As part of our services to member companies we coordinate Lunch & Learns on various topics and recently we’ve been doing a 3 part series on term sheets and valuations. Check out the speakers we had on the Term Sheets and Valuations Session #1 post and the key takeaways and speakers on Session #2.
The third was held on October 26 which we will be posting about soon. The third session in the series on term sheets and valuations was a panel comprised of successful entrepreneurs. They shared their tips and tricks on getting financing rounds managed and closed as well as what terms are most important to them.
The following was written by Celeste Mejia, one of our ATI Interns, who previously interned with Goldman Sachs. She is currently working with member companies InXero, Unwired Nation, and Agile Planet.
Some key mistakes entrepreneurs make when approaching VCs and discussing term sheets include:
- Not paying attention to ownership and equity. Not being flexible in terms of percentage ownership.
- Focusing too much on the pre-money value, when post-money value is often more important for VCs.
- Being overly optimistic. Assume things will go badly and plan for that.
Tips for entrepreneurs:
- The more entrepreneurs can control on the first round, the more options and leverage they will have on further rounds
- Understanding what “preferred stock” and “participating preferred stock” means is important. Typically, common stock will get very little money at exit.
- Typical ownership that VCs ask for in Series A will range from 25% to 35%.
- The employee stock pool shouldn’t be ignored. By exit, VCs will probably want to carve out the pool and it will be 100% dilutive to owners. Entrepreneurs should try to make that pool as small as they can. Relative range: 20% or less if possible. The employee pool is generally refreshed at each investment round.
- Due to the state of the economy, there is a disconnect between what VC’s expect, in terms of return, and what they can realistically get. In order to compensate for this difference, VCs will ask for more ownership
- Going to VC’s that have experience in your company’s field and striking a connection with them is very important
- It takes a long time to secure A round financing. Typically, companies will speak to 30 or more VCs before meeting a match. Meeting frequently with VCs even if there’s no immediate need for money will help build important relationships.
- Angels are a great place to go to get “enough traction” that leads to VC investing
David Altounian is the President and CEO of Motion Computing, a leading provider of Slate Tablet computing products. He was the founding member of the Motion team and was a key product officer until 2006 when he left to pursue a graduate degree. Mr. Altounian rejoined Motion in July of 2008. Mr. Altounian has more than 20 years of management and staff experience in the technology sector. Retired from Dell Computer Corporation after nearly seven years, Mr. Altounian served in senior marketing executive positions for both the notebook computer and workstation product businesses where he was responsible for the Worldwide Product Marketing organizations. He spent two years in Europe as the General Manager, Workstation Line of Business for Europe, Middle East, and Africa.
Prior to joining Dell, Mr. Altounian managed marketing and business development teams for leading technology companies including Motorola, Compaq Computer Corporation and Ashton-Tate. He was the founder and is currently a board member of iTaggit Inc., a web 2.0 company committed to helping people document, showcase, monetize, and value the things that they collect. He earned his Bachelor of Science degree in business administration from California Coast University and earned his MBA at Kellogg School of Management at Northwestern University.
Ana C. Ward is currently Senior Vice President, General Counsel for Asuragen, Inc. Prior to Asuragen, she was General Counsel for Ambion and was responsible for a wide variety of legal issues including licensing, corporate transactions, patents, and trademarks. Prior to joining Ambion, Ms. Ward served as Senior Intellectual Property Counsel for Tricon Global Restaurants, Inc., and as an associate at the law firm Sidley & Austin. She has a BA in French/Zoology, a Masters in Molecular Biology, a Doctor of Jurisprudence, and a Masters of Business Administration, all from the University of Texas at Austin. Ms. Ward is also a registered patent attorney, and served as an adjunct professor at the UT School of Law.
Larry Warnock is the President & CEO of Phurnace Software, Inc., an ATI alumni company. He provides strategic guidance and operational expertise to the company. Larry has over 25 years of experience working with start-up and established technology companies. Most recently he was CMO of Vignette, a publicly traded enterprise content management software company. As a Venture Partner at AV Labs (Austin Ventures), Larry assisted with the incubation of several early-stage software companies. Previously, he was an executive at start-up OnLink Technologies which was acquired by CRM market-leader Siebel Systems. Earlier in his career, Larry was a VP at Documentum, a publicly traded content-management software company (acquired by EMC) from its start-up phase through a successful IPO and into the market leader. Larry holds a BBA in Marketing from Texas A&M University where he was a Cadet Lt. Colonel in the Corps of Cadets. He is currently a guest lecturer at McCombs School of Business, University of Texas at Austin, and the Acton MBA program of Hardin-Simmons University.
Andrews Kurth is a leading law firm for entrepreneurs, public and private emerging grown companies, and venture capital and private equity firms. Our firm’s Technology & Emerging Growth practice comprises a dedicated team of attorneys in technology centers around the United States providing focused representation to public and private emerging growth companies and entrepreneurs as well as the venture capital and private equity firms that finance them. We take pride in having a practical, business-life approach to advising our clients, and we share their entrepreneurial spirit and drive. Our driven client service teams combine relevant experience with an understanding of a client’s business and markets to provide efficient, cost-effective legal services and creative solutions with an outstanding degree of responsiveness. We thrive in the fast-paced entrepreneurial world by combining flexibility and speed with the experience that comes from taking billions of dollars in new ventures from inception to IPO and beyond.