YourStory holds its inaugural workshop for 2013; Soumitra Sharma of IDG Ventures demystifies the VC Term Sheet for entrepreneurs

Disclaimer: This session was hosted by YourStory.in as part of our YS Workshops for Entrepreneurs

Over numerous interactions with entrepreneurs and startup enthusiasts, YourStory has repeatedly heard about the lack of actionable insights and coverage of real-world issues when it comes to education and awareness channels. It is to meet this gap that YourStory got into the workshop space and it has conducted several workshops across different cities in past years. In fact, educating entrepreneurs and creating information resources is an integral part of YourStory’s mission to promote entrepreneurship. YS Workshops come with one critical differentiator – focus on the most relevant and pressing issues for entrepreneurs, with real world experiences of industry experts, investors and seasoned entrepreneurs. It was with this in mind that YourStory held its inaugural workshop for 2013, on Demystifying the VC Term Sheet, conducted by Soumitra Sharma of IDG Ventures India.

The workshop was conducted at the YourStory office in Bangalore and was attended by a packed audience of entrepreneurs. Soumitra facilitated the workshop in a very participative style, fielding participant questions as and when they came up. To make things extremely relevant, he used a real term sheet and broke down its various aspects.

Soumitra started the workshop by explaining that a majority of investments made by VCs lose money and only a handful create returns – extraordinary ones when they do! In such a high risk asset class, it is critical for VCs to manage their risks on each investment, through instruments such as Term Sheets. Term sheets are about 2 key pillars – Economics or the financial aspects, and Control or the ability of VCs to influence key company decisions. With these two aspects as the focus, a VC term sheet outlines the deal structure and key terms of any VC investment. Soumitra then elaborated on how VCs value companies, explaining the various rounds of funding and typical range of ownership acquired in each round. This was followed by a deep dive into the intricacies of Preference shares, Conversion rights, Performance based Valuations, Tranching, ESOP Pools and Dilution. Using simple language and examples that were easy to relate to, Soumitra went on to cover complex but highly critical clauses related to exit, transfer of ownership and exit route definitions in the term sheet. He then explained the clauses that VCs put in for various types of exits including IPOs, Strategic Sales, M&A and Buybacks. He simplified complex terms such as Drag Along, Liquidation Preference, Right of First Refusal etc., and shared the rationale behind including these in the term sheet.

The workshop then went into details of Control related clauses such as Voting Rights, Founder Vesting and Affirmative Rights. This was followed by a discussion on Closing & Conditions Precedent along with Indemnities and Reps & Warranties. The icing on the cake was really the last section – appropriately called Tricks of the Trade – where Soumitra offered several tips and suggestions on term sheet negotiation, based on his practical experience. He started by assuaging the participants’ concerns on the seemingly draconian terms that VCs insist upon. He stressed on Founders as the real value creators and value drivers in the business. According to Soumitra, the term sheet should be viewed as an instrument to align incentives of Founders with those of Investors. He ended the workshop with this closing thought – “As a Founder, it is both your right and responsibility to negotiate hard!”

This was the first of what will be a highly packed workshop calendar from YourStory in 2013. In addition to Bangalore, workshops are being planned for several other cities like Chennai, Delhi, Hyderabad, Mumbai and Pune. The workshops will cover a range of topics from Finance, HR, Marketing and Product Management.