Guide to Venture Capital Term Sheets August 06

AGuideToVentureCapitalTermSheetsIndexPageIIntroduction.........................................................................................................3IIWhatisaTermSheet?......................................................................................4IIITheInvestmentProcess....................................................................................5IVWhattermsaretypicallyincludedinaTermSheet?.........................................61.Typeofshare.............................................................................................62.Valuationandmilestones...........................................................................73.Dividendrights...........................................................................................74.Liquidationpreferenceanddeemedliquidation.........................................85.Redemption................................................................................................96.Conversionrights.......................................................................................107.Automaticconversionofshareclass/series...............................................108.Anti-dilution(orpriceprotection)................................................................109.Foundershares..........................................................................................1110.Pre-emptionrightsonnewshareissues..................................................1211.Pre-emptiverightsontransferandtagalongrights.................................1212.Dragalongorbringalong.........................................................................1213.Representationsandwarranties..............................................................1314.Votingrights.............................................................................................1315.Protectiveprovisionsandconsentrights(classrights).............................1416.BoardofDirectors/BoardObserver..........................................................1417.Informationrights.....................................................................................1518.Exit...........................................................................................................1519.Registrationrights(US)............................................................................1520.Confidentiality,IntellectualPropertyAssignmentandManagementNon-competeAgreements.......................................................................1521.Employeeshareoptionplan.....................................................................1622.Transactionandmonitoringfees..............................................................1623.Confidentiality..........................................................................................1624.ExclusivityandBreakFees......................................................................1625.Enforceability...........................................................................................1726.Conditionsprecedent...............................................................................17VVentureCapitalGlossaryofTerms....................................................................17VIExampleofaTermSheetforaSeriesAround................................................28Appendix1–Capitalisationtable.......................................................................34Appendix2–RightsattachingtoPreferredShares.........................................35Appendix3–RightsattachingtoFounderShares...........................................38Appendix4–Proposedwarranties....................................................................39Appendix5–Proposedcovenants....................................................................40Appendix6–Conditionsofissueandtransferofshares................................42Appendix7–Performancemilestones..............................................................43Page3IIntroductionAlthoughventurecapitalisawell-establishedsourceoffundsforearlystagecompaniesinoverseasjurisdictionsandtheprocessofventurecapitalinvestmentiswellunderstood,theavailabilityofventurecapitalhasbeenlimitedinNewZealanduntilrecentlyandtheprocessisnotsowellunderstoodhere.However,recentfundraisingactivity(spurredbyinitiativeslikethegovernmentfundedNewZealandVentureInvestmentFund)hasraisedawarenessandavailabilityofthisformoffundinginNewZealand.Therearesignificantdifferencesinthenatureofventurecapitalinvestmentdependingonthestageofinvestmentandaprivatelyfundedcompanymighthaveanumberoffundingrounds.Thefirstroundisoftentoraiseasmallamountofmoney(seedcapital),typicallyfromfriendsorfamilyorhighnetworthindividuals(oftenreferredtoasangels).Occasionallyaspecialistearlystageventurecapitalinvestormightinvestatthisstage.Forroundswithoutaventurecapitalinvestortheremayormaynotbeformalinvestmentdocuments.Venturecapitalistypicallythemostactiveformofinvestment.Thisfactandthehighrisknatureofventurecapitaldistinguishitfromothertypesoffinanceandinve