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July 9, 2017 By admin

What is Negotiable in a Venture Capital Deal?

Congrats, You Got a Term Sheet

You have done the hard part and you now have a term sheet from a VC in hand.  While you are not funded just yet, you should be congratulated because this is a real validation of your business.  As it should be, the term sheet itself is non-binding on either the VC or your company as to the obligation to close, so, even if you sign it as drafted, neither your company nor the VC are required to close the deal. That closing will be subject to coming to agreement on full “definitive” contracts and whatever due diligence the VC wants to continue to do on the company (and what you may elect to do on the VC firm). That does not mean the contents of the term sheet are insignificant.

The term sheet outlines the many key terms of the investment deal. It is not intended to cover everything that will arise in the actual binding contracts, but it should have all the “major” items included. The signed term sheet is the map for the attorneys to use in drafting the contracts. To the extent that a major issue comes up later in the deal that was not addressed in the term sheet, or there is a material change in terms after the term sheet has been signed, one party or the other is probably going to be a bit perturbed.  So the point is, it is in everyone’s best interest to get the term sheet right now so problems do not arise later. Stated differently, don’t expect to sign the (mostly) non-binding term sheet and then raise big issues or changes later. This will quickly create “deal fatigue” and either kill the deal or create bad feelings with your new shareholder. Negotiate the major terms before you sign the term sheet.

What VC Terms are Not Negotiable?

So if you must negotiate the major terms now–before you sign the term sheet, what terms are really negotiable? It is easy to find an “expert” or lawyer that says “everything is negotiable” and in some theoretical world, that may be true (if your company is a “unicorn”). However, in the real VC world, many terms are simply non-negotiable realities of accepting VC money. With very, very few exceptions, if you are taking money from a real VC,

  • if your company is not already structured as a corporation for state law purposes and a “C Corporation” for tax purposes, you will need to convert
  • the stock issued will be preferred, not common
  • there will be a liquidation preference
  • assume board representation for the preferred class
  • assume the company will be required to indemnify the board designee and obtain D&O insurance
  • assume defined “major decisions” will require the consent of the VC
  • assume that founders will need to sign noncompetes where enforceable and other documents in favor of the company
  • you will need to enter into a Management Rights Agreement with the VC

This is clearly not an exhaustive list but merely examples.  If you do not enter the negotiation understanding certain realities, you will look amateurish and have less chance of successfully negotiating the items that are negotiable. Further, there is no reason not to be aware. If you have a term sheet from a traditional VC for “Series A” preferred stock, look at the annotations for the NVCA’s template term sheet. If you do not understand those annotations, find an advisor that does. If your advisor or attorney does not know what a Management Rights Agreement is when you ask them, find another advisor. A lawyer that does not even know what a Management Rights Agreement is may be a fine lawyer, but they by definition do not know VC deals and cannot properly advise you as to market terms. Representing many investment funds, I cannot tell you how many times I encounter lawyers that are advising company founders on VC deals but they have no background to properly advise their own clients on what to expect and which terms are “market.” The outcome is that the founders end up worrying about issues that are not particularly important and the transaction becomes more expensive because it extends lawyer time wasted on arguments you will never win. The result will be the same, and you will have simply wasted money, stress and time in the interim.

It does make it a bit more difficult that some firms have their own “third rail” issues that are non-negotiable for that particular firm. Do your research on the VC firm on the Internet. In conducting your own due diligence on the VC, ask them for references in the form of management contacts from companies in their current and former portfolios. While they will naturally provide those with the best relationships, ask those founders what terms were and were not negotiable with that firm. In my experience, they will share this intel.

Alright, So What is (or should be) Negotiable?

There is a list of terms, some of which have real economics behind them, that should always be fair game in my mind for negotiation. These include:

  • Valuation (within reason but if you are nuts on valuation, that probably would have been flushed out by the VC before the term sheet stage)
  • Liquidation preference multiple (if it is anything except 1x, negotiate!)
  • Participation (participating or not, caps?)
  • Vesting schedule for founders (if it is being imposed or extended, its is negotiable at least as to time)
  • Dividends (any, amount, cumulative?)
  • Registration Rights (at least as to type)

In summary, do your own research, use knowledgable advisors and attorneys and get the major terms fully negotiated before you sign the term sheet without raising things that will never be successfully changed. It will make your deal more likely to actually close and will start your relationship with the VC off on the right foot.

Filed Under: Category #1, Uncategorized Tagged With: negotiation, Series A. preferred stock, Term Sheets, VC, venture capital

July 1, 2016 By admin

USA Today Event Shines National Spotlight on Spacecoast for Innovation

OneNation_email header copy

On July 13th, USA TODAY is sponsoring one of a series of ten national “One Nation” events at Port Canaveral.  Each One Nation event focuses on a different hot topic and its importance to our nation’s future. Through a competitive review process, USA TODAY selected Brevard County to host one of these exclusive events – this one on American Innovation. Everyone is invited to attend. The question is, will the Spacecoast step up to the plate and participate?  

USA TODAY is a national publication with a worldwide reach. We spend plenty of time in this area talking about whether the Spacecoast, this unique hub of innovation, is properly recognized as such by the media, the investment community and the broader business community at large. Now that a national spotlight is upon us, we need to show up and celebrate it.  For the price of $10, attendees will hear from those on the forefront of technology, experience immersive 360 video and interactive virtual reality, enjoy entertainment, food and, for those over 21, beer!  For $10!  In addition, each attendee will receive a free VR viewer.

Let’s make this event a success and show not only that world innovation occurs in Central Florida but that the community supports and celebrates that fact.  One Nation: American Innovation at Port Canaveral tickets can be purchased here.  

Filed Under: Uncategorized

May 7, 2016 By admin

Startups are Like Rock Bands

How Startups Are like Bands
How Startups Are like Rock Bands

They famously start in garages with ragtag groups of people with different skills trying to make music together. They work late hours and drive the neighbors crazy–all in pursuit of a dream of fame and fortune. They usually have no money and often have day jobs just to pay the bills. Their parents wish they would do something more responsible. They are dreamers. They know the odds are not good but if they make it big, they will be wealthy beyond their imagination and crowds will fill arenas to hear them. I’m not talking about rock stars, I’m talking about startup founders.

I have always thought the parallels between startups and garage bands were interesting. Much more so than sports teams or other group dynamics, the garage band is an analogous situation. Like a band, there is no tryout involved, no permission or formal way to get involved–you just decide to form a startup on your own. There is no age requirement and members may have done it before or just learning for the first time.

I have seen founders start in obscurity and rise to worldwide prominence. I have seen talented founder groups fail to reach financial success for reasons totally outside of their control.  I still remember a fund manager who years ago mentioned that you would have to be totally crazy to do a startup. He didn’t mean it disparagingly. He genuinely respected the special form of insanity that causes founders to work for nothing for hours that border on unhealthy.

Early on, many people just don’t get what they are doing or simply think their work is not good. The tough ones believe i themselves and press on anyway. The CEO is typically the lead singer.  He or she is the outward face that the public tends to see, hear and know. However, the other band members, while less visible, are just as important. The CTO is like a lead guitar player. The COO is drummer setting the beat. Everyone has a role and needs to play it well if they are to be successful.

Personalities get involved. They break up. They burn out. Lots of talented groups end up making a living but not a very good one. Luck is often important.

If you are struggling through your own startup now, I hope this comparison is useful to you. Perhaps seeing your group as a rock stars in the making will give you the some encouragement to continue to pursue your dream and vision. As the Byrds sang . . .

“What you pay for your riches and fame

Was it all a strange game

You’re a little insane

The money that came and the public acclaim

Don’t forget what you are

You’re a rock’n’roll star”

Filed Under: Uncategorized

November 15, 2015 By admin

Mission Possible: Startup Funding on the Spacecoast

SpaceCoast Business-November 2015

I’m very humbled by the November 2015 Spacecoast Business article done by Lyle Smith entitled “Making Startup Funding Mission Possible on the SpaceCoast.” The article gives me far too much credit for the surge in private equity investments being realized by local companies.  The real credit goes to the local companies that are of a sufficient quality to receive investment funding in the first place. Never-the-less, I am grateful for the kind words (and the James Bond photo).

Filed Under: Uncategorized

November 7, 2015 By admin

There’s Really Dumb Investment Opportunities . . . and Then There’s All Aboard Florida

All Aboard Florida Folly
All Aboard Florida asking Fund Managers to Buy $1.75 Billion in Tax Exempt Bonds

Picking Winners and Losers

I have long time clients that are professional fund managers and serial angel investors. I have tremendous respect for these risk takers that play a vital role in funding businesses.  We have also been investors ourselves and served in roles within private investment funds.  It probably goes without saying that we like the space and and feel like it is an area where you can “do good and do well.”  But successfully investing in startups and businesses that are little more than ideas is really hard–it is an industry predicated upon a high failure rate. It’s just incredibly difficult to pick winners.

However, as hard as it can be to predict winners, it is often pretty easy to pick losers.  Some business pitches really scream “crash and burn” from the start. There is no shortage of really bad ideas out there. All Aboard Florida’s idea to build a profitable high-speed train between Miami and Orlando is as bad as it gets. More on that below but what is really interesting to me is that some of these obvious losers require billions in capital, are promoted or originated by very sophisticated parties and are sometimes even funded with their own money.  Like all things crazy, many of these ideas seem to originate in Florida and are welcomed by grinning politicians that are nowhere to be found when it all blows up. Will All Aboard Florida be another funded fool’s errand? Some opponents of All Aboard Florida are already throwing in the towel and concluding that raising $1.75 billion in bonds is a done deal.

A Bright Future for Florida Citrus?!?

To find a recent example of billion dollar nonsense, one need only look back a few years in order to find a prime example. In 2013, while an incurable disease was decimating Florida’s citrus industry, Coca-Cola Company thought it would be a great time to plant 50,000 acres of new citrus. The cost: a mere $2 Billion.  Coca-Cola proudly heralded that “the future of Florida orange juice is looking brighter today.” It wasn’t. In fact, it had never looked more bleak. Turns out Coca-Cola’s future was looking a whole lot dimmer too.  Stating the incredibly obvious, I sent the following tweet:TWEET

What has happened since then was all too predictable. The disease has still not been cured and Florida is experiencing its lowest production of oranges in more than 50 years.  The prognosis is actually getting worse. I don’t know exactly what has happened to Coca-Cola’s new groves, but I’m guessing it wasn’t good. Florida has lost at least 100,000 acres of groves to disease and $3.6 billion in revenues since 2007.   It was a really dumb plan and it was initiated by one of the oldest and largest corporations in the world. It is stunning to me that seemingly sophisticated managers of funds (in this case, shareholder funds) can be so obviously stupid.

Now Florida’s Transportation Future Looks Bright!

But at least it was on Coca-Cola’s nickel. Over the last few years, All Aboard Florida has been pimping this high-speed passenger train service between downtown Miami and the Orlando airport. In 2013, I wondered whether there could be something dumber than planting 50,000 acres of oranges in the face of incurable disease. Well ladies and gentlemen, we have our winner!  The pure lunacy of this train as an investment opportunity has been well chronicled by Carl Hiaasen here and here. Because I could not possibly make this case better than one of America’s most talent writers, I commend those articles to your reading. It does say something to see a writer who seems to have little experience in financial reporting so effortlessly dismantle the All Aboard Florida business model.

As obviously flawed as it may be, I nearly spewed my coffee when I saw All Aboard Florida’s recent proclamation that “The Future of Florida’s Transportation Looks Bright.” Sure . . . just as bright as its citrus industry did in 2013.

All Aboard?

While I was tempted several times, I have not written anything outside of Twitter about this half-baked idea because I have been certain that it will die under its own weight. After all, All Aboard Florida apparently needs $1.75 billion in tax exempt bond sales to make the train a reality. Unlike Coca-Cola, these guys are looking to use other people’s money. It is currently being marketed as “junk bonds” to institutional and high-income investors with a minimum $100,000 buy-in. Even though we have seen dumb ideas get funded before, surely no sophisticated party would make a six-figure investment into a bond as uniquely risky as the bonds financing this moronic train. I guess we will soon see if history repeats itself again and asset managers do the truly unexplainable.

Fund Managers Not Getting Aboard

I was encouraged that the financial world has not completely lost it’s mind when word started to circulate last month that efforts to sell these bonds has been falling on deaf ears.  Lyle Fitterer, managing director for Wells Capital Management was quoted as saying “We looked at it, but we are not going to be participating, . . . It came down to a credit decision.” That would be fund manager-speak for “there is no way in hell we would get our money back.” I also enjoyed the quote from Jim Colby, who apparently manages about $1.6 billion of high-yield municipals: “It was not priced to demand . . . That is about all I will say.” Apparently Jim Colby is no fool either. I’ll say what he won’t. For anyone to take this kind of extreme risk, the investment returns would have to be so sky high that the train would have to be projected to belch golden bricks from its smokestack. The jury was still out as to whether Daniel Solender of Lord Abbett & Co. in Jersey City, New Jersey is as sharp as his contemporaries. The firm apparently oversees $17 billion but he reportedly had not decided whether to invest as of the publication of the article. I’ll assume he was either just being political or had not yet really taken a look. 

Next week, Merrill Lynch will be taking these junk bonds to the U.S. municipal market to help fund All Aboard Florida. What could possibly go wrong? We will see how many bond fund managers know less about investing than Carl Hiaasen. After all, the outlook couldn’t be brighter, right? 

Filed Under: Uncategorized Tagged With: All Aboard Florida, Carl Hiassen, Fund Managers, Investors, Tax-Exempt Bonds

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