Evaluating Venture Capital Term Sheets

By Ilya Strebulaev, Theresia Gouw Ranzatta, David Hoyt
Case No. E460 | Length 21 pgs.
When entrepreneurs are successful in convincing venture capital firms that they are an attractive potential investment, they are presented with offers detailing many terms of the investment agreement. These are described in term sheets. Sorting through the myriad terms can be a daunting proposition for an entrepreneur. Yet, it is important for entrepreneurs to understand the terms of a proposed financing. These determine the payout the entrepreneurs will receive when the company is liquidated or sold (either to another company or to the public through and IPO), the dilution the entrepreneurs will suffer in the event of a future down round of financing, control of the board of directors, and other important matters. The Series A terms will also set a precedent for the terms of future financing rounds. This case presents a situation in which entrepreneurs receive term sheets from two venture capital firms. The two term sheets differ in many ways, and students are asked to evaluate them from the perspective of the entrepreneur.

Learning Objective

The case highlights the variety of terms that are part of a venture financing agreement. Understanding these terms, and the potential areas for negotiation, are important to both entrepreneurs and venture funders. The teaching objective of the case is to illustrate the ways in which the terms of a venture financing can impact the interests of both the entrepreneur and venture capitalist.
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