Offering Terms / Price
Standard Language

Amount of Financing: An aggregate of $ X million, representing a __% ownership position on a fully diluted basis, including shares reserved for any employee option pool. Prior to the Closing, the Company will reserve shares of its Common Stock so that __% of its fully diluted capital stock following the issuance of its Series A Preferred is available for future issuances to directors, officers, employees and consultants.

Alternatively:

Price: $______ per share (the Original Purchase Price). The Original Purchase Price represents a fully-diluted pre-money valuation of $ __ million and a fully-diluted post money valuation of $__ million. For purposes of the above calculation and any other reference to fully-diluted in this term sheet, fully-diluted assumes the conversion of all outstanding preferred stock of the Company, the exercise of all authorized and currently existing stock options and warrants of the Company, and the increase of the Companys existing option pool by [ ] shares prior to this financing.

The pre-money valuation is what the investor is valuing the company today, before investment, while the post-money valuation is simply the estimated valuation of the company at its exit. There are two items to note within the valuation context: stock option pools and warrants. Your pre-money and post-money valuation should be included in the financial section of your business plan.

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Stock Option Pools

“Stock Option Pool” are options that are made available to employees to give them compensation and more stake in the game. The size of the option pool should be 20% or less pre-money, not post.

If the investor wants to increase the pool, it will lower your pre-money valuation, and they will insist that it happens before the investment. If this is a concern, then the pre-money valuation should be increased.

If you sell the company before Series B financing, all un-issued and un-vested options will be cancelled. Those options will then be split amongst the investors proportionally to their % of ownership. Even though, you being the owner and probably common stock holder, gave up that as part of your % of ownership in raising capital. In other words, when you exit, some of your pre-money valuation goes into the investor’s pocket.

To learn more about negotiating the Option Pool check out Venture Hacks

Warrants

A warrant, like an option, gives the holder the right but not the obligation to buy an underlying security at a certain price, quantity and future time. The security represented in the warrant (usually share equity) is delivered by the issuing company instead of an investor holding the shares. Companies will often include warrants as part of a new-issue offering to entice investors into buying the new security. A warrant can also increase a shareholder’s confidence in a stock, if the underlying value of the security actually does increase overtime.

It is suggested for Series A financing that no warrants are included. Warrants as part of a venture financing - especially in an early stage investment - tend to create a lot of unnecessary complexity and accounting headaches down the road. If the issue is simply one of price, we recommend the entrepreneur negotiate for a lower pre-money valuation to try to eliminate the warrants. Occassionally, this may be at cross-purposes with existing investors who want to artificially inflate the valuation since the warrant value is rarely calculated as part of the valuation (but definitely impacts the future allocation of proceeds in a liquidity event.) Note, that with bridge loan financings, warrants are commonplace as the bridge investor wants to get a lower price on the conversion of their bridge into the next round - it’s not worth fighting these warrants.