by Scott Kupor
Subject to the Protective Provisions below, the Company’s Certificate of Incorporation will provide that the number of authorized shares of Common Stock may be increased or decreased with the approval of a majority of the Preferred Stock and Common Stock, voting together as a single class, and without a separate class vote by the Common Stock.
Board of Directors:
The Board shall initially have three directors. The holders of Series A Preferred Stock, voting as a single class, will have the right to elect one member of the Board (who shall be designated by VCF1). The holders of Common Stock, voting as a single class, will have the right to elect one member of the Board, to be the CEO. The remaining member of the Board will be an outside industry expert approved by the other members of the Board. The parties shall enter into a voting agreement with respect to the election of the directors.
Protective Provisions:
For so long as any shares of Preferred Stock remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of a majority of the outstanding shares of Preferred Stock, voting together as a single class on an as-if converted basis, shall be necessary for effecting or validating the following actions (whether consummated by merger, amendment, recapitalization, consolidation, or otherwise): (i) any amendment, alteration, or repeal of any provision of the Certificate of Incorporation or the bylaws of the Company (the “Bylaws”); (ii) any increase in the authorized number of shares of Preferred Stock or Common Stock; (iii) any authorization, designation, or issuance, whether by reclassification or otherwise, of any new class or series of stock or any other equity or debt securities convertible into equity securities of the Company ranking on a parity with or senior to the existing Preferred Stock in right of redemption, liquidation preference, voting, or dividends or any increase in the authorized or designated number of any such new class or series; (iv) any redemption or repurchase with respect to Common Stock (excluding shares repurchased upon termination of an employee or consultant pursuant to a restricted share purchase agreement); (v) any agreement by the Company or its stockholders regarding an asset transfer, license of intellectual property out of the ordinary course of business, acquisition, or a Liquidation Event; (vi) any action that results in the payment or declaration of a dividend on any shares of Common Stock or Preferred Stock; (vii) any voluntary dissolution or liquidation of the Company or any reclassification or recapitalization of the outstanding capital stock of the Company; (viii) any increase or decrease in the authorized number of members of the Company’s Board; (ix) any borrowings, loans, or guarantees in excess of $500,000; (x) any interested party transaction, unless approved by the Board (including a disinterested majority of directors); or (xi) any increase to the Company’s stock option plan.
There shall be no separate series votes of any series of Preferred Stock.
Information Rights:
The Company shall deliver to a purchaser of $2.0 million or more of the Preferred Stock (a “Major Investor”) its audited annual and unaudited quarterly financial statements prepared in accordance with US GAAP, consistently applied. In addition, the Company will furnish Major Investors with monthly financial statements compared against plan and will provide a copy of the Company’s annual operating plan prior to the beginning of the fiscal year. Each Major Investor shall also be entitled to standard inspection and visitation rights. These provisions shall terminate upon a Qualified IPO or Liquidation Event.
Registration Rights:
Customary registration rights.
Right to Make Pro Rata Investments in Company Offerings:
In the event the Company proposes to offer equity securities to any person (excluding Exempted Securities), Major Investors shall have the right to purchase their pro rata portion of such equity securities. Major Investors shall have twenty (20) calendar days after delivery of a notice from the Company describing such offering to elect to purchase their pro rata portion. Any such equity securities not subscribed for by a Major Investor may be reallocated among the other Major Investors. Such right of first refusal will terminate immediately prior to a Qualified IPO or upon a Liquidation Event.
Stock Restriction:
Each current and future holder of 2% or greater of the Company’s Common Stock post-financing will execute a Right of First Refusal and Co-Sale Agreement with the Investor and the Company pursuant to which the Company and then the Investor will have a right of first refusal with respect to any shares proposed to be sold by the holders of Common Stock. Any shares purchased by the Company will be returned to treasury. The Right of First Refusal and Co-Sale Agreement will also contain a right of co-sale providing that before any such holder of Common Stock may sell any of his shares, he will first give the Investor an opportunity to participate in such sale on a basis proportionate to the amount of securities held by the seller and those held by the Investor. Such agreement shall contain exceptions for transfers to affiliates and transfers for estate planning purposes, but shall not include exceptions for any other transfers or pledges of stock. In addition, no stockholder shall be a party to any Stock Sale unless all holders of Preferred Stock are allowed to participate in such Stock Sale and the consideration received pursuant to such Stock Sale is allocated among the parties thereto as if such Stock Sale were a deemed liquidation event. A “Stock Sale” means any transaction, series of related transactions, or series of unrelated transactions in which a person or entity, or a group of affiliated (or otherwise related) persons or entities acquires more than fifty percent (50%) of the outstanding voting stock of the Company. The Right of First Refusal and Co-Sale Agreement will terminate upon a Liquidation Event or a Qualified IPO.
The Bylaws will contain a blanket restriction on the transfer (including pledges and other hypothecation of shares and proceeds from the future transfer of such shares) of Common Stock and founder stock without disinterested Board approval, but not a corresponding restriction on transfers of Preferred Stock.
Drag Along:
Each current and future holder of 2% or more of the capital stock of the Company will be required to enter into an agreement providing that in the event a majority of the Board, holders of a majority of the Common Stock (voting as a separate class), and holders of a majority of the Preferred Stock (voting as a separate class) have approved an acquisition of the Company, whether by merger, sale of assets, sale of stock, or otherwise, such holder will grant any necessary consents or approvals reasonably determined by the Board to be necessary in order to approve or participate in the acquisition of the Company subject to customary limitations.
Purchase Agreement:
The investment shall be made pursuant to a Stock Purchase Agreement by and between the Company and the Investor, which shall contain, among other things, appropriate representations and warranties of the Company, covenants of the Company reflecting the provisions set forth herein, and appropriate conditions of Closing, including an opinion of legal counsel for the Company and the issuance of a management rights letter to the Investor.
D&O Insurance:
The Company shall covenant to maintain directors’ and officers’ insurance, with a limit of at least $2.0 million and other terms satisfactory to the Board.
EMPLOYEE MATTERS
Vesting:
Except as otherwise approved by the Board, options issued after the Closing to employees, directors, consultants, and other service providers of the Company will have a post-termination exercise period of no more than ninety (90) days and be subject to vesting as follows: 25% to vest on the first anniversary of (i) the date of commencement of providing services to the Company in the case of new hires or (ii) the date of grant in the case of refresh grants, with the remaining 75% to vest in equal monthly installments over the next thirty-six (36) months thereafter.
Shares of capital stock held by the founders will be subject to a forty-eight- (48-) month
vesting schedule with the vesting commencement date relating back to such founders’ commencement of full-time services to the Company. Such vesting will be subject to, in the event that there has been a Liquidation Event, 100% acceleration in the event of a termination without “cause” or “good reason.”
Employee and Consultant Agreements:
Each employee and consultant of the Company shall sign (or shall already have signed) a proprietary information agreement providing that (i) he is either an at-will employee or a consultant of the Company, as the case may be, (ii) he will maintain all Company proprietary information in confidence, and (iii) he will assign all inventions created by him as an employee or consultant during his employment or service to the Company.
OTHER MATTERS
No-Shop:
The Company agrees that, through the earlier of (i) thirty (30) days from the date this Term Sheet is executed by the Company and a VCF1 and (ii) the date on which VCF1 notifies the Company in writing of its intention not to continue to pursue the proposed purchase of Series A Preferred Stock, neither the Company nor any director, officer, employee, or agent of the Company will, directly or indirectly, solicit, initiate, entertain, or encourage any proposals or offers from any third party relating to the sale of the Company’s capital stock (other than customary grants of options pursuant to the option plan), any merger or consolidation of the Company, the dissolution of the Company, or the acquisition of a material portion of the Company’s assets, or participate in any discussions regarding, or furnish to any person any information with respect to, any such transaction.
Confidentiality:
This Term Sheet and any related correspondences from the Investors are to be held in strict confidence and not disclosed to any party other than the Board, existing investors in the Company, Company employees who reasonably need to know, and their legal counsel without prior approval of such Investors.
Closing:
Except for this provision and the provisions contained herein entitled “No Shop” and “Confidentiality,” which are explicitly agreed by the Investor and the Company to be binding upon execution of this Term Sheet, this Term Sheet is not intended as a legally binding commitment by the Investor or the Company, and any obligation on the part of the Investor or the Company is subject to satisfactory completion of legal due diligence by VCF1, satisfactory business and technology due diligence by VCF1, and completion of legal documentation to the satisfaction of VCF1.
Legal Counsel and Fees:
Upon the closing of the transaction, the Company shall bear its own legal fees and expenses and shall pay the reasonable fees and expenses of VCF1 not to exceed $35,000.
The foregoing correctly reflects our mutual intentions as a basis for proceeding toward negotiation of definitive agreements.
COMPANY XYZ, INC.
VENTURE CAPITAL FUND I, L.P.
By:
By:
Name:
Name:
Title:
Title:
Date:
Date:
ACKNOWLEDGMENTS
When Marc Andreessen and Ben Horowitz reached out to me in 2008 to ask if I would join them on the a16z journey, I have to admit that I hesitated. I was living in North Carolina at the time, working for Hewlett-Packard, and my family was enjoying the welcome respite from the fast-paced excitement of the Bay Area. And, not to mention, it was the summer of 2008, the beginning of what would become the global financial crisis that would decimate the financial services industry and throw the global economy into a financial tailspin.
I’ll never forget being on a call with Ben in September 2008—the precise weekend that Lehman Brothers would go bankrupt—discussing the plans for the a16z business and questioning whether we’d be able to raise a new venture fund. In many ways, it seemed to defy the odds, but then again, I’d seen this story before.
I’d joined LoudCloud at the beginning of 2000 in what turned out to be the height of dot-com euphoria. Less than twelve months later, we had to “adjust” our financial plan to the new realities of the dot-com bust. And, as I discussed in this book, we went public in 2001 in the crosshairs of the technology meltdown, ultimately navigating our way through a massive restructuring and the sale of the LoudCloud business to EDS, followed by the launch of Opsware as a public company with exactly one client (EDS).
But, in ultimately deciding to join Marc and Ben on the a16z journey, I recalled what I had told my wife when I made the original decision to join LoudCloud: “While it’s impossible to predict whether we’ll ultimately build a successful business, I know that the journey will be an amazing one.”
And having the privilege to work with two individuals as successful, ambitious, and intellectual as Marc and Ben has been truly that. I come to work every day knowing that I will be challenged to think differently and to respond to new opportunities, never relying on precedent as the answer for why we do something, but rather being forced to think through everything from first principles.
Thus, in many ways, the decisions to join LoudCloud in 2000 and a16z in 2008 were IQ tests. Lucky for me, I passed the tests.
This book would not have been possible without those decisions, as the opportunities and the platform that those experiences—and Marc and Ben personally—provided me, set the stage for the learning that I hope to have conveyed throughout this book. And for that I am eternally grateful to the two of them.
I also want to thank all my teammates at a16z, who are too numerous to name individually here, and whose contributions to the success of the firm are equally too numerous to call out individually. They are the ones who have made the firm successful and helped build the a16z platform to a point where we have the ability to communicate directly with entrepreneurs in forums such as this book.
Special thanks to a few folks who reviewed early versions of the manuscript and provided helpful feedback: Joe Grundfest, professor at Stanford Law School, who taught me everything I know about securities regulation; Bobby Bartlett and Adam Sterling, professors at UC Berkeley Boalt School of Law, who have been great partners in broadening the knowledge of the VC ecosystem to new investors, particularly those outside Silicon Valley; and Peter Stamos, CEO of Stamos Capital Partners, who always forces me to expand my thinking around financial management.
Of course, any mistakes in this book are mine and mine alone. Hopefully, they are relatively few and far between.
To my parents: Thank you for instilling in me a love of learning and for providing me the strong foundation on which I’ve relied for so many years.
And, ultimately, to my loving wife, Laura, and my three amazing, crazy fun, and inspirational daughters, Ashlee, Alexa, and Amanda: Without your love and support, I am nothing.
NOTES
42 percent of all US company IPOs: Will Gornall and Ilya Strebulaev, “The Economic Impact of Venture Capital: Evidence from Public Companies,” Stanford Graduate School of Business Research Paper No. 15-55, November 1, 2015; Tim Kane, “The Importance of Startups in Job Creation and Job Destruction,” Firm Formation and Economic Growth, Kauffman Foundation Research Series (Ewing Marion Kauffman Foundation, July 2010).
Chapter One: Then and Now
$36 billion went into new startups in 1999: Thea Singer, “Where the Money Is,” Inc., September 1, 2000; National Venture Capital Association Yearbook 2016 (NVCA and Thomson Reuters, 2016); National Venture Capital Association 2018 Yearbook (NVCA and PitchBook, 2018).
On March 10, 2000, the Nasdaq index: Heather Long, “Tech Stocks Aren’t at Bubble Levels,” CNN Business, March 10, 2015, https://money.cnn.com/2015/03/10/investing/nasdaq-5000-stocks-market/index.html.
Nasdaq P/E ratio today is under 20: �
��Nasdaq PE Ratio 2006–2018,” Macrotrends.net, accessed December 18, 2018, https://www.macrotrends.net/stocks/charts/NDAQ/nasdaq/pe-ratio.
Cisco’s market cap peaked at about $555 billion: Paul R. La Monica, “Cisco Is the Market’s Comeback Kid,” CNN Business, March 15, 2018, https://money.cnn.com/2018/03/15/investing/cisco-comeback-best-dow-stock/index.html.
Nasdaq index began a precipitous decline: “The Dot-Com Bubble Bursts,” Editorial, New York Times, December 24, 2000, https://www.nytimes.com/2000/12/24/opinion/the-dot-com-bubble-bursts.html.
Chapter Two: So Really, What Is Venture Capital?
median ten-year returns in VC: Cambridge Associates, “US Private Equity Was Strong, US Venture Capital More Middling in Second Quarter of 2017,” January 8, 2018, https://www.cambridgeassociates.com/press-releases/us-private-equity-was-strong-us-venture-capital-more-middling-in-second-quarter-of-2017.
Accredited investors: US Securities and Exchange Commission, “Accredited Investors,” https://www.sec.gov/fast-answers/answers-accredhtm.html.
Accel Partners: JP Mangalindan, “Timeline: Where Facebook Got Its Funding,” Fortune, January 11, 2011, http://fortune.com/2011/01/11/timeline-where-facebook-got-its-funding.
investments in companies by VC firms topped $84 billion: National Venture Capital Association 2018 Yearbook (NVCA and PitchBook, 2018).
VC firms raised about $100 billion: National Venture Capital Association 2018 Yearbook.
global buyout industry raised about $450 billion: Joshua Franklin, “Global Private Equity Funds Raise Record $453 Billion in 2017: Preqin,” Reuters, January 4, 2018, https://www.reuters.com/article/us-privateequity-fundraising/global-private-equity-funds-raise-record-453-billion-in-2017-preqin-idUSKBN1ET23L; Christine Williamson, “Hedge Fund Assets End 2017 at Record $3.2 Trillion—HFR,” Pensions & Investments, January 19, 2018, https://www.pionline.com/article/20180119/ONLINE/180119827/hedge-fund-assets-end-2017-at-record-32-trillion-8211-hfr.