Term Sheets: Six to One - Half a Dozen to the Other (Part 1)
This was going to be one post, but it reached 5000 words, so I broke it into two. If Vinod Khosla is standing there ready to write you a check for $10 million, perhaps you should take the money (and not worry about the 1x preference with full participation and 8% dividend) before he changes his mind. These days, clients are having a hard time finding any financing. So, almost always, you take what you can get. However, let’s engage in the willing suspension of disbelief. A name brand VC has handed you a term sheet with everything slanted her way. You are...
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What about preference with a capped participation?
The way capped preferences work is that in a sale of the business, the VC investor gets its investment back (a so-called 1x preference) and then participates with the common in any proceeds from the sale that exceed the preference. Imagine the fairly frequent case of a 2x or 3x capped participation. This means that the VC gets to participate until her return is 2x or 3x, as the case may be, their investment. (If the VC would get more by converting, they will simply convert.) This kind of structure helps the VC in low to intermediate return scenarios. They...
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No Exit
LogMeIn has now successfully opened trading – the fourth IPO of a venture backed company since RackSpace in August of 2008. Four is better than zero. But if you consider how many there were in 2007 (fifty something, if memory serves me well), we still have a long way to go before there is an IPO market that will sustain the so-called venture model. In the meanwhile, consider a recent article in VentureWire to the effect that there were 137 M&A exits for venture backed companies in the first half of 2009, and – here is the truly alarming news – only 2...
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