L2 - Venture Capital Flashcards
Which financing stage is there in the concept/research stage?
Seed stage
Which financing stage is there in the business planning stage?
angel investors
Which financing stage is there in the product development stage?
angel + early stage investments
Which financing stage is there in the first commercial deals stage?
early stage
Which financing stage is there in the fully commercial stage?
round 1/A
Which financing stage is there in the fully commercial/expansion stage?
Round 2/B
Which financing stage is there in the expansion stage?
Round C
Which financing stage is there in the ready for IPO stage?
Mezzanine
What are the equity forms given to companies?
Buy-outs
Growth investments
minority investments (investor takes a non-controlling stake)
Venture Capital
How to decide between internal vs. external equity? Sample questions
If answered with ‘yes’ then external equity is worth considering
Does the company have a product with a competitive edge or unique selling point?
Can it be protected by intellectual property rights?
Is there a realistic exit opportunity?
etc.
Which six legal documents are there?
- term sheet
- participation agreement
- shareholder agreement
- articles of association
- rules of procedure
- ancillary agreements
term sheet
A term sheet is a nonbinding agreement that shows the basic terms and conditions of an investment. The term sheet serves as a template and basis for more detailed, legally binding documents.
participation agreement
participation agreement (investment contract)
shareholder agreement
The shareholders’ agreement / participation agreement regulates the conditions of the investor’s entry (company valuation, amount of investment through equity capital, including premiums / agio and debt capital, usually shareholder loans, or mezzanine capital as well as guarantees from the existing shareholders). Furthermore, the modalities of the investor’s influence in Germany are standardised through special control and information rights as well as restrictions on disposal. Finally, the exit of the financial investor is also ensured through co-sale obligations, purchase options (put and call options) and liquidity preferences.
ancillary agreement
An ancillary agreement, or ancillary contract, is any legal agreement established in addition to a pre-existing contract. To be an ancillary agreement, the agreement must include terms relating to the original contract.
does the valuation of a startup actually mean how much it is worth?
No. In early-stage companies the valuation is a negotiated number and does not really mean anything about what the business is worth
convertible note
- in certain events debt holder can convert the obligation for repayment into equity security
- loan will be replaced by the instrument of the financing round issued (e.g. series A preferred)
- valuation and share price for the issuance/conversion is set by the company and the new investor
- note holder will get a discount on the share price (approx. 20-30%)
Types of preferred shares
- participating preferred
- non-participating preferred
- capped participation preferred
Liquidation preference meaning
- investors will get their funds back before the founder or other shareholders receive anything.
Non-participating preferred stock
- preferred holders receive an amount equal to [1x to 3x] the initial investment plus accrued and unpaid dividends
- holders of common stock receive the remaining proceeds
- if holders of common stock would receive more per share than holders of preferred stock, holders of preferred will convert their preferred shares into common stock (convertible preferred stock)
Disadvantages of Non-Participating Preferred Stock
The downside of owning this type of stock is that the elimination of a participation right limits the price that an investor can obtain by selling these shares to a third party, since the shares are less valuable.
Advantages of Non-Participating Preferred Stock
The upside of this situation is that the holders of the preferred stock have a preference right, under which they will be paid before the holders of common stock. This preference right also applies when previous dividends have not been paid - all preferred dividends must be paid before any dividends are paid to the holders of common stock.
participating preferred stock
- preferred holders receive an amount equal to [1x to 3x] the initial investment plus accrued and unpaid dividends
- thereafter, preferred holders and common stock holders participate in the remaining proceeds pro rate on as-converted basis.