⬛ What does a structured term sheet look like? Anything that deviates from these market terms.
Some years ago, an associate at a law firm told me that Pay-to-play provisions were "very common" at Series A—as in, a Pay-to-play provision was inserted in almost all venture deals they did. 👀
This was before law firms like @CooleyLLP and data aggregators like @getaumni @cartainc & @PitchBook published their data freely & consistently. Today we know better.
Everyone in a venture deal wins when they know what's important. Leave the rest to the market.
This is for early-stage financings but there are often shared terms at later stages.
Key Legend:
• Liquidation Preference: Ensures investors get their investment back before other equity holders in the event of an exit or liquidation (1x = dollar for dollar, non-participating = no double dip)
• Dividends: These are distributions of profits to shareholders, and non-cumulative means that if they are not paid out in one year, they do not accumulate to be owed in subsequent years. Startups generally don't issue dividends, but CUMULATIVE dividends are a sneaky way of seeking higher liquidation premiums.
• Anti-Dilution: This provision protects investors from dilution if later shares are sold at a lower price than what they paid, with the broad-based weighted average being a method to fairly adjust the price based on the new & existing shares.
• Pro-rata rights: These rights give "major investors" (lead VCs) the option to participate in future funding rounds to maintain their ownership percentage.
• Board Seat: Right of a venture capital lead investor to have one representative on the company's board of directors (Median # board seats for Seed is 3, Series A is 5)
• Right of First Refusal (ROFR): This grants the investor the right to match any offer the company receives for its shares before the company can sell to another party.
• Redemption: This term, rarely used in early-stage deals, would allow investors to force the company to buy back their shares under certain conditions.
• Pay-to-play: A rarely included provision that requires investors to participate in future financings to benefit from certain protections like anti-dilution or even holding preferred stock.
• Protective provisions: These are veto rights or supermajority vote requirements for major decisions, aligned with the NVCA (National Venture Capital Association) default standards.1) Liquidation Preferences
Feb 22, 2023 • 6 tweets • 4 min read
A paradox with venture funds right now:
• VC funds are at a 9-year low (-65% in $ Q4 2022)
• Billions still being raised & closed in new funds (GGV–$2.5B, Bain Capital–$2.4B, SignalFire–$900m)
What's the key issue?
• It's not first–time FUNDS. It's first time FUND MANAGERS.
Limits:
• 250 LPs if venture fund <$10m—§3(c)(1)(C)
• 2,000 LPs if all Qualified Purchasers—§3(c)(7)
• ∞ foreign LPs—Reg S.
A legal framework for forming parallel funds.
1/x 🧵
2/ But why are there even limits to raising a fund?
• Three laws makeup 80%+ of venture fund law:
—Securities Act
—Investment Company Act ("ICA")
—Investment Advisers Act
The ICA is one of the three backbones of venture law and the reason a fund has limits.
• 100, 250, or 2k
Nov 19, 2021 • 6 tweets • 2 min read
After 12 years of practicing law each year I learn something new that surprises me—but shouldn't.
2021
• VC fund advisers who file with FINRA qualify as accredited investors, regardless if they themselves are accredited or not.
New Rule: All VC funds = accredited investors.🤯
Now, this is a "new" rule, but it has been on the books since Aug 2020. How did I miss it?
I was researching on a website that hadn't been updated since mid-2020 (Cornell Law).
Eventually someone would have probably called me out.
But how I found out was answering an email.
Mar 2, 2021 • 6 tweets • 3 min read
Law of VC Episode #18 - Simplifying the Safe
• Remove Valuation Caps & Discounts
• Replace with Conversion Percentage
Instead of teaching founders the nuances of discounts, valuation caps and MFNs, why not simplify the Safe and treat it like a cap table with fixed ownership? 2/ After five years of testing pre-money Safes, YC made two major changes to the Original Safe:
1) Pro rata rights removed by default 2) Valuation Cap is now "Post-Money"
What does that mean?
Here's a chart explaining the differences and how to count the other pre-money stuff.
Nov 24, 2020 • 11 tweets • 4 min read
Five Reasons Why Raising a VC Fund is So Difficult: 1. Lack of Transparency & Trad Biases 2. Reliance on Two Types of LPs—FOs and HNWs 3. Risk Aversion 4. Strong Competition 5. Covid-19
First an #SPV in the VC context simply means an entity setup to provide financing to startups or to acquire secondary shares in pre-IPO companies.
SPV #structures:
-LLC (common)
-LP
-Series LLC: Alumni Ventures Group
-Series LP: Assure/AngelList/etc
2/ Traditionally, #SPVs (special purpose vehicles) were used for structured financing transactions. These entities blew up in the 2009 financial crisis.
Today, it's very common to see SPVs on a Silicon Valley startup cap table. For example, in @Uber's #IPO there were 100+ SPVs.
