of closing a deal. It is therefore
important to create a term sheet that is beneficial to you before you sign it.
Dividends
Firstly, we’ll start with the dividends. Dividend is a periodically paid sum of money that
a company gives out to her shareholders to thank them for their support to the company. The
dividend paid comes from a percentage of the profit that a company reserves to pay her
dividends. This percentage is not determined out of the blue. The company determines the
total sum of money to pay to her investors through future predictions of her total earnings. To
calculate how much dividend you’re entitled to, you’ll have to divide the total dividend payment
by the amount of outstanding stock. The number that comes out of that calculation is the
dividend per share (DPS). Now that we know what a dividend is and how to calculate your
DPS it is important to know why you should pay dividend as a company. Paying dividends can
make a stock look more appealing to new investors since the investor will get a periodically
paid sum of money, only for the fact that he invested in the company. If an investor has to
choose between two stocks that have the same price per stock, but one stock pays dividends
and the other does not, the dividend one will look more appealing. The fact that a dividend is
linked to a profit also makes for a great security to be able to attract and secure new investors
in harsh times. The more people you’ll be able to attract to invest, the more this will drive up
the price of a stock. If the price of the stock goes up, automatically does the companies value
and so does your entitlement in case of any liquidation event.
There are two types of dividend: a cumulative dividend and a noncumulative - a so-
called fixed dividend -. The cumulative aspect means that paying the dividend is an obligation
- a mandatory act - even if you’re not making a profit. This means that if you don’t make any
profit in the first three years, but you do in the fourth, you’ll have to pay out both the past three
years that you weren’t able to pay before as well as the fourth year. A fixed dividend limits
your obligation to pay dividends to whenever funds are legally available. This means that if
you don’t make any profit in the first three years, but you do in the fourth, you won’t have to
pay out the past three years that you weren’t able to pay before as well. Only the fourth year
has to be paid.
This term sheet includes an annual 5,00% cumulative dividend. The first problem that
occurs with a cumulative dividend offered by a start-up has to do with the profit part. As I just
told you, a dividend is part of the profit that is reserved by a company to be paid to investors.
The problem is that a start-up usually doesn’t make a profit, which means that there won’t be
any cashflow to even be able to pay-out dividends. Especially because of the word
‘cumulative’, which mandates you to pay the dividend, paying dividends without cashflow can
become very costly in the long run. The table below shows the payments that have to be made
when complying with the 5,00% cumulative dividend included in this term sheet in case of a
price per share fluctuating between $2,00 and $4,00 at a set dividend percentage of 5,00%,
even if you have no cashflow available to pay dividends the first three years.
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