There was recently a panel on valuations and term sheets. Linda Williams from Pillsbury Law put together a great deck, so with her permission, I'm posting a portion of it.

• Raise enough money (assume a three month slip in plan) to hit a milestone that positions the company for an "up" follow-on round
• Term sheets are a pre-nuptial, be sure you are marrying the right firm/partner
• Endeavor to get multiple investors/syndicates interested - Do not shop with a term sheet in hand
• Term sheet is an LOI; it's non-binding
• The whole game is to minimize risk, not optimize success ·Don't attempt to gain concessions on little things
• Understand the VC's business model to appreciate their deal interests * Hits business, looking for large, needle-moving outcomes
• There are 100pts/% of ownership no more no less

• Liquidation preference
• Anti-dilution protection
• Board of directors
• Restrictions and limitations
• Right of first offer

• Amount
• Investors
• Type of security
• Price per share
• Cap table (Valuation)

• Vesting schedule
• Employee compensation
• Proprietary information and inventions agreement

• Purchase agreement
• Legal fees and expenses
• No-shop provision
• Legal disclaimers
• Signatures

1.Long term perspective - Liquidation preference

2.Proper governance - Board, voting rights

3.Shared Risk - Anti-dilution protection

4.Path to liquidity - Registrations, first offer

5.Investor protection - Comp, vesting, IP

6.Operational excellence - Valuation, price

7.Deal terms - Security

8.Deal Mechanism - No shop, dividends

9.Miscellaneous terms

• Type of security - preferred vs. common; ISOs & NSOs
• Valuation - pre & post money: how it is calculated ("fully diluted basis")
• Liquidation preference: proceeds on M&A/liquidation go to pay back investors principal first
• Participating preferred: preferred gets original investment + pro-rata of common on an as converted basis
• Equity conversion - for IPOs to clean up cap table
• Anti-dilution forms - weighted average, ratchets
• Pay to play - converts non-participating preferred investors to common
• Traunche - breaking total amount of investment into milestone based parts
• Founders stock restriction agreement & vesting schedule 4Pari passu - "equal in all respects" designates new shares rank equally with existing preferred
• Voting thresholds in protective provisions - avoid single shareholder negative control
• Legal fees- You pay both company and investor counsel

• Ideal board: 2-2-1 ·2 preferred reps, 2 common reps, 1 mutually acceptable independent ·Limit employee seats to no more than 2 -- 1 for CEO ·1 seat for industry exec and/or CEO mentor leave other seats open
• Boards hire and fire CEOs, approve budgets/operating plans ·Outside investor board members wear two hats
• Avoid "mushroom management", work for high trust relationship - a whole topic by itself
• Advisory boards should be small, purposeful, non-PR based - put your technical thought leaders here