Join us for the second installment of our Q&A session with OurCrowd Partners, Zack Miller (Investor Community) and David Stark (Investments), about the fundamentals of deal terms in startup investing. Last session we focused on valuation and how different preferences in the term sheet can impact your investment. This week we're looking at pre-emptive rights, anti dilution protections and control provisions -- all things that have to do with an investor's control of his investment.

1. Conquering the Term
Sheet
Everything You Need to Know About Deal Terms
Part 2

2. David Stark
Partner, OurCrowd
@starkupnation
Zack Miller
Partner, OurCrowd
@newrulesinvest

3. OurCrowd
Leading equity
crowdfunding platform
with 8000+ investors
from over 100 countries

4. Quick Review
Lesson 1 - Equity
Valuation
Liquidation preferences
ESOP
Key takeaway
Need to look at the
WHOLE
term sheet to see the full
picture

5. Mailbox: Liquidation preferences
preferred shares automatically
convert to common in a
qualified IPO
Q: What happens to
liquidation preferences in
the event of an IPO?

6. Mailbox: Investment amount
Warrants are the rights to invest
X amount at $Y for a period of Z
months.
Q: Can you explain how warrants work?
Real life example: Currently funding
company on OurCrowd.com with
15% warrant coverage at current
price (for 2 years)

7. Today’s agenda
Pre-emptives
Anti-dilution provisions
Board of Directors
Information Rights
Veto Rights
Right of first refusal
Drag along rights
Registration rights

8. Pre-emptive (Pro-rata)
Rights
Pro-rata right is the right
to invest in later rounds in
order to maintain your
ownership

9. –Fred Wilson, Union Square Ventures
“I think pro-rata is the single most important
term anyone can negotiate for in a venture
capital investment.” (Source)

11. Because returns in early stage
investing come from a small portion of
your portfolio and therefore, you want to
own as much as you can in the winners

13. Let’s illustrate

14. Ownership % in the company * new investment amount =
pro-rata right
Invest $100k at $10M post, you own 1%
Say the company raises $5M at $20M premoney
They are selling 20% of the company and you would be diluted to 0.8%
(without pro-rata)
Formula
Example
If you want to maintain 1% holding, then you
would invest 1% of the $5M (or, $50k)

15. Implications for upround,
downround scenarios

16. Individual angels rarely get “the most important
right” (prorata) —>
institutional investors (like OurCrowd and VCs) do

17. Current''
Ownership'
Total'New'
Investment'
Post'Money'
Ownership'
1%'1%' ?'
100%'of'the'
company'
25%'being'sold'to'
new'investor'
25%'
.75%'
.25%'
1%'
25%$99%$ 74%$

18. Current''
Ownership'
Total'New'
Investment'
Post'Money'
Ownership'
1%'1%' ?'
100%'of'the'
company'
25%'being'sold'to'
new'investor'
25%'
.75%'
.25%'
1%'
25%$99%$ 74%$
Current''
Ownership'
Total'New'
Investment'
Post'Money'
Ownership'
1%'1%' 1%'
100%'of'the'
company'
25%'being'sold'to'
new'investor'
25%'
.75%'
.25%'
1%'
25%$99%$ 74%$

19. Anti-dilution provision
protection from dilution resulting from later issues of stock at
lower price than investor originally paid
Definition

20. Weighted Average
Full Ratchet Broad-based Narrow-based
if company issues
shares at a lower
price, earlier price is
effectively reduced
to price of new
shares
NCP = OCP * ((CSO + CSP) / (CSO + CSAP))
NCP = new conversion price
OCP = old conversion price
CSO = common stock outstanding
CSP = common stock purchasable with consideration received by
company (i.e. “what the buyer should have bought if it hadn’t been a ‘down
round’ issuance”)
CSAP = common stock actually purchased in subsequent issuance (i.e.,
“what the buyer actually bought”)
CSO = ALL shares of stock
outstanding, including
options, ESOP, convertible
securities
CSO = Only the number of
shares of the series of
Preferred that is being
adjusted
Anti-Dilution Provision

21. Without Anti-Dilution
Investor A invests $2M at $8M pre (20% ownership)
Investor B invests $5M at $7.5M pre (40% ownership)

22. Full Ratchet
Investor A invests $2M at $8M pre (20% ownership)
Investor B invests $5M at $7.5M pre (40% ownership)

23. Broad-Based Weighted
Investor A invests $2M at $8M pre (20% ownership)
Investor B invests $5M at $7.5M pre (40% ownership)

24. Narrow-Based weighted
Investor A invests $2M at $8M pre (20% ownership)
Investor B invests $5M at $7.5M pre (40% ownership)

25. Anti-dilution Cheat Sheet
Investor A invests $2M at $8M pre (20% ownership)
Investor B invests $5M at $7.5M pre (40% ownership)

26. Vesting
Key here is to ensure management’s commitment
What’s
a cliff?
Typical
Schedule
?

27. Board representation

28. • Liquidation preference
• Right to participate pro-rata in future rounds
• Right to a board seat
–Fred Wilson, Union Square Ventures
The 3 terms you must have in a venture investment
(other than price):

29. Typical Board
Composition
Investors, Founders,
Industry Expert

30. What does a BOD do?
• corporate governance
• approving annual budgets
• accounting to the stakeholders for the organization's
performance
• selecting, appointing, supporting and reviewing the
performance of the chief executive;
• ensuring the availability of adequate financial resources
• setting the salaries and compensation of company
management

32. director
vs.
observer

33. Information rights
Starting point: Entrepreneurs want happy investors and owe
them communication. How much, though?

34. Veto rights
Protective and Control

35. Right of first refusal / Co-sale
If common holders want to sell stock, investors
have a right of first refusal on purchasing the stock
or they have the right to participate in the
proposed sale

36. Bring along/
Drag along
Majority shareholders
can force minority to sell

37. Registration rights
• an investor’s right to force a
company to list shares
publicly so investor can sell
them
• demand registration,
piggyback rights, S-3

38. Next step?
Join us next week for Lesson 3
Other common investment structures:
Convertible Notes
SAFEs
OurCrowd.com
Check out our real-life
term sheets by
accrediting on our
website