Venture Capital and the Finance of Innovation, Second Edition

148 CHAPTER 8 TERM SHEETS
Pre-Money
Valuation:
The Original Purchase Price is based upon a fully-diluted pre-money
valuation of $10,000,000 and a fully-diluted post-money valuation of
$15,000,000 (including an employee pool representing 15% of the fullydiluted
post-money capitalization).
Capitalization: The Company’s capital structure before and after the Closing is set forth
below:
Pre-Financing Post-Financing
Security # of Shares % # of Shares %
Common—Founders 7,750,000 77.5 7,750,000 51.7
Common—Employee Stock Pool 2,250,000 22.5 2,250,000 15.0
Issued 300,000 3.0 300,000 2.0
Unissued 1,950,000 19.5 1,950,000 13.0
Series A Preferred 0 0.0 5,000,000 33.3
Total 10,000,000 100 15,000,000 100
8.1.1 Investors
This section of the term sheet lists all investors, the dollar amount of their investment
(which we will call the $investment), and the number of shares they receive for this
amount. In this case, the investment implies ownership of 33.33 percent of the
company on a fully diluted basis (which assumes that all preferred stock is converted
and that all options are exercised). The details of the fully diluted share count are
given in the capitalization table immediately preceding this paragraph. We refer to
the 33.33 percent represented by the Series A as the proposed ownership percentage,
a number that will play an important role in our analysis.
In this term sheet, all of the $investment is paid at one time. In some cases,
the $investment is spread across multiple payments, known as tranches, which
may be contingent on the firm reaching some prespecified milestones, such as the
development of a working prototype for a product, the first major customer, or
some specific level of sales. The Dow Jones Report tells us that about 19 percent of
all rounds had such tranches in the July 2007 June 2008 period, with this frequency
higher in first rounds (Series A) than in later rounds. Anecdotal evidence
suggests that such tranching is more common in weak VC markets (such as the
postboom) than it is in strong markets (such as the boom period). 2 Most analysis in
this book is appropriate only for one-time investments without additional tranches.
The analysis of tranched investments requires specific modeling of each milestone.
2
Consistent with this view, the rounds with tranches were 16.5% of total in the July 2006 June 2007
period, according to the Dow Jones Report.