‘Til exit do you part: Terms of Investments

‘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

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