week 7 discussion
FINANCING THE ENTREPRENEURIAL VENTURE
Documentation package (some examples) of investor funding of startups
ENCLOSURES
In this packet you will find examples of:
• A typical NDA (non-disclosure agreement), which is a contract almost always signed by
the startup seeking funds and a potential investor, in which legal confidentiality is ensured.
Startups often have unique value propositions, business models, ideas business processes or
products and IP that must be protected.
• A Deal Termsheet This is signed when the parties have agreed in principle to do the
business, the investor will invest, and the startup will share the equity. The example you
have in this packet is for the 2nd round of finance of an actual startup company. This
termsheet forms the financial and primary terms of the investment agreement, which is not
included in this packet as these can be typically 50 pages or so and must be drafted by
experienced attorneys in corporate and startup law.
• A Spreadsheet of the agreed valuation and termsheet ownership which shows the final
equity holdings according to the investment agreement and terms of the termsheet deal.
This is always incorporated by reference and made part of the investment agreement as it
details precisely what percentage of the company the various parties (investors, founders,
and other parties) own at various steps.
Financing Examples
FINANCING THE ENTREPRENEURIAL VENTURE
Complete the Business Plan Must have to seek investment
Undertake Investor Search Major Undertaking
Negotiate with Interested
Investors NDA, Valuation, Term Sheets
Sign Deal & get to work
Always Milestone conditions
Get ready for next round
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MUTUAL NON-DISCLOSURE AGREEMENT
THIS MUTUAL NON-DISCLOSURE AGREEMENT (“Agreement”) is made the
day of 20xx BETWEEN:-
(1) THE STARTUP, a THE INVESTOR incorporated in the state of Maryland having its
address at
(2) a THE INVESTOR
incorporated in and having its
address at
(“Investor”).
WHEREAS:-
(A) THE STARTUP and the THE INVESTOR hereto have entered, or intend to enter, into
discussions concerning
(the “Purpose”).
(B) Pursuant to the Purpose the parties have agreed to exchange certain Confidential
Information (hereinafter defined) concerning the Purpose and have agreed to provide
and to accept such Confidential Information on a strictly confidential basis and on the
terms and conditions set out below.
(C) The party disclosing information shall hereinafter be referred to as the “Disclosing
Party” and the party receiving such information shall be referred to as the “Receiving
Party.”
IT IS HEREBY AGREED between the parties as follows:-
1. CONFIDENTIAL INFORMATION
1.1 The term “Confidential Information” for the purpose of this Agreement shall mean any
and all information disclosed, furnished or communicated (if in writing, machine
readable form, text, drawings, schematics, designs, or any other tangible form
whatsoever to be marked or otherwise designated as being “Confidential” or
“Proprietary” or if disclosed orally, to be stated at the time of disclosure as being
Confidential, reduced into writing and delivered to the Receiving Party within thirty
(30) days of disclosure) including but not limited to, research, product plans, trade
secrets, algorithms, know-how, formulae, schematics, products, pricing, services,
customers, markets, developments, inventions, processes, product development,
Initial: _____________ _____________ Page 2 of 5
forecasts, marketing or finances by or on behalf of the Disclosing Party to the Receiving
Party in connection with the Purpose.
1.2 Notwithstanding any other provision of this Agreement, the parties hereto acknowledge
that Confidential Information shall not include any information that:
a) is in the public domain at the time of disclosure hereunder, or subsequently comes
into the public domain other than by breach of this Agreement;
b) was previously in the possession of the Receiving Party without obligation of
confidentiality as evidenced by written records;
c) is independently developed by the Receiving Party without use of the Confidential
Information as evidenced by written records;
d) a party hereto lawfully receives without any restriction on disclosure from a third
party; and
e) is in response to a valid order of a court or other governmental body or is otherwise
required by law to be disclosed, provided the responding party gives sufficient
notice to the other party to enable it to take protective measures.
2. OBLIGATIONS OF CONFIDENTIALITY
2.1 In consideration of the disclosure and release of the Confidential Information by or on
behalf of the Disclosing Party to the Receiving Party, the Receiving Party hereby agrees
to hold and keep in strictest confidence any and all such Confidential Information. The
Receiving Party shall use the same degree of care to avoid disclosure or use of the
Confidential Information as it uses in respect of its own information of like importance
but in no case less than a reasonable degree of care.
2.2 The Receiving Party undertakes that it shall make use of the Confidential Information
solely for the Purpose.
2.3 The Receiving Party shall take all steps and measures to minimise the risk of disclosure
of the Confidential Information by ensuring that only such employees whose duties
require them to possess the Confidential Information for the Purpose shall have access
to the Confidential Information on a need-to-know basis and such disclosure shall be on
terms not less restrictive than those herein contained. In any event, the Receiving Party
shall be responsible for any breach of the terms of this Agreement by any of its
employees and shall take all measures (including but not limited to court proceedings)
to restrain such employees from prohibited or unauthorised disclosure or use of the
Confidential Information.
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2.4 The Receiving Party shall ensure that the Confidential Information will not be copied
or reproduced in any form whatsoever by the Receiving Party, its employees or any
other third parties without the express written permission of the Disclosing Party.
2.5 The Receiving Party hereby agrees that it shall promptly return to the Disclosing Party
any or all such Confidential Information upon request by the Disclosing Party at any
time, or at the Disclosing Party’s request, destroy all such Confidential Information and
issue a written document signed by an officer confirming such destruction.
2.6 Obligations of confidentiality under this Agreement shall not be construed to limit either
party’s right to independently develop products without use of the Confidential
Information. The unintentional use of Confidential Information in non-tangible and
non-recorded form which may be incidentally retained by persons who have had access
to Confidential Information may not be limited
3. NO LICENSE GRANTED
3.1 Nothing in this Agreement shall be construed as granting expressly or by implication
during the duration of this Agreement or thereafter, any transfer, assignment, license on
any other rights in respect of any license, patent, copyright or any other industrial or
intellectual property right in force and belonging to the Disclosing Party which rights
shall remain vested in and the absolute property of the Disclosing Party.
4. REPORTING MISUSE OR MISAPPROPRIATION OF CONFIDENTIAL
INFORMATION
Each party agrees to promptly notify the other party in writing of any misuse or
misappropriation of such Confidential Information of the other party which may come
to its attention.
5. DURATION OF AGREEMENT
This Agreement shall be effective upon its execution, and shall, unless otherwise agreed
between the parties in writing, continue for a period of three (3) years from the date this
Agreement is executed, provided that the obligations undertaken herein with respect to
Confidential Information received prior to the termination of this Agreement shall
survive and continue for three (3) years after disclosure of Confidential Information
notwithstanding the expiration or termination of this Agreement.
6. REMEDIES
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Nothing herein shall be construed as limiting any party’s rights to those expressly set
out herein, to the exclusion of such other rights as may be available under common law
or equity. The Receiving Party acknowledges and agrees that due to the importance of
the Disclosing Party’s Confidential Information, there may be no adequate remedy at
law for any breach of its obligations hereunder, which breach may result in irreparable
harm to the Disclosing Party, and therefore, that upon any such breach or any threat
thereof, the Disclosing Party shall be entitled to seek appropriate equitable relief in
addition to whatever remedies it might have at law.
7. RIGHTS CUMULATIVE
The rights and remedies of each of the parties provided herein are cumulative and not
exclusive of any rights and remedies provided by law to such party.
8. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of the
state of Maryland, USA.
9. JURISDICTION
The parties irrevocably submit to the non-exclusive jurisdiction of the courts Maryland.
Initial: _____________ _____________ Page 5 of 5
IN WITNESS WHEREOF the parties hereto have caused their duly authorised representatives
to set their hands the day and year first abovewritten.
For and on behalf of
THE STARTUP PTE LTD
Name :
Title :
For and on behalf of
[ ]
Name:
Title:
SIGNATURE PAGE TO THE NON-DISCLOSURE AGREEMENT BETWEEN THE STARTUP PTE
LTD AND [ ] DATED [ ]
1
STARTUP COMPANY
Term Sheet
June 7, 20xx
Co-lead Investor 1: Venturebank Infrastructure Fund
(“VB” or “Investor 1”)
Co-lead Investor 2: Golden Socks Private Equity Fund
(“GS” or “Investor 2”)
Co-lead Investor 3: VC International Group Consortium
(“VC” or “Investor 3,” comprised of the VC group
Managing Director of
The co-lead investing group
And of the investment: VC International Group Consortium
Lead Vendor Financier
And Managing Director Crisco Capital
of Vendor Finance: (“Crisco” or “Lead VF”)
____________________________________________________________________________________
co-lead Amount: US$ 60-70 million to be invested in STARTUP Company (“STARTUP ”
or “the Company”), of which VB will contribute US$ 30 million, GS will
contribute US$20 million, and VC will contribute US$20 million.
Non-lead investors
Amount to be
Obtained: US$5-20 million, resulting in a fully-funded business plan for the
company. Non-lead co-investors to be confirmed subsequent to
execution of this document.
Co-lead total
Shares Purchased: A number of shares of Series B Convertible Preferred Stock, such that
the total number of shares on a fully diluted “as converted basis”
multiplied by the Purchase Price is equal to US$ xxx million post-
money. Fully diluted “as converted basis” means the sum of: 1) all
Common Stock shares; 2) all Series Preferred Stock shares; and 3) all
allocated options (whether issued or not-yet issued) on “as converted
basis”.
Upon completion of the Investment, 3 co-leads will own x%, other
shareholders will own y%, and the Options will comprise z% of the
Company’s fully diluted shares.
Divbursements: The funds will be disbursed according to the following schedule, with the
following specific milestones:
Tranche 1: US$30 million on 30 June 2001, with 15 million Series B
Convertible Preferred Stock issued, of which 3 co-leads will contribute
US$x million for x(a) million Series B Convertible Preferred Stock.
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Tranche 2: US$ 35 million on January 30, 2002, with y million Series B
Convertible Preferred Stock, , of which 3 co-leads will contribute US$y
million for y(b) million Series B Convertible Preferred Stock.
Milestones: To achieve two of the three targets as follows:
(a) To generate a target number of Subscribers (to be agreed)
(b) To meet its CAPEX target (to be agreed)
(c) To meet its OPEX target (to be agreed)
(hereinafter referred to as the “Target” or collectively the “Targets”)
For the purposes of certainty, a Target is deemed to be achieved if the
Company is able to achieve a performance figure which is +20% or -20%
of the number for a given Target.
Tranche 3: US$ 30 million on July 30, 2002, with z million Series B
Convertible Preferred Stock, , of which 3 co-leads will contribute US$15
million for z(c) million Series B Convertible Preferred Stock.
Milestones: To achieve two of the three targets as follows:
(d) To generate a target number of Subscribers (to be agreed)
(e) To meet its CAPEX target (to be agreed)
(f) To meet its OPEX target (to be agreed)
(hereinafter referred to as the “Target” or collectively the “Targets”)
For the purposes of certainty, a Target is deemed to be achieved if the
Company is able to achieve a performance figure which is +20% or –
20% of the number for a given Target.
Conversion: Each share of Series B Convertible Preferred Stock is convertible into
one share of Common Stock at any time, at the option of the holder. The
conversion ratio is subject to adjustments for stock splits and for stock
issued at less than the current conversion price, excluding approved
employee stock options.
Mandatory Conversion: Upon a public sale of Common Stock resulting in at least US$50 million
of proceeds to STARTUP. (hereinafter defined as an “IPO”).
Voting Rights: The Series B Convertible Preferred Stock will vote, together with the
common stock, on an “as if converted” basis.
Debt Financing: Crisco, which has already approved Startup for vendor finance, and
according to the term sheet negotiated, shall provide The Company with
vendor finance in an amount not to exceed X$. For non-Crisco vendor
finance up to an amount of US$50M, Crisco shall act as lead Vendor
Financier. Such debt financing shall include entering into vendor finance
arrangements and the issuance of debt instruments.
Affirmative Covenants: STARTUP shall furnish Series B Preferred shareholders who hold 10%
or more of the outstanding shares (whether Preferred or Common) with
certain information and permit access to certain data including the
following:
1. Monthly financial statements prepared in accordance with U.S.
GAAP (including an income statement, a cash flow statement, a
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balance sheet, and comparisons to budget) within 30 days of month-
end.
2. Annual audited financial statements prepared in accordance with
U.S. GAAP within 60 days of year-end.
3. Monthly Board meetings to review STARTUP’ progress.
4. Annual Business Plan, approved by STARTUP’ Board (including
monthly budget) no later than 30 days prior to the beginning of the
fiscal year.
Negative Covenants: Without the approval of a majority of the holders of Series B Convertible
Preferred stock, STARTUP will not take certain actions including the
following:
1. Sell or issue any equity or debt securities in the company, with the
exception of Board-approved options to employees.
2. Declare or pay any dividend or distribution or otherwise repurchase
or redeem any equity securities.
3. Make any acquisitions or enter into any mergers.
4. Engage in any business other than that described in the currently
approved Business Plan.
5. Amend the currently approved Business Plan.
6. Appoint, remove, or change the terms of employment (including
compensation) of its CEO, CFO, COO and its other senior
executives.
7. Other mutually agreed covenants.
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Executive
Management: The Company intends to make an offer of employment to Mr. Big
Cheese as Chief Executive Officer of the Startup Group, who is prepared
to come on board immediately. Upon Mr. Big Cheese’s acceptance of
the position, Messrs. (Founders 1 & 2) shall move to the positions of
Executive Vice-Chairmen and shall continue in executive capacity and
form the Executive Committee together with Mr. Big Cheese, and the to-
be-named CFO.
Board Seats: VB will have one (1) seat out of eight on the Board of Directors. GS will
have one (1) seat out of eight on the Board of Directors. The other six are
or will be held by (to be named), and two outside directors to be
nominated). There will be an optional ninth board seat to be allocated to
(potential additional investor) in the event of their confirmed investment.
Right of First Refusal: Until an IPO, in the event that any shareholder desires to sell or transfer
all or a portion of its shares, the other shareholders will have the pro-rata
right to purchase such shares on the same terms and conditions as those
offered by prospective buyers.
Pre-emptive Rights: If the Company issues additional equity securities prior to an IPO, all
shareholders will be provided the opportunity to purchase their pro rata
share so as to maintain their fully-diluted equity ownership position.
Registration Rights: In the event of an IPO, the Investor will have rights to three (3) demand
registrations and unlimited “piggyback” registrations of their securities, if
applicable. Expenses for these registrations shall be borne by the
Company.
Expenses: In the event this transaction does not complete, the Investor and the
Company will each bear its own expenses associated with this
transaction.
Termination: If a definitive agreement is not reached on or before June 30, 20xx, or
such other date as the Company, its shareholders and the Investor may
agree in writing, this Term Sheet shall be automatically terminated on
such date.
Disclosure: From and after the date hereof, STARTUP, all its shareholders and
Investor agree that they shall make no written or other public disclosures
regarding this transaction to any individual or organization without the
prior written consent of the other party save to their respective advisers
or as required by law or any regulatory authority.
Binding Effect The parties understand and acknowledge that, except for the
and Liability: obligations of the Company, its shareholders and the Investor in the
sections on “Expenses”, “Termination”, “Disclosure,” and this “Binding
Effect and Liability,” this Term Sheet, or any attachment hereto, is not a
legally binding agreement and that the failure to execute and deliver a
definitive agreement shall impose no liability on the Company, its
shareholders and/or the Investor.
Should the terms of this Term Sheet be acceptable to the Company, please so indicate on the
enclosed copy of this letter and return it to the undersigned.
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Signature blocks to be prepared…
By: ___________________________
Accepted and Agreed on behalf of STARTUP, Inc., and all its Shareholders
By: __________________________
Founder 1
Chief Executive Officer, Startup.
Date: _________________________
FINAL EQUITY HOLDINGS INVESTMENT AGREEMENT Shares Outstanding Shares Issued Value Per Share Value Ownership
Post Money Series A 57,968,750$ after inclusion of employee stock option plan at same per share value Shares owned Founders 10,500,000 45.28% Shares owned Employees SOP 4,637,500 20.00% Shares owned Investor 1 5,950,000 25.66% Shares owned Investor 2 700,000 3.02% Shares owned Investor 3 1,400,000 6.04%
23,187,500 2.50 100.00%
Series B Stage - 1 June 2001 - USD20M Drawdown Premium relative to previous round 1.00 Pre Money Series B Stage 1 57,968,750$ 2.5 Shares owned Founders 10,500,000 0 33.67% Shares owned Employees SOP 4,637,500 0 14.87% Shares owned Investor 1 5,000,000 5,950,000 2,000,000 25.49% Lead New Investor 10,000,000 4,000,000 12.83%
0 0.00% Shares owned Followers 0 0.00% Shares owned Investor 2 700,000 0 2.24% Shares owned Investor 3 5,000,000 1,400,000 2,000,000 10.90%
23,187,500 8,000,000 2.50 Total number of shares 31,187,500 2.50 Post Money Series B Stage 1 77,968,750.00 100.00%
Series B Stage 2 - January 2002 - USD40M Drawdown Premium relative to previous round 2.00 Pre Money Series B Stage 2 155,937,500$ 5 Shares owned Founders 10,500,000 0 26.79% Shares owned Employees SOP 4,637,500 0 11.83% Shares owned Investor 1 7,950,000 0 20.29% Lead New Investor $30,000,000 4,000,000 6,000,000 25.52% Shares owned Followers $10,000,000 - 2,000,000 5.10% Shares owned Investor 2 700,000 0 1.79% Shares owned Investor 3 3,400,000 0 8.68%
31,187,500 8,000,000 5.00 Total number of shares 39,187,500 5.00 Post Money Series B Stage 2 195,937,500.00 100.00%
Series B Stage 3 - June 2002 - USD40M Drawdown Premium relative to previous round 2.00 Pre Money Series B Stage 2 391,875,000$ 10 Shares owned Founders 10,500,000 0 24.31% Shares owned Employees SOP 4,637,500 0 10.74% Shares owned Investor 1 7,950,000 0 18.41% Lead New Investor $30,000,000 10,000,000 3,000,000 30.10% Shares owned Followers $10,000,000 2,000,000 1,000,000 6.95% Shares owned Investor 2 700,000 0 1.62% Shares owned Investor 3 3,400,000 0 7.87%
39,187,500 4,000,000 10.00 Total number of shares 43,187,500 10.00 Post Money Series B Stage 3 431,875,000.00 100.00%
Investment per Investor Shares per Investor Average Price Paid Shares owned Founders 10,500,000 24.31% Shares owned Employees SOP 4,637,500 10.74% Shares owned Investor 1 $5,000,000 7,950,000 0.63 18.41% Lead New Investor $70,000,000 13,000,000 5.38 30.10% Shares owned Followers $20,000,000 3,000,000 6.67 6.95% Shares owned Investor 2 $0 700,000 0.00 1.62% Shares owned Investor 3 $5,000,000 3,400,000 1.47 7.87%
$100,000,000 43,187,500 - 5.00 Total number of shares 43,187,500 5.00 Post Money Series B Stage 2 215,937,500.00 100.00% Notes :