Term Sheet Analysis

1

The Next Round and Down Rounds

Preparing for the Next Round

• Capital formation is a continuous process

• Subsequent to closing a round, begin to think about positioning for next round

• Time between rounds vary depending on investment environment and company progress

2

Considerations for the “Next Round” • Milestones/objectives requisite to next round

• Existing investors, new investors or a combination

• Short term cash needs

• Proposed valuation/dilution

• Series A/B ‘balance’

• Board seats, charter and investment agreement amendments

The Dreaded “Down Round”

• 2003 Nasdaq fell from 5200 to 1600

• Valuations dropped 95%

• Follow on financings severely impacted

• Down rounds, cram downs, involuntary recaps, and the ‘death spiral preferred’

• Litigation occurred due to significant dilution and restrictive covenants

3

Market Changes Brought Relief

• Upside performance adjustments

• Carve outs for management/option pools

• Warrants for angels who remained active

• Bonus pools for the management team

• Pay-to-play provisions

Summary • It’s never too early to begin thinking about

positioning the company for its next round of capital

• Consider investor groups, valuation, additional restrictions, short term bridges

• Down rounds (now) reflect poor performance versus market factors

• Market changes have lessened the negative impact of down rounds