Clayton, Dubilier & Rice’s Post

🔍 Understanding the Term Sheet 🔍 For those navigating the startup world, the term sheet is a critical document that you’ll encounter during fundraising. It’s a non-binding agreement that outlines the key terms and conditions of a proposed investment. Here are some essential elements: 1. Valuation: Determines our company’s worth and the investor’s ownership percentage. 2. Investment Amount: The total funds being invested. 3. Type of Security: Specifies the equity or convertible security offered, such as preferred stock. 4. Board Composition: Allocates board seats between investors and founders. 5. Liquidation Preference: Outlines the payout order in case of a liquidation event. 6. Voting Rights: Details the voting privileges of investors. 7. Anti-Dilution Provisions: Protects investors from dilution during future funding rounds. 8. Founder Vesting: Ensures founders remain committed by vesting their equity over time. 9. Right of First Refusal: Allows investors to participate in future funding rounds. 10. Drag-Along Rights: Enables majority shareholders to compel minority shareholders to join in a sale. While it’s not legally binding, a term sheet sets the stage for the final agreements and aligns expectations between startups and investors. #Startups #Investment #Fundraising #Entrepreneurship #BusinessGrowth

The Art of Negotiating with VCs: Understanding the Money Behind the Deals💡💰 Negotiating with venture capitalists (VCs) is a unique experience—one that requires not only a sharp strategy but also an understanding of where their money comes from. Recently, I found myself in a high-stakes negotiation with a VC fund, and knowing their financial backers gave me an edge. Here’s a behind-the-scenes look: 1. Understanding Their Backers: VC funds aren’t just sitting on a pile of cash. They raise money from a range of sources, including pension funds, university endowments, insurance companies, and even high-net-worth individuals. These investors, known as limited partners (LPs), are looking for substantial returns, which means VCs are under pressure to invest in high-growth opportunities. 2. The Negotiation Begins: Armed with this knowledge, I approached the negotiation table with a clear understanding that the VC’s ultimate goal is to deliver significant returns to their LPs. This shaped my strategy—I positioned my startup as not just a promising venture but as a potentially high-return investment that could help them meet their financial obligations to these institutional investors and wealthy backers. 3. Leverage Through Insight: During the discussions, I highlighted how our growth trajectory aligns with the type of returns their LPs are seeking. I also emphasized our potential to attract further investment and scale rapidly, which resonated with their need to justify their capital deployment. 4. The Power of Knowing the Source: By understanding where VC funds get their money, I could better tailor my pitch and negotiate terms that aligned with both their expectations and ours. It wasn’t just about securing funding; it was about showing that we understood the broader financial ecosystem and how we fit into it. 5. Closing the Deal: The negotiation ended on a high note. Not only did we secure the funding we needed, but we also established a partnership based on mutual understanding. By demonstrating our awareness of their financial pressures and aligning our goals with theirs, we set the stage for a successful collaboration. The Takeaway? In any negotiation, especially with VCs, knowledge is power. Understanding where the money comes from can give you the insight needed to craft a winning strategy and close the deal on favorable terms. #VentureCapital #Negotiation #StartupFunding #InvestorRelations #BusinessStrategy #Entrepreneurship #DealMaking #VC #FundingSuccess

🤔Are you working with a 2% or a 20% #VC firm? ⭕ An important question every #founder should be asking when raising capital. ⭕ One more reason why IPOs should be promoted earlier than later. ⭕ Size matters. An excelent analisis by Jamin Ball, partner at Altimeter, recently discussed with Brad Gerstner and Bill Gurley in the lates BG pod episode (https://lnkd.in/erxhYHUG). By the way both Jamin's Cloud Judgement substack and the BG pod are worth following, both combining deep knowledge and battle tested experience in both public and private markets! #innovation #growthmindset #saas #vcfunding #startups #venturecapital #ipo #financing #equity #captable https://lnkd.in/eSnhwVXP

For #startup Founders: #JasonLemkin's checklist for reviewing a prospective term sheet/investor. Some useful tips in the Comments also. #GlobalBusiness

#WhatWeLearned Securing the Right Lead Investor and Advisor Can Make or Break Your Startup Pavel Asanov’s Midday Connect session this week shed light on an often-overlooked aspect of startup fundraising—working with the right lead investors and advisors. Why is the lead investor so important? 1. They Drive Investor Confidence A lead investor usually invests a large chunk of your funding round (e.g., $250k in a $500k raise). Their involvement makes other investors more likely to follow. 2. They Help Make Decisions Easier When your lead investor approves a business decision—like acquiring a small company—other investors are likely to follow suit without lengthy individual negotiations. 3. Advisory Shares It’s common for lead investors to request advisory shares. According to Pavel, offering around 0.25% of your company to the lead investor is a fair trade for their expertise and involvement in your growth. Pavel also touched on the importance of your advisors investing in your business. If a prominent advisor is on your cap table but hasn’t invested financially, it could raise red flags for other investors. They might wonder why someone close to your business doesn’t have "skin in the game." If you haven’t yet secured a lead investor or structured advisor relationships thoughtfully, this is something to start working on immediately. Your next round of funding might depend on it! Watch the full session here: https://lnkd.in/gRapd7b6 #middayconnect #startupadvisors #startupfundraising #advisory #advisoryshares #leadinvestor #investor

Imagine this: You’re an investor eyeing a promising startup, but you’re wary of the risks. What if there was a financial tool that could offer you a safety net while still allowing you to reap the benefits of the company’s growth? Enter convertible debentures. Here’s why savvy investors often opt for convertible debentures: ➡️ Flexibility: Convertible debentures are like having a plan B. They offer the security of fixed interest payments, with the added option to convert into equity if the company hits it big. ➡️ Downside Protection: If the company doesn’t perform, you can stick with the bond until maturity, ensuring you don’t walk away empty-handed. ➡️ Priority in Liquidation: In the unfortunate event of a company winding up, convertible debenture holders are higher up the pecking order, getting paid before equity shareholders. ➡️ Tax Efficiency: For companies, the interest on these debentures is tax-deductible, making it a cost-effective way to raise funds. ➡️ Delayed Valuation: Startups can defer the tricky business of company valuation by issuing convertible debentures, buying time to establish their market worth. Convertible debentures are not just a funding mechanism; they’re a strategic tool for both investors and companies navigating the high seas of business growth. Curious about how convertible debentures can fit into your investment strategy or fundraising efforts? Let’s connect and explore the possibilities. #InvestmentStrategy #ConvertibleDebentures #StartupFunding #FinancialTools #BusinessGrowth

Weird hill some founders decide to die on: refusing standard pro-rata letter. Pre-seed rounds in the US are typically done on post-money YC SAFE + standard YC pro-rata letter. As an exception, there are some priced pre-seed rounds and non-SAFE convertible note rounds. While it's technically possible to sign a SAFE without a pro-rata letter, it typically happens only with angel investors. Vast majority of VCs sign SAFE + pro-rata. Pro-rata is a clear win-win for both sides - it costs the company nothing, and creates a strong alignment of interests. In about 2% of cases I see founders asking to forgo the pro-rata letter. It typically comes up as the first thing after the commitment at a specific cap, when the relationship is still early, and it creates an immediate strain and need for additional negotiation. It's bad both short-term (waste of time, the round might not close or be delayed), and long-term (if the company ends up convincing VCs to invest without pro-rata, they won't be aligned with VCs on follow-on investment and will likely receive less support). If you're truly building the next unicorn / decacorn / centacorn, it's important to focus. Only the companies that are laser-focused on their vision win. Focusing instead on trying to innovate in fundraising and do non-standard deals takes attention and energy away from the vision.

Most VCs mean well. Yet, even with the best intentions, some VCs wake up and realize (or worse, don't realize): I’ve become that asshole investor. You know the type: late for meetings, always on their phone, ghosting founders, stressing them out, and giving unthoughtful advice. These investors add negative value, even considering their investment. There are psychological drivers that push VCs to this point. And then founders pay the price. #vc #startups https://lnkd.in/gzj6zqvC

There should be a recipe for VCs and PEs to prove their worth to founders. For once in my career, I’m part of a company that doesn’t need capital. We’re growing, scaling, and not scrambling for funds. But that doesn’t mean we wouldn’t consider bringing on an equity partner—especially one with repeatable success in our industry who can help us hit our next big milestone, whatever that may be. Here’s the thing: When founders seek capital, we lay it all out. VCs and PEs get access to everything—our playbook, our strategy, our financials. We have to prove our worth down to the last detail. So why is it so hard to get the same transparency from them? Before cutting a check, show us what you bring to the table. I’m not talking about vague promises—give us concrete, actionable ways you can help us dominate our market. What tools, experience, and specifics do you have that will actually move the needle? VCs and PEs, take note: I’m not suggesting you roll out the red carpet for every founder that walks through your door. But when you see that spark, that glimmer of potential—take a leap. Instead of just waiting for us to sell ourselves, show us what you’ve got. Give us a taste, a test of what working with you would be like. Offer some insight, a connection, or even a small piece of your playbook. You might learn more from how we respond to that first test than you ever could from a data room. This could be your way of identifying not just the companies worth investing in but the ones you truly want to partner with. Because when it comes to building something great, it’s not just about the money. It’s about the partnership, the value-add, and the mutual belief in what can be achieved together. It’s a win/win with the potential for so much more.

For #startup Founders: #JasonLemkin's checklist for reviewing a prospective term sheet/investor. Some useful tips in the Comments also. #GlobalBusiness