Conquering The Term Sheet Everything You Need To Know About Deal Terms Part 2

1. Conquering the Term Sheet Everything You Need to Know About Deal Terms Part 2

2. David Stark Partner, OurCrowd @starkupnation Zack Miller Partner, OurCrowd @newrulesinvest

3. OurCrowd Leading equity crowdfunding platform with 8000+ investors from over 100 countries

4. Quick Review Lesson 1 - Equity Valuation Liquidation preferences ESOP Key takeaway Need to look at the WHOLE term sheet to see the full picture

5. Mailbox: Liquidation preferences preferred shares automatically convert to common in a qualiﬁed IPO Q: What happens to liquidation preferences in the event of an IPO?

6. Mailbox: Investment amount Warrants are the rights to invest X amount at $Y for a period of Z months. Q: Can you explain how warrants work? Real life example: Currently funding company on OurCrowd.com with 15% warrant coverage at current price (for 2 years)

7. Today’s agenda Pre-emptives Anti-dilution provisions Board of Directors Information Rights Veto Rights Right of ﬁrst refusal Drag along rights Registration rights

8. Pre-emptive (Pro-rata) Rights Pro-rata right is the right to invest in later rounds in order to maintain your ownership

9. –Fred Wilson, Union Square Ventures “I think pro-rata is the single most important term anyone can negotiate for in a venture capital investment.” (Source)

10. Because returns in early stage investing come from a small portion of your portfolio and therefore, you want to own as much as you can in the winners

11. Let’s illustrate

12. Ownership % in the company * new investment amount = pro-rata right Invest $100k at $10M post, you own 1% Say the company raises $5M at $20M premoney They are selling 20% of the company and you would be diluted to 0.8% (without pro-rata) Formula Example If you want to maintain 1% holding, then you would invest 1% of the $5M (or, $50k)

13. Implications for upround, downround scenarios

14. Individual angels rarely get “the most important right” (prorata) —> institutional investors (like OurCrowd and VCs) do

15. Current'' Ownership' Total'New' Investment' Post'Money' Ownership' 1%'1%' ?' 100%'of'the' company' 25%'being'sold'to' new'investor' 25%' .75%' .25%' 1%' 25%$99%$ 74%$

16. Current'' Ownership' Total'New' Investment' Post'Money' Ownership' 1%'1%' ?' 100%'of'the' company' 25%'being'sold'to' new'investor' 25%' .75%' .25%' 1%' 25%$99%$ 74%$ Current'' Ownership' Total'New' Investment' Post'Money' Ownership' 1%'1%' 1%' 100%'of'the' company' 25%'being'sold'to' new'investor' 25%' .75%' .25%' 1%' 25%$99%$ 74%$

17. Anti-dilution provision protection from dilution resulting from later issues of stock at lower price than investor originally paid Deﬁnition

18. Weighted Average Full Ratchet Broad-based Narrow-based if company issues shares at a lower price, earlier price is effectively reduced to price of new shares NCP = OCP * ((CSO + CSP) / (CSO + CSAP)) NCP = new conversion price OCP = old conversion price CSO = common stock outstanding CSP = common stock purchasable with consideration received by company (i.e. “what the buyer should have bought if it hadn’t been a ‘down round’ issuance”) CSAP = common stock actually purchased in subsequent issuance (i.e., “what the buyer actually bought”) CSO = ALL shares of stock outstanding, including options, ESOP, convertible securities CSO = Only the number of shares of the series of Preferred that is being adjusted Anti-Dilution Provision

19. Without Anti-Dilution Investor A invests $2M at $8M pre (20% ownership) Investor B invests $5M at $7.5M pre (40% ownership)

20. Full Ratchet Investor A invests $2M at $8M pre (20% ownership) Investor B invests $5M at $7.5M pre (40% ownership)

21. Broad-Based Weighted Investor A invests $2M at $8M pre (20% ownership) Investor B invests $5M at $7.5M pre (40% ownership)

22. Narrow-Based weighted Investor A invests $2M at $8M pre (20% ownership) Investor B invests $5M at $7.5M pre (40% ownership)

23. Anti-dilution Cheat Sheet Investor A invests $2M at $8M pre (20% ownership) Investor B invests $5M at $7.5M pre (40% ownership)

24. Vesting Key here is to ensure management’s commitment What’s a cliff? Typical Schedule ?

25. Board representation

26. • Liquidation preference • Right to participate pro-rata in future rounds • Right to a board seat –Fred Wilson, Union Square Ventures The 3 terms you must have in a venture investment (other than price):

27. Typical Board Composition Investors, Founders, Industry Expert

28. What does a BOD do? • corporate governance • approving annual budgets • accounting to the stakeholders for the organization's performance • selecting, appointing, supporting and reviewing the performance of the chief executive; • ensuring the availability of adequate ﬁnancial resources • setting the salaries and compensation of company management

29. director vs. observer

30. Information rights Starting point: Entrepreneurs want happy investors and owe them communication. How much, though?

31. Veto rights Protective and Control

32. Right of ﬁrst refusal / Co-sale If common holders want to sell stock, investors have a right of ﬁrst refusal on purchasing the stock or they have the right to participate in the proposed sale

33. Bring along/ Drag along Majority shareholders can force minority to sell

34. Registration rights • an investor’s right to force a company to list shares publicly so investor can sell them • demand registration, piggyback rights, S-3

35. Next step? Join us next week for Lesson 3 Other common investment structures: Convertible Notes SAFEs OurCrowd.com Check out our real-life term sheets by accrediting on our website