Seattle Ventures Early-Stage Financing & Term Sheet Negotiation

Written by Dante Martin

· Linden’s has worked with many companies to help them with early stage financing and term sheet negotiation. Linden did not have a business background when she was in school.

· Angel investors are not as focused on equity as VC’s are.

· Angels tend to be more patient

· Although Angels are more patient, they can still be a hassle because they keep a watchful eye and want to be involved with the business

· Many Angels have contacts and experience in the technology industry. They also have start-up experience.

· Angels invest by themselves or in groups. When investing in groups some Angels may act as brokers to their network of fellow angels.

· If a start-up is dealing with angels it is likely that many people will see the business plan. So, in the beginning a start up must make decisions on how secretive they need to be.

· Angels are more likely to sign NDA’s

· Some deals with Angels can keep a start up from getting VC funding

· Venture firms can be a bigger help in operations

· If a start-up has term sheet from many different VC firms from different areas then they will have more negotiating leverage.

· Going to VC’s for a first round is not uncommon

· NO MONEY = NO COMPANY

· “If you owe the bank a little money then the bank owns you, If you owe the bank a lot of money then you own the bank”

· Start-ups should issue shares to founders instead of options, to save on capital gains tax.

· If the valuation of a new business is too low then it becomes difficult to incent employees

· If the valuation is too high investors will be unhappy due to resulting down rounds of funding

· “back-of-napkin” burn rate equation: BURNRATE = #PEOPLE X $10,000 + SALES&MARKETING

· Some investors use ratchets to compensate for a possible down round

· A right of repurchase means if you get fired the business gets your stock

· Registration rights: Investors can register to sell shares on the public market

· Piggyback sale rights: Investors can sell shares any time the company does.

· Underwriters don’t like piggyback registration rights

· Convertible debt: A loan can be converted into equity

· Documentation can cost $25,000.00 on term sheets