The presentation is about valuation of a start-up and usual deal structure - term sheet. In the presentation you can find an overview why traditional valuation methods don't work (DCF, P/E multiple,...) and what are the real life approaches. You can also find more about types of the investments and potential exits. The second part of the presentation is dedicated to the term-sheet and most frequent terms in an equity investment, especially in Central and Eastern Europe. In the presentation are listed the most frequent provision you can stumble upon, but no term sheet includes all of them. In the presentation you can learn about many different clauses that influence economics and control in a venture capital deal. Nevertheless you should read more on the web (Term Sheet Hacks...) and the books like Venture Deal to have a clear picture if you have a good deal on the table or not for your startup.

1. MASTER OF
STARTUPS
SERIES
TERM SHEET AND
VALUATION
www.geekhouse.si/en

2. BLAZ KOS
• 10+ years working with start-ups
• Management of university incubator, technology park and business angel network
• Management of two start-up accelerators and co-working space
• PODIM Conference – one of the biggest conferences in Alps-Adriatic region
• 600+ lectures in CEE
• Mentored over 300 start-ups
• Two handbooks about startups, 1500+ pages on two blogs
I am on a life mission to make the world a more innovative, organized and transparent place to be by
helping individuals, organizations and communities achieve their peak potential and an entirely new level of
performance.

3. www.AgileLeanLife.com
An entirely new level of personal performance.

4. VALUATION

5. Valuation of the startup companies
• No agreed method
• It’s difficult – more art than science
• It’s more about reaching the agreement between
investor(s) and entrepreneur(s)
• Negotiations have the key role
• Entrepreneur and investor must feel comfortable with
the valuation otherwise the things can go wrong in the
future

6. Valuation
Formal approaches
• Asset approach
• Book value, Adjusted book value, Replacement value, Liquidation value
• Income approach
• Discounted Cash Flow (DCF)
• Market approach (comparables)
• EBIDTA, EAT and capitalization factor or P/E multiple
Problem with startups:
• No assets / Optimistic forecasts

7. Public Company Comparables
• You identify common sector and do pro rata valuation
• It’s very hard to match with startups
• It’s easier on markets like US, where thousands of
companies are listed
• Here (CEE) you have practically no cases

8. Net Assets
• Balance Sheet Valuation
• Startups usually have no assets
• No value of IP and future expectations of the
company
• But can provide sanity check

9. Discounted cash flow
• Very popular method in financial sector
• Present value of all future cash flows
• Value of the company today are all future cash streams at
the discounted rates
• The biggest problem are often not realistic financial
projections
(startups should also focus more on innovation accounting
not traditional accounting to measure real progress)

10. Rule of thumb
• Minimal return investor expects (ROI)
• Money back (3x in 3 years, 5x in 5 years)
• Maximum investment investor is prepared to make
• What is the minimum equity investor wants

11. Real life approaches
• Usual % of ownership for an angel round: 15% - 25%
• or Convertible Debt (with 10 – 25% discount to the next round)
• Usual % of ownership for a VC rounds: 25 – 35%
(in every round investors will get approx. 1/3)
• How much has been done
• Phase of development (idea, prototype, first customers,…)
• Blood money
• Seize of the investment
• Risk
• Time horizon
• Negotiation skills
• Valuations in UK/US are much higher.

12. Since your financial
projections will be
wrong, focus on a
length of time you want
to fund your company
to get to the next
meaningful milestone.
HOW MUCH MONEY
SHOULD YOU RAISE?

13. Types of investments
• Capital increase
• Money into the company
• Convertible lone agreement (CLA)
• Debt that can be converted to equity
• Capital increase + CLA
• Capital increase + Buyout
• Buyout (not for BA/VC, more for PE)
• Money to the shareholders who are selling

14. Exits
• Management buyout (MBO)
• Mergers and acquisitions (M&A)
• Technology
• Customers and market share
• EBIDTA
• Initial public offering (IPO)
• Company goes public on stock exchange
• Partial exit through secondary market investors
• Bankruptcy/liquidation of the company

15. TERM
SHEET

16. Many VCs are experts in negotiating
strategies. They know how to distract you
from the main show. A great lawyer can
keep entrepreneur from falling into traps.

17. Term Sheet
• Summary of Terms for Equity Investment
• Deal Structure
• Agreed Terms for:
• Control
• Valuation
• Liquidity / Exit Strategy
• Risk / Down-Side protection
Economics

18. What is term sheet?
• An indication of two parties wanting to try to come to an agreement
sometime in the future
Goals:
• Articulate the basic provisions and terms of a potential deal that can
be used to draft the actual definitive legal agreements
• Sometimes lock down the negotiations between the Company and
Investors for a period of time
Legal documents based on term sheet
• Articles of Association
• Shareholders Agreement
• Investment contract
• Employment contracts

19. Term Sheet – General 1/2
• The Company and Involved Parties
• Series: Seed, A, B, C … K
• Price per share & Shareholder structure (N of shares/price, %)
• Before/After the investment
• Securities (type of stocks): Common (founders) /Preferred stock (investors)
• Investment size
• Pre-money valuation
• Post-money valuation (pre money + investment size)
• Purpose of the investment (why company needs money)
• Use of proceeds (how money will be spend)
• Disbursement schedule (how money will be transferred)

20. Term Sheet – General 2/2
• Investors
• Lead investor
• Co investors
• Key milestones (not common)
• Business plan
• Financial plan
• Representations and warranties (for presented data,…)
• Confidentiality (and penalties)
• Exclusivity (yes or no) / No-Shop Agreement
• Binding (yes or no)
• Expenses
• Due diligence: Investor
• Legal costs: Company after the investment
• Expiration of the term sheet
• Proposed closing date

21. Term Sheet - Management
• Management of the Company
• Non competing clause / 100% devotion to the Company
• Key Personnel Insurance
• Vesting schedule / Reverse vesting / The Cliff
• If you quit/get fired the company can buy back for pennies
percentage of entrepreneurs share
• Good leaver
• Bad leaver
• Lock-up/Negative covenants
• Option pool (10 – 20%)
• Reservation of the stock for future hires

22. Term Sheet - Control
• Voting rights
• Same/different than shareholder structure (CEE)
• Board Structure and Members
• Usually 5 members with voting rights (mature board 7 or 9)
• Executive and non-executive members
• Founder, CEO, VC, VC, outside board member
• Clerk/Procutrator (CEE)
• Usually the lead investor
• Protective provisions
• For transactions higher than x€
• Transferring intellectual property
• Taking debt
• Etc.

23. Term Sheet – IP/Information
• Due diligence (costs)
• Technical, Legal, Financial
• Intellectual property Ownership
• Information right
• All important company information must be provided to the BOD and select
investors
• CFO/Accounting firm
• Right to appoint
• Reporting
• Monthly reports
• Quarterly reports
• Yearly reports and plans

24. Term Sheet – ROI 1/2
• Pre-emptive rights/Rights on first refusal
• Current shareholders can always buy before others
• Dividends
• Dividend policy – reinvested, payed out etc.
• Anti dilution
• Protection in event of down round, additional financing at the lower
price – full/weighted ratchet
• Liquidation preferences
• Investor gets x100% of original money back before founders gets
anything
• Pay to play
• Investor must keep participating proratably in future financings

25. Term Sheet – ROI 2/2
• Tag along / Co sale agreement
• Investors follow founder sale on pro rata basis
• Drag along
• Effect is to force the non-investors’ to sell the company when the
investor thinks there is a good deal on the table
• Mandatory exit route
• Investors have the right to force all SH to sell the company after some
period of time
• Redemption rights
• Redemption rights provide a mechanism for an investor to get money back
if the company has excess cash and is not pursuing an IPO/M&A.
• Put/Call Options
• IPO / Registration rights

27. Negotiations 1/3
Entrepreneurs’ point of view
• Build the successful business
• Raise enough money to brig vision to life
• Keep as much control over the company as possible
• Keep as much value over the company as possible
• Share risk and reward with other investors

28. Negotiations 2/3
Investors’ point of view
• Maximizing IRR
• Wise spending of money
• Not to get diluted
• Exit (achieving liquidity event)
• Reputation

29. Negotiations 3/3
SPLIT OF FINANCIAL RETURNS
• Investor gets reward for the high risk and added value
• Incentive for founders to maximize value and stay in the company
CONTROL RIGHTS
• Founders want to have more control if thing go as planned
• Investors want to have more control if things do not turn out well

30. After the investment
• Professional relation
• Investor is not daily active in the company
• Filling the information asymmetry gap
• Regular reporting
• Activating the investor
• Being proactive in the relation and socializing
• Calling the investor when help is needed
• Informing them about the unexpected problems