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Wednesday, June 29, 2022

Some Takeaways From Stockholm & Helsinki's Term Sheet Battle

Thanks to everyone for attending Helsinki and Stockholm’s term sheet battle! We hope you had a chance to learn as much as we did in the audience!

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In Helsinki, Kimmo Reina from Bird & Bird Micke Paqvalén, the CEO of Kiosked, really threw some punches against Daniel Blomqvist from Creandum and Jimmy Fussing Nielsen from Sunstone. In Stockholm, Martin Hauge of Creandum and Christian Jepsen of Sunstone Capital duked it out in a tag-team match with Martin Källström of Memoto and Martin von Haller of Bird & Bird.

It was great to see experienced negotiators in the ring, but another great takeaway was the VCs telling the audience what the normal terms are in Europe at the moment. As a general note, Creandum and Sunstone’s experience is that entrepreneurs have the tendency to get caught up in pre-money valuations and then get eaten up by a lot of “fun” clauses in the term sheet to protect the investor’s return. It seems obvious when saying it outloud, but really it might be very worthwhile to pull back on the valuation, and instead negotiate the best term sheet that balances your return and control in the chance of both a huge and meager exit.

I got a chance to write down a few of the takeaways in the first-half of the show here:

Liquidation Preference
As a little background, the point of a liquidation preference is to keep the founder’s motivations in line (from a VC perspective) by giving investors a senior right over the liquidation proceeds. For example if a VC invests 3 million to own 1/3 of a company, which later sells for 3 million, with a 1x liquidation preference they would receive their 3 million back before any other money is divided.

Without the liquidation preference at a 3 million exit, the founders would receive 2 million (for the 2/3 they own of their company) and the VC’s would only receive 1 million. The founders would get a decent return while the investors lose on the deal.

The VCs seemed to be in agreement that a 1x liquidation preference is common in Europe, with a hurdle rate. A double-dip isn’t as common in Europe, but does appear.

Reverse Vesting on Founder’s Stock
This is for the circumstances where one of the founders quits or needs to be removed from the company. This typically gets negotiated into a good leaver/bad leaver situations, where a founder walking away is considered a “bad leaver”, and will receive some par value for their shares (such as €1/share). Here, a good leaver could ironically be a situation like the founder dying, where obviously you don’t give the estate €1/share, but rather the market value.

If a founder leaves, sometimes the VCs take the shares, but the normal situation is to divide it or put it back in the option pool. To me the option pool seems like the best choice, because you’ll likely need those shares to get more talent onboard.

Vesting clauses are also important for entrepreneurs to keep their team together, but its good to keep in mind that they’ll likely be re-negotiated again when you hit your next round of funding.

Representations of Warranties
Basically this comes down to “what you say in this contract and due diligence better be true, or its going to cost you.” Here it’s important for entrepreneurs that the liability is capped. The VCs say that you want to cap it at the invested amount, but make it so the VC first receives shares before actual cash so you’re not thrown out on the street.

Also the question of what is, “To the best of your knowledge” has some important wording, but it’s something your lawyers will argue about.

There was a lot more covered, but you’ll have to attend our next Term Sheet Battle to get the full picture!

And again, thanks to Term Sheet Battle, Startup Bootcamp, Bird & Bird, Creandum, and Sunstone Capital for helping put together two awesome shows. And we can’t forget…

Thanks to our sponsors:

We would like to thank UpCloud for supporting ArcticStartup and Term Sheet Battle in Helsinki. UpCloud is a cloud hosting company that provides freely scalable server resources from Helsinki and London with competitive pricing. UpCloud guarantees the resources you buy, so you can be sure that performance is always top notch across all service levels.

If you want a free €100 voucher to test the service, please e-mail Antti Vilpponen before the end of June 2013.

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