Nurture Talent Academy conducted InvestorYatra for startups in Delhi, Gurgaon and Noida in July 2013. 25 entrepreneurs visited investors offices like TLabs, GSF Accelerator, SAIF Partners and Canaan Partners to learn all about incubators, accelerators, angel investors and venture capital. Every session had an investor share insights on a startup topic - this presentation contains specifics about term sheet and agreements shared by Nishant Verman of Canaan Partners. Check out more on www.investoryatra.com.

1. Making Sense of Termsheets
Nishant Verman
July 2013
Investor Yatra

2. My Background
Startup
Corporate
Education

3. Termsheet = Valuation
» Termsheet is the blueprint for your future relationship with your
investor
» Encapsulates two aspects:
› Economics: investor returns in liquidity event
› Control: mechanisms for investors to exercise affirmative or veto
» As with other things in life – there is no good or bad term!
› Depends on demand vs. supply of capital, market conditions,
your business etc.
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4. What is my company worth?
Valuation
» Pre and Post: Pre-money is value of your company before you raise
funding; Post-money is the value including the funding you raise.
› Post-money = Pre-money + amount raised
› Investor Ownership % = Amount Raised / Post-money
» Example 10 Cr. raise on 20 Cr. PRE  30 Cr POST.
» Gives investor 33% of the company
» Valuation driven by what market is willing to bear.
» Key : focus on Increasing total value vs. Ownership %
Type of Equity : Preferred Shares vs. Common Shares
» Investors want Preferred shares which come with special rights
» Example all the rights we will talk about now (next few slides)

5. Liquidation Preference
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Explained:
Quantum of money that investors receive preferentially, prior to other shareholders
receiving any proceeds in case of liquidity (such as sale of a company).
Investor Intent:
• Investors try to balance risk and reward in investing
• Valuation paid in current round is typically in recognition of future expected value
• If business fails to create that value, Liquidation preference is intended to provide
some base level of return

6. Let’s Do a Simple Exercise
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Series A
Pre-money Valuation = $10M
Investment Size = $5M
Post-money Valuation = ?

7. Let’s Do a Simple Exercise (cont’d)
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Series A
Pre-money Valuation = $10M
Investment Size = $5M
Post-money Valuation = $15M
VC Ownership = 5 / (5 + 10)
= 33%

8. Now let’s look at liquidation preferences!
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Exit Value = $30M
1 No Liquidation
Preference
2 1x Liquidation Preference,
Participating
Investor ownership = 33%
Investor Return = $10M
Cash-on-Cash = $10 / $5
= 2x
Investor ownership = 33%
Liquidation Pref. Amt = $5M
Remaining Proceeds = $25M
Investor Participation = $8
Investor Return = 5+8 = $13M
Cash-on-Cash = 13/5 = 2.6x

9. Anti-Dilution Protection
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Explained:
Provides existing investors ability to get to a lower valuation for the current round by a price
adjustment in case the company raises capital at a lower price than current price.
Investor Intent:
• While investors are willing to take the business risk, at the downside, they are protecting
themselves against a valuation risk.
• They are also protecting themselves against significant dilution due to a low priced
offering in the future.

10. Protective Covenants
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Explained:
Provides investors an ability to influence key decisions affecting the company. Also referred
to as affirmative rights, these are items to which the investor must consent for them to take
effect e.g., Dividends, M&A, ESOP plans, CapEx etc.
Investor Intent:
• Typically, venture investors take minority stakes in the company
• However, they are desirous of ensuring that they have enough controls to be able to
influence key decisions, and prevent leakage of value.

11. Exit Rights
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Drag Along
• States that if the company is
unable to provide an exit to the
investor after a certain
amount of time (X years)…
• …the investor can sell his
shares to a purchaser, but if
required can also force (DRAG)
the promoter and other
shareholders to sell some of
their shares, and at the same
price as the investor.
Co-Sale:
• Co-Sale: states that if the
Promoter is selling his shares,
then the investor has the right to
sell their shares at the same
price along with the Promote

12. Now the fun part...let’s negotiate!
TERM OPTION 1 OPTION 2
Type of Share Preferred Preferred + Common
Valuation $4M $6M
Liquidation Preference 1x 2x Participating
Board Seats 1 Board Seat 1 Board Seat +
1 Board Observer
Anti-dilution Broad-based
weighted average
Full-ratchet
Drag Along 6 years from Closing 5 years from Closing
Vesting of Founder Stock Equally over 4 years Equally over 4 years;
1 year cliff
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Venture Catalysts for Next-Gen Market Leaders
» 26 year old firm with offices in
California | NY Corridor | India | Israel
» $3.5 billion under management across
9 funds
» 135+ liquidity events
53 IPOs | 85 M&As
» Invested in over 250 companies

14. India Portfolio
14
Our Companies

15. © Copyright 2009 Canaan Partners 15
Canaan Entrepreneur Pitchbook
Download here:
www.canaan.com
Resources

16. © Copyright 2009 Canaan Partners 16
StartUp Catalyst
Resources
startupcatalyst.in
@startupcatalyst

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Contact Details
nverman@canaan.com
@VenturAdventurs

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