‘Til exit do you part: Terms of Investments

Confused by what terms like “anti-dilution”, “drag along” and “no shop clause” mean?   Ever wonder why VCs include the terms and conditions that they do on VC term sheets?

At last week’s CIBC Presents Entrepreneurship 101, Shirley Speakman, the Director of Investments for the Ontario Centres of Excellence’s Investment Accelerator Fund (IAF) lectured on Terms of Investments: Working with VCs. Having been involved in more than 80 transactions from both the investor and company side, Shirley knows a thing or two about what the general terms and conditions of VC term sheets mean from the VC point of view.

Having a VC put big money into your company is a serious commitment on their part (kind of like a marriage), and the term sheet is like a pre-nuptial agreement that protects their money should it not work out.

To VCs, the terms and conditions are all about minimizing their downside risk.  If your company takes off and achieves the kind of returns they are looking for, everyone wins.  If it doesn’t achieve those returns, the terms will  protect the VC’s investment.  For example, VCs generally ask for preferred shares while you and your employees will have common shares. If the company must be liquidated, the preferred share holders (i.e. the VCs) will be paid first.

Interested in learning more about the rationale of the terms and conditions on a term sheet?  Watch the video below.

Downloads and resources

• Video: Terms of Investments: Working with VCs
• Slide presentation: Terms of Investments: Working with VCs
• Class summary:
• Entrepreneur’s Toolkit – Venture capital term sheets
• Entrepreneur’s Toolkit – Elements of a term sheet
• Entrepreneur’s Toolkit – Understanding the term sheet
• Entrepreneur’s Toolkit – Angel term sheets
• Entrepreneur’s Toolkit – The due diligence process in venture capital
• Entrepreneur’s Toolkit – How investors determine the valuation of your business
• Blog – Well-known VC blogger Brad Feld’s Term Sheet series explains each term
• The Mark‘s The Future of Venture Capital in Canada: Among several articles on the state of VC in Canada today, Rick Segal (one of the panelists on last week’s Entrepreneurship 101 presentation) wrote “Don’t Fear the Start-up” where he calls for more funds to invest in early stage start-ups).
• Join the Facebook Group: CIBC Presents Entrepreneurship 101
• Register to get the weekly email updates

CIBC presents Entrepreneurship 101 2009/10 – Week 23 -Terms of Investments: Working with VCs from MaRS Discovery District on Vimeo.