We have been presented with a situation in which, Wendy Borg and Jason Kushdog, founders of Trendsetter Inc., are looking for VC’s that would provide for their funding needs, to establish and scale their business. Trendsetter Inc. is a software startup that would provide innovative warehouse and distribution solutions to clothing retailers. They have received two “Term-sheets” that are basically a summary of the terms and conditions under which the VC’s are willing to invest in Trendsetter. One is from “Alpha Ventures” and the other from “Mega Fund”. Both are willing to invest $5 million into Trendsetter Inc. under certain conditions.
Before we go into the analysis of the Term sheets, there are a few points that we need to take into consideration
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Exhibit -2 shows the vesting option (for owner and employees) as offered by both the VC’s. Both VC’s have placed similar vesting options.
Owners are vested 25% at the time of financing (Year 0) and linearly then on for the next 3 years. Employees are not vested at the time of financing, but are vested 25% after the end of the first year. From then on the employees are vested linearly for the next four years (till year 5).
Exhibits - 3 & 4 show the vesting schedule for both VC’s and the associated yearly ownership % change. Inclusive of vesting, at the time of financing (Year -0) Alpha Ventures offers an implied owners value of $1.05 million, if revenue target is met, or $0.95 million, if revenue target is not met. If target is met, owner will own 17.36% of the company, but only 15.97% if target is not met.
Mega Funds offer the owners an implied owner’s value of $1.125 million (higher than the best case scenario of ALPHA) and the owners would own 18.37% of the company (more than ALHA’s best case