Venture Deals, 3rd Edition

CHAPTER 4 Economic Terms of the Term Sheet

When discussing the economics of a venture capital deal, one often hears the question, “What is the valuation?” While the valuation of a company, determined by multiplying the number of shares outstanding by the price per share, is one component of the deal, it’s a mistake to focus only on the valuation when considering the economics of a deal.

In this chapter we discuss all of the terms that make up the economics of the deal, including price, liquidation preference, pay-to-play, vesting, the employee pool, and antidilution.

Price

The first economic term, and the one most entrepreneurs focus on more than any other, is the price of the deal. Following is the typical way price is represented in a term sheet.

Price: $___ per share (the Original Purchase Price). The Original Purchase Price represents a fully diluted pre-money valuation of $___ million and a fully diluted post-money valuation of $___ million. For purposes of the above calculation and any other reference to fully diluted in this term sheet, fully diluted assumes the conversion of all outstanding preferred stock of the Company, the exercise of all authorized and currently existing stock options and warrants of the Company, and the increase of the Company’s existing option pool by [X] shares prior to this financing.

A somewhat different way that price can be represented is by defining the amount of the financing, which backs into the price. For example:

Amount of Financing: ...