Julie Stern and Mark Foster founded WebTracker as a new software company providing the unique services in the area. The successful idea allowed entrepreneurs to gain the interest of two venture capitalists, Regent Capital and Bantam Ventures (Sahlman & Roberts, 2015, p. 1). These companies have different experiences in the sphere of investment. Therefore, Stern and Foster received two term sheets to be analyzed, and then, decide on their choice of the investor.
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A range of factors can influence the decision of entrepreneurs, and much attention should be paid to the concrete details presented in the term sheets regarding the valuation of the company, the level of control, dividends, the anti-dilution protection, and liquidation conditions (Sherman, 2012). This paper aims to compare and analyze the aspects presented in the term sheets and provide the advice for Stern and Foster with the focus on the conducted analysis.
Differences and Similarities between Regent Capital Term Sheet and Bantam Ventures Term Sheet
The structures of the term sheets proposed by Regent Capital and Bantam Ventures, as well as the majority of formulations in them are similar. Thus, the venture capitalists propose the same formulations in their term sheets while discussing the aspects of non-binding, the optional conversation, registration rights, and the ‘drag along’ factor. These sections present the supporting information for the conditions provided in the other sections of the term sheets, and those conditions are quite different (Sahlman & Roberts, 2015, p. 6).
It is also important to note that the procedures associated with the liquidation, or preferences, are also discussed in the documents in similar terms. The main focus is on protecting the investors’ interests if the company cannot realize the plan in relation to the profitability. Still, the discussion of the board of directors is rather similar in order to distribute the control and ownership rights in the start-up company.
The term sheets also include many differences that need to be taken into account by the entrepreneurs. Thus, two companies propose different amounts to fund the start-up, and they use different approaches to the calculation of the pre-money valuation and the associated employee option pool. In addition, the approaches to calculating dividends are also different, affecting the founders’ shares in the situation of the liquidation.
The voting rights and protection provisions are also formulated differently. More importantly, Regent Capital proposed the formula for calculating the prices in the context of the anti-dilution provisions (Sahlman & Roberts, 2015, p. 9). Founder vesting is also a point for the discussion because the proposed conditions differ significantly. Finally, the no-shop provision period is longer in the case of Regent Capital.
The Preferred Term Sheet
The analysis of these two term sheets indicates that the document proposed by Bantam Ventures is more beneficial for Stern and Foster because of its less strict conditions. However, while referring to the factor of the investors’ reputation, it is possible to choose Regent Capital as the venture capitalist and concentrate on the negotiations in order to change some of the formulations mentioned in the document.
From this point, the choice of the term sheet is based not only on the analysis of the actual conditions but also on the analysis of the venture capitalist’s reputation and potential to provide the further funding, if it is required (Sherman, 2012, p. 68). In this context, Regent Capital has the higher potential. However, the task of Stern and Foster is to negotiate the term sheet aspects in order to follow the pattern proposed in the Bantam Ventures.
Thus, the first point to discuss is the pre-money valuation and the employee option pool that should be counted within the post-money valuation, as it is proposed by Bantam Ventures (Sahlman & Roberts, 2015, p. 9). While following the term sheet, the second option to discuss is the no-shop provision periods. The period of eight weeks proposed by Regent Capital can be viewed as rather limiting for the founders; therefore, it is relevant to negotiate on the 30-day term proposed by Bantam Ventures.
The next important point is the dividends. Regent Capital points at the typical 8% annual dividends that are cumulative. This option is protective for the investors, but the founders can negotiate to follow the pattern proposed in the term sheet of Bantam Ventures, where dividends are 3% and accruing (Sahlman & Roberts, 2015, p. 7).
Protective provisions presented by Regent Capital are also rather limiting, and it is possible to negotiate the exclusion of some points from the list in order to address the interests of founders. In this case, the protective provisions need to be correlated with the liquidation preferences.
Anti-dilution provisions should be analyzed by Stern and Foster in detail in order to decide whether the formula proposed by Regent Capital is based on the same aspects as the principle of the weighted average anti-dilution mentioned by Bantam Ventures. From this point, selecting Regent Capital, the entrepreneurs can expect the improvement of the conditions provided in the term sheet as the result of negotiations.
Negotiations of the Term Sheet with Regent Capital
The two main reasons to select the term sheet proposed by Regent Capital and participate in the negotiations are the high reputation of the company and the amount of the funding. Therefore, the focus should be on negotiating Regent Capital’s term sheet. In order to make this venture capitalist interested in changing the conditions, it is necessary for Stern and Foster to choose the effective negotiation strategy.
The analysis of the provided term sheet demonstrates that Regent Capital is focused on protection of their interests in the case of the liquidation (Coleman, Cotei, & Farhat, 2013, p. 2). As a result, the entrepreneurs need to formulate the clear exit strategy to present it for Regent Capital in order to explain how the start-up company plans to cope with the possible loss in its revenues.
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The statements about changing the conditions that are presented in the sheet in financial terms need to be supported with the actual discussion of guarantees for Regent Capital (Sherman, 2012). The argued business plan needs to reflect why the proposed conditions regarding the points interesting for Regent Capital will be working in the critical situation.
The term sheet reflects the adequate level of control and funding. Still, more attention should be paid to discussing the founder vesting in order to respond to the interests of Stern and Foster and to protective measures along with the case of dilution. While persuading Regent Capital to support the new terms and conditions, Stern and Foster need to accentuate the projected valuation of the start-up company and levels of returns that are appropriate for both founders and investors.
WebTracker’s Exit Strategy
The procedure associated with the Initial Public Offering (IPO) for start-up companies is rather problematic because of the related expenses. In spite of the fact that Foster can see the IPO as an effective strategy for the company, it is important to pay attention to the prerequisites and limits associated with this process.
The barriers to the IPO include the unrealized plan regarding the regularly increased revenues; the high competition in the industry; and increased risks (Kim & Wagman, 2014, p. 522). The advantage of the IPO is the potential for the expansion and the intense increase in revenues, but such development requires a lot of resources. On the one hand, the services proposed by WebTracker can be discussed as unique and having the potential for the increase of the customer base (Ready, 2011, p. 164).
On the other hand, the information technologies industry is one of the most actively developed sectors in the United States, and the competition is significant. In this context, the other exit strategy can be chosen. The merger can be discussed as the most likely strategy for WebTracker that needs to develop the customer base and improve the brand recognition in the industry. The merger with the other software company or the industry leader can result in increasing the revenues; still, the founders’ control will be limited in this case.
Stern and Foster’s Entrepreneurial Characteristics
Having analyzed the entrepreneurs’ features and behaviors, it is possible to state that Foster is inclined to follow the traditional pattern in the establishment of the start-up company. He tries to predict and prevent risks that can be associated with both selecting the young company in the field of investment and receiving the limited ownership while working with Regent Capital. It is possible to assume that
Foster belongs to the type of entrepreneurs who choose the best-practice approaches and patterns in the field while planning the stable growth and development of the company and implementing the effective risk prevention strategy.
Stern can be discussed as belonging to the category of innovators in this field, who focus not only on promoting the unique idea but also on protecting their rights and interests. Therefore, if Foster analyzes the overall conditions associated with accepting this or that term sheet, Stern can be viewed as more focused on the protection of the founders’ financial interests in this case.
The selection of the term sheet for the start-up company to receive the expected funding is a challenging task that requires the high level of responsibility. The co-founders of WebTracker, Foster and Stern, can be expected to choose different term sheets. While referring to the entrepreneurs’ features, it is possible to assume that Foster will choose Regent Capital in spite of the more restrictions discussed in the document.
On the contrary, Stern would choose the term sheet addressing her personal financial interests of a founder. From this point, it is possible to advise analyzing all risks and accepting the term sheet provided by Regent Capital while focusing on the development of the effective negotiation strategy in order to make the investors interested in the conditions that are beneficial for co-founders.
In addition, much attention should be paid to the presentation of the effective exit strategy. In the case of WebTracker, it is possible to choose not only popular IPO but also the less risky merger.
Coleman, S., Cotei, C., & Farhat, J. (2013). A resource-based view of new firm survival: new perspectives on the role of industry and exit route. Journal of Developmental Entrepreneurship, 18(1), 1-25.
Kim, J. H., & Wagman, L. (2014). Portfolio size and information disclosure: An analysis of startup accelerators. Journal of Corporate Finance, 29(1), 520-534.
Ready, K. (2011). Exiting your business. Startup, 1(9), 163-176.
Sahlman, W., & Roberts, M. (2015). WebTracker. Harvard Business School, 2(9), 1-15.
Sherman, A. J. (2012). Raising capital: Get the money you need to grow your business. Boston, MA: AMACOM.