DAAdmin

People often accuse lawyers of using too many words. One recently received summarization of the primary terms of a venture capital investment deal in 100 words or less was submitted as follows.

“$200,000 10% bridge loan with 25% warrant coverage. 20% of the company on a fully diluted basis for $2 million. $8 million pre-money valuation and $10 million post-money. Redeemable participating preferred stock with a 5% cumulative dividend. Convertible into Common Stock. Qualified IPO triggers mandatory conversion. Weighted average price antidilution protection with a 15% option pool. Investors receive first refusal and come along rights with overallotment options, drag along, and visitation rights, as well as one demand and unlimited piggybacks (cut-backs pro rata) and S-3 registration rights.“

Obviously, this is simple and concise. But “What does it mean?”

Early-stage founders struggle to put a price tag on their company when still early in development and commercialization.

The ‘why this is’ is revealed by identifying the solution.

First, we need to understand that capital markets are competitive. Interest rate “spreads” are the easiest way to understand risk vs. financial reward. When a U.S. Treasury bond (considered “safe”) pays 5%, then how much more needs to be paid for a riskier investment? For example, a home mortgage, inventory loan, or an investment in a pre-clinical oncology company?!