Venture Capital Deal Terms
Common Venture Capital Deal Terms
When raising an early stage round of venture capital, there are several deal terms that may arise. These terms can affect the valuation of the company, the ownership and control of the company, and the rights of the investors. We’ve defined some of the most common deal terms that may arise in an early-stage venture capital round below.
Pre-Money Valuation: The value of the company prior to the closing of a new round of investment. This valuation is set by negotiations between the company and the lead investor and is used to determine the ownership stake that the investor will receive in exchange for their investment.
Post-Money Valuation: The value of the company after the closing of the investment has been made. This is calculated by adding the investment dollar amount to the pre-money valuation.
Option Pool: A pool of company shares set aside for future employee equity grants. This is typically expressed as a percentage of the fully diluted capitalization of the company.
Liquidation Preference: A provision that gives investors the right to receive a certain amount of money before any proceeds are distributed to common shareholders in the event of a sale or liquidation of the company.
Anti-Dilution Protection: A provision that protects investors from dilution in the event of a down round, where the company raises capital at a lower valuation than its previous round.
Conversion Rights: The right of the investor to convert their preferred shares into common shares, typically in the event of an initial public offering (IPO) or sale of the company.
Board Composition: The number and identity of board members usually represented by a mix of founding team members and investors. This can include board observer rights, which give investors the right to attend board meetings and receive board materials.
Information Rights: The right of the investor to receive certain information from the company, such as financial statements, on a regular basis.
Vesting Schedule: A requirement that the founders of the company vest their ownership stake over time. This is typically done to align the incentives of the founders with the long-term success of the company.
Drag-Along Rights: A provision that allows a majority of investors to force all shareholders to sell their shares in the event of a sale or merger of the company.
Right of First Refusal: A provision that gives the company or preferred stock investors the right to purchase shares from an investor before they can be sold to a third party.
Participating Preferred: A type of preferred stock that gives investors the right to receive both their liquidation preference and a pro-rata share of the remaining proceeds in the event of a sale or liquidation of the company.
Pro-Rata Rights: The right of the investor to participate in future rounds of financing in order to maintain their ownership percentage in the company.
Redemption Rights: The right of the investor to require the company to buy back their shares after a certain period of time.
These are some of the most common deal terms that may arise in an early-stage venture capital round. It's important for both the company and the investors to understand these terms and negotiate them carefully to ensure a successful outcome for everyone involved. It's always recommended to consult with legal and financial professionals when navigating the complexities of early-stage financing.