Advising the entrepreneur who seeks to raise capital – pitching interviews and term sheet negotiation
Andres Cerisola, FERRERE, Montevideo
Valerie Ong, Rodyk & Davidson, Singapore
Juan Pablo Cappello, Greenberg Traurig, Miami
John Eckert, McLean Watson, Toronto
Timothy McCunn, Borden Ladner Gervais, Ottawa
D’Arcy Nordick, Stikeman Elliott, Toronto
Raja Sujith, Majmudar & Co, Bangalore
Amir Zolty, Eyal Khayat Zolty Neiger & Co, Herzliya-Pituach
Entrepreneurs pitching professional investors frequently seek counsel for legal and strategic advice. The venture capital industry in turn has well-defined rules as to what a professional investor expects from an entrepreneur during the – at best – 60 minutes of the initial interview and how that information is to be presented. If the interview (and its follow ups) goes well, a term sheet negotiation may follow right away. This interactive panel reviews how to advise the entrepreneur to present the company at the initial interview, the PowerPoint content, the oral presentation, the preparation for Q&A, and critical advice the entrepreneur needs for the initial phase of a term sheet negotiation.
Co-Chairs warm up on this panel’s topic
As lawyers involved with entrepreneurs, we are usually a source of, not only legal, but also strategic advice. In that context, we are regularly requested to provide input on how to put together a pitch for a professional investor and also, of course, on critical issues in the negotiation of a capital contribution when the pitch is successful.
We kick off this panel giving consideration to certain rules on a successful pitch. A traditional rule is that a successful pitch has to comply with the so called ‘10-20-30 rule’: 10 slides, font 20 and 30 minutes or less for the initial presentation. So, once the entrepreneur’s temptation to use 100 slides is dealt with, one important topic is what the ten slides should be about.
The most important thing is the team. A professional investor is mostly looking for effective teams, the feeling that ‘this is really a smart group of people.’ A professional investor normally gets excited when she or he feels that there is a group of people who understands the market, thinks consistently, has access to the necessary people, and has passion and drive.
The second thing a professional investor wants to see is the market size. It is difficult that a company can grow significantly if the market is small, unless it is a market with very little competition. Something a professional investor will look for is good answers and reliable figures on the size and prospects of the specific market.
Thirdly, the product – what exactly is this company about? What is the innovation or new concept that will make the product a success? What is the ‘pain’ that the product solves, what is the secret sauce? A simple explanation of the product and its value is critical and rarely present.
Fourthly, ‘projection certainty’ is also important and rarely addressed. Every entrepreneur pitching a professional investor claims she or he is going to sell a lot. Rarely these statements are backed by reliable, organised information.
Fifth – the protection against incoming competition. Without some entry barrier, even if a success, the company is not likely to rip the benefits. The professional investor wants to see a smart analysis of the competition and a strategy to tackle the likely new competition.
Sixth, the company needs to provide a vision for a reasonable exit for the investor. If there is no possible exit from the investment on sight, it is unlikely a professional investor will find the investment attractive.
A seventh issue to tackle in the pitch is the ‘money in-money out.’ It has to make sense to invest the money that needs to be invested in relation to the likely prize upon the exit. Especially when you build in that early stage projects have a high mortality rate, and a successful project has to pay for a number of failures that statistically will exist.
Eighth: corporate governance. It is not encouraging when a professional investor comes across two brothers who claim that they will be ‘co-CEOs’. This is not to say that a professional investor likes an autocrat, but it is good to see a sensible corporate structure, ideally with interesting smart external directors who add value and credibility to the company. The entrepreneur’s ability to attract smart and valuable people to both management and board positions is very important.
The ninth consideration is the financial plan and the assumptions supporting it. Professional investors know entrepreneurs are not normally sophisticated financiers, but some clue on what the figures are and how reliable they are carries the decision making process a long way. In this context, a key issue is how much money is needed and how far that money will take the venture.
Finally, valuation is also important, but it is not the issue on which decisions are made. Within reasonable limits, valuation is not what defines whether a professional investor invests or not. If the prior elements are present, a professional investor will want to do what is reasonably necessary to be part of the venture. If the above is not there, no low valuation will persuade a professional investor to place her or his money in a flawed project.
Providing flesh and concrete content to the above, as well as substance to the pitch, will be the starting point for the panel. But once the pitch is presented and the professional investor gets interested, the term sheet negotiation starts.
Depending on the dynamics of our interactive programme, we will likely discuss:
- standard versus customised term sheets;
- the risks in the definition of preferred stock that the professional investor gets;
- the impact that the preferences may have on successive rounds or an IPO;
- liquidation preferences;
- stock vesting clauses;
- option pools;
- redemption clauses; and
- anti-dilution arrangements and their risks including full ratchet and play or loose clauses, special board approvals, information rights and their limitations, registration rights, and even the payment of the professional investors’ expenses.
This will be an exciting panel on a hot topic for attorneys in close contact with growth companies.