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Early stage term sheets 101: Leveraging best practices

Sep 18, 2017

Emerging and high growth companies will have to navigate the complexities of early stage term sheets on their way to raising capital. In order to get to a term sheet, it’s crucial for you to focus on building and developing relationships with your investors right from the beginning. From providing regular investor updates to setting up meetings over coffee, keeping investors engaged is crucial to sustainable growth.

But getting to a term sheet is only part of the equation; you must also understand how to structure a term sheet, make decisions on value-add partnerships with the right investors, and know how to develop networks. In this presentation, available in both webinar and PowerPoint format, Chad Bayne, Co-Chair of Osler’s Emerging and High Growth Companies Group, explains the nuances and importance of the issues surrounding term sheets including the following:

  • getting to a term sheet 
  • structure of a term sheet 
  • choosing an investor 
  • investor red flags 
  • best practices


For more information, contact Chad Bayne, Co-Chair, Emerging and High Growth Companies Group, at or 416.862.4708.

This presentation is part of Osler’s Emerging and High Growth Companies 101 series, designed to help emerging ventures navigate through the various issues and legal requirements they will encounter throughout their growth cycle.

Video transcript

JAMIE ROSENBLATT: Yeah, exactly. We're here for you, so we put down some stuff we think is useful. If you don't find it useful, let us know. If you have specific questions, put your hand up and we'll do this thing.

So the topic today, Early Stage Term Sheet 101 for Emerging and High Growth Companies. Just as a sort of overview of what we're going to take you through, we're going to talk about the actual process of getting to a term sheet, so when you're approaching VCs, how you develop those relationships, what are the sort of things that they're looking for when they make an investment decision, et cetera? Once you actually are in the throes of negotiation, what does structuring a term sheet look like? What are some of the provisions that you should be prioritizing your time on? What are some of the things you shouldn't be?

Then we'll go into choosing an investor if you're in the sort of fortunate position of having multiple term sheets in front of you. How are you going to decide who's to take? What are sort of the good, the bad, and the ugly of your investing partners? And then sort of best practices.

So just is a quick about. I think Simon did a great job, so moving on. I'm just going to give you a little bit more information about Golden Venture Partners and what our fund is about. So our tagline is investing in extraordinary entrepreneurs building transformative businesses.

And really, the key takeaway here is we're looking first and foremost at extraordinary teams looking to solve really, really big problems. That's what it comes down to. It's not anything crazy or anything you haven't heard before, but we really prioritize exceptional teams, people who are focused on solving problems in novel ways.

And so Simon mentioned that we're seed stage, and that is a term that's sort of gone muddled over the years, as I'm sure Chad can speak to. Within seed stage, you have pre-seed, seed, seed-plus, seed extension. And so it means a whole variety of things. And so I just want to put a finer point so that you can sort of remember what I mean when I say seed.

For us, our initial check size is in the $500,000 to $1.5 million range. So that's our initial check. We also have a reserve strategy of 2 to 1. So for every $1 up front, we're putting $2 in on the back end, and that can be used to maintain our pro rata rates to provide a bridge around financing for a company that's maybe not quite at series A but still needs an additional sort of injection of cash.

And we typically lead the rounds that we're in. So one of the things you'll find in early stage investing is there's often people who will put their hands up, but there's not as many people who will consistently say yes, I'm willing to take the lead on this deal and help you fill out the rest of your syndicate. In terms of our approach--

CHAD BAYNE: That's very important too because there's actually-- just to interject, there's investors in the ecosystem that will basically say, I'm going to invest x percent of this round. But if they don't actually help you, either not going to put their check in without raising the rest of the round or they don't actually help fill out the syndicate, they're not much value, right? Like, if they're basically saying they're going to invest x percent and they make you go out and fill your syndicate, that's not a particularly good lead investor. So one of the things that Golden does incredibly well and probably better, I'd say, than anybody else in the ecosystem is their ability to fill in syndicates and the fact that they will actually put their money where their mouth is. And if they can't fill a syndicate in right away, they'll put their money in to allow the company to continue to execute while they fill in the syndicate.

JAMIE ROSENBLATT: Yep. Thank you for the kind words. But we'll get to this when we talk about what makes a good investor. But syndicate composition I think is so fundamental to what we do, and the reason is, if you look at the academic literature, there's lots of VCs out there and there's lots of smart people at VCs, but if you actually look at what differentiates the value add ones, it's the networks that they bring to bear to the companies that they invest in.

So you think about what that means. What is a network? Are they facilitating introductions to customers? Are they facilitating introductions to experienced service providers that can help the company scale?

Are they facilitating that next layer of capital, finding investors to join the round? Are they helping with talent? And all of those things.

And so we have a great network, and we spent a lot of time building our network. But the only way that you non-linearly can grow the impact of a network is to add a net new one. And so that's where your syndicate partners come into effect. So if Golden has a great network and then VC X has a great network and they don't overlap so much, let's bring them in on board because they can just help inflect growth in the company that much more.

So yes, in terms of where we focus, we're sort of sector agnostic and business model agnostic. We've done hardware. We've done AI. We've done machine learning.

We've done social networks with Wattpad. We've done SaaS marketplaces, et cetera. What matters to us is that you're a technology first company at the seed stage. So really, that's the only prerequisite.

So quick look at our companies in our portfolio. We're about 60% Canadian and 40% American. And so yes, that's a little bit about us.

So going into term sheets 101. Getting to a term sheet. So basically here, I just wanted to sort of highlight a few of the things that are important for you. Just as a show of hands, how many people are founders here? OK.

So one of the primary roles of being a CEO, being a founder of a company, is the capital-raising process. And so how do you actually get to a term sheet? What are some of the best practices? What can you do?

So first and foremost, it's networking. The expression is VCs invest in lines, not dots. So building a relationship over time means that you give sort of insight into who you are as an entrepreneur.

It's great if you pitch me once and you look fantastic on paper. You give a knockout presentation. You promise that you're going to do x, y, and z. But then nothing happens for six months.

So keeping regularly engaged through using tools like monthly investor updates is a great way to provide that sort of rich story that shows, here's what I said I was going to do at point A. Here I am at point B, halfway to my goal. And here I am at the end. I've achieved objective x, whether it's monthly recurring revenue of x number of dollars or this many users. Getting to know your potential investors early and often is a great way for them to sort of understand your trajectory and be up to speed when the time comes for you to raise.

CHAD BAYNE: This is actually probably the most fundamental thing that needs to be done from an early stage company perspective, and it's the thing that companies do the worst. Too often, I see companies come and say, well, like, we have x number of months of cash left. We gotta go raise a round. And it's like, well, have you built any relationships.

Like, if we're starting from scratch, it's going to be very-- A, your back is against the wall, one. But two, you haven't built any relationships, so nobody knows you. So the reality is these deals take longer than you think to get done.

Now, some go quickly, and there's always lots of literature to say, oh yeah, I can get a deal done in x number of weeks, but as far as I'm concerned, based on these samples that I have, those are actually outliers. They're not the norm. It takes a long time to build relationships, and it takes-- as you go up the scale in terms of dollar amounts, you need to spend even more time. You've got to build a longer relationship.

Nobody's going to give you $10 million for an A round meeting on one-- based on one meeting, two meetings, right? It's going to take months of time to build that relationship, and it's building a relationship, right? It's like, this is not just a simple financial transaction, right? This is essentially like a marriage that you're going to have this individual or team of individuals involved in your company for a considerable amount of time, so you're going to need to A, build relationships with them, but also ultimately get to know them and figure out if that's actually even a good match for you as well. So.



AUDIENCE: What type of fortune code graph response would they say? They're using like one big complicated parameter that's not doing too much, so it kind of, for instance, is just phrased around. Should they be spending like 4 hours a week doing this?

CHAD BAYNE: It could be as simple, like-- and Jamie, you have your views as well. It could be as simple as just giving the people that you've already contacted updates, like, providing them regular updates when you update your existing investor base, providing them the same type of update, right? Like, we've done x, y, z. This is what we've done.

In your case, we've signed these types of agreements with different big pharma or ultimately with old age homes or whatever the case may be. Like, doing those types of things to give people the update. And that way, when you come down and sit with the investor, whoever it might be, you're not starting from scratch again.

They've at least had some-- if they're interested in the company and they want to meet you again, they've been following you on some basis or another, and having the opportunity at times when somebody comes into town, sit down with them for quick coffee, right? You don't actually have to go out and do the road show to the Valley, like, every couple months, but it's just maintaining the relationships. And I see too often people let those relationships slide, and then they basically start from scratch when you sit down again.

JAMIE ROSENBLATT: So I'll say two things on that front. One, I try as little time as necessary. And so what I look for are the things that are going to be the most leverage, and that's why I think investor updates are so useful. They're the lowest impact way of keeping the most people in your orbit.

So there's a company that I often reference because I think they do a really good job of that, and that's Shoelace, which is a seed stage company here in Toronto. I tracked those guys for a year without ever actually talking to them because we had a good relationship. They sent me the investor updates. I was like, OK. Enough has happened here that it's time for us to re-engage, and then we went through the process or whatever.

So finding what works for you with your investors will be important in terms of-- people often say, OK, so what's the cadence of these updates? Like, how frequently? It's like, well, once a week, too frequent. Once every six months, probably not frequent enough.

In general, it's somewhere between four and six weeks because at least then you have something to flush out your report other than I ate this for lunch today. You know what I mean? You have to have something material that's actually interesting. And so it also allows you to sort of, believe it or not, communicate the culture of your company. Like, people include pictures, yada, yada.

So the other thing I will say is it also depends on who your existing investors are and their views on it. I can tell you that we shield a lot of our companies from frequent inbound because we're worried about is it actually value add right now? Like, there was a series B fund in Boston that's been hounding me to get at one of our companies for six months now. And I just keep saying, oh, their head's down. They're focused on pro-- like, I just give them all the bullshit that we tow the company line, so to speak.

It's because they're just going to be a distraction. We know for a fact that they don't write checks sizes less than $10 million, and so why are you going to engage with this company right now? Their next round might be $10 million, maybe. So I think it's the way I conceptualize it is on the one hand, high leverage items like investor updates and being strategic with who you're contacting, and on the other side, work with your existing investors and advisors to figure out what's a waste of time and what isn't.

CHAD BAYNE: Yes. That makes a lot of sense. And especially with, like, the example Jamie gave in terms of investor reach outs where, like, everybody gets super flattered when Insight contacts them, right? Like, Insight's the largest growth fund in the world, like $8 billion in the current fund. They're not investing you.

Like, unless you have $20 to $30 million of recurring revenue, they're not investing. Full stop, right? Like, it just-- they're putting you in a CRM. That's it. So like, there are going to be meetings that are going to be an absolute waste of time, and you best try to pick and choose the ones that will actually yield value in the near term rather than something that's way down the path, right?

JAMIE ROSENBLATT: Crunchbase is your friend. If someone wants to talk to you, go look them up on Crunchbase. See if they actually do deals that look like your company. If they don't, chances are that's not going to be the best time you ever spent.

So moving on to the latter two points, preparing your diligence materials early. It just makes-- you know that at some point someone's going to say, OK, so you pitched-- you sat down with me over coffee, and then I say, OK, I want x, y, and z materials. So having a well-organized diligence room, having your legals in order, having an understanding of your cap table, and just putting it in a format that allows you to tell the narrative that you're looking to tell.

Because by the way, like, you can take the exact same company-- and BenchSci in our portfolio is a great example of this. When we initially looked at them, we passed because we had no-- we had no clue what they did. It was for scientists. No business people on the leadership team.

And their story was a mess. Their materials were a mess. We just didn't know what we were looking at.

A year later, they came back with Liran, who was the business sort of lead and became the CEO at the company, and he told a beautiful story that we all understood instantly, and we're like, holy smokes. This is a massive opportunity. Like, we want in. And so it was the exact same company that it was, believe it or not, like, six months, a year before. The entire narrative has changed.

And so when I talk about diligence materials, and Chad can certainly speak to this, it's about tell your best story. You can't change what the company does. All you can do is make sure that when the time comes that someone says I want to dig in, I want to hear all about it, that you've put your best foot forwards.

CHAD BAYNE: And it's like anything, right? Like, preparing a house for sale or anything like that. Like, you have to put it in such a light that is truthful to what you're doing, but also, it's got to look clean. Like, if it's like you throw everything in one drop box and it's not organized properly and you haven't got documents signed from a legal perspective, that is going to be a reflection.

When the investors start digging into the materials, they're like, eh. If these guys can't get their shit together on diligence, like, how are they going to run the company? So all these things matter in terms of creating your impressions with the investor base.

JAMIE ROSENBLATT: I think it's so, so important because there's a lot of stuff in this process that's going to be outside of your control. And so for those thing-- like, listen. Don't over-optimize. Like, no one cares what shade of blue you use to accent your profile pic or whatever.

But the stuff that's in your control, that's low-hanging fruit, right? Like, just knock that out of the park, and you don't have to worry about it. You can focus on trying to nudge luck in your favor, so to speak.

The last thing we sort of touched on with this point about how do you optimize your time when you go out and raise, define your parameters and expectations. There's a lot of literature out there, and if you haven't been pointed to it, I'll just say a couple of things. Like, if you go-- for SaaS companies, the angel VC Christopher Janz puts out his back of the envelope, his sort of SaaS napkin. So what do you-- what are your metrics looking like at each stage of financing? He says $50,000 in monthly recurring revenue for a seed stage company. $200,000 monthly recurring revenue for a series A company.

And then Chris and Angela from Version One put together a similar sort of benchmarking exercise for marketplaces. So if you want to gut check as to where you stand, listen, they don't know your company. They're just giving you the abstract. But it's a useful sort of reference point if you're not sure.

And then the other thing is AngelList, Crunchbase, all of these resources out there will give you a lot of information about investors that you should be targeting or that you shouldn't be targeting. I spoke to a friend, started a company in San Francisco, and he was like, I want to go talk to Excel. I want to go talk to all these-- like, Kleiner. And I'm like, why? He's like, well, they're, like, the number one and two ranked VCs.

I'm like, sure, but like, your company, it's basically the equivalent of-- what do they call it for the ICOs? It's like a white paper right now. It's vaporware, if you will. And they write $30 million checks. That's not who you should be targeting. And so it was a complete waste of his time. And if he had just done a little bit of research ahead of time, then he would know I should have targeted Homebrew and not Excel, so to speak.

CHAD BAYNE: Yeah, and it's very important, again, when you go actually start talking to investors to understand thesis, what they invest in, check size, all these types of things. If you can get the data, where they are in their fund cycle as well because they may not be making any new investments, right? So--

JAMIE ROSENBLATT: We will always be investing. We are always open for business. So don't worry about it.

CHAD BAYNE: But there are other investors that basically, they're at the end of their fund cycle. They're not investing anymore, right? So knowing that is very important.

Like I just deal with a company recently where they went down and pitched a tier one Valley VC for series A, and they asked for a fraction of what that VC would actually put in. And once the VC hears that, their ears close, and they say-- they don't even hear anything. This is, like, a waste of my time, right?

Because we're not going to put $3 million in this company. If you want $10, $12 million, we'll talk. But $3 million is not worth our time.

JAMIE ROSENBLATT: The funny thing is, like, venture investors simultaneously are forced to have really big imagination because a lot of the companies they invest in are in markets that are either really nascent or don't even exist. But at the same time are looking for reasons to say no. And the easiest way to say no is like, well, that's just not where we invest or a space we don't invest in.

And so, thank you. Sorry for wasting your time, et cetera. It also shows and signals sophistication on your part if you have an understanding as to what they're looking for.

CHAD BAYNE: But it is very rare they say no. They'll say, that's very interesting. Keep in touch. Blah, blah, blah.

JAMIE ROSENBLATT: Yeah, keep in touch. Assholes. So yeah. Sorry.

So moving on to red flags for-- here are things that will worry investors. And to be completely honest, I think a lot of these can be rehabilitated and fixed. There's a couple on here that I'm going to flag that I don't think can so easily, and the first one is cap table issues and the idea that you give away too much equity too early. And so here's the frame of thinking, and I'm sure most of you have heard it before, so I'll speed through.

But at the seed stage, when we invest, we have a smart team, good idea, a little bit of early traction. But in between investment and a successful exit, there's this sea of uncertainty, and we're hoping that you can figure out a way to navigate it. And so we want to ensure that you're incentivized appropriately such that you don't abandon ship too early. And so that means if you gave away 90% of your company to a consultant who built your first website or to a friend or an advisor who said that they needed x to sit on your board, that's going to be problematic because the main sort of prize for you is the value of your equity, that it goes up.

So if you, as founders, only own 5% after your seed round, that's trouble. And there's no way to put the genie back in the bottle. And we'll go through exactly how to benchmark that in a second, but I think Chad's opinion here would be-- or insight here would be really valuable.

CHAD BAYNE: It's a killer. It's a killer. And one of the things we stress to the founders when we first down is everybody's got to reverse vest their equity. Like, you've got to basically A, keep everybody honest, but the last thing you want to have is a founder who's been at the company for a month, two months, five months, six months, whatever, basically gets cold feet and says, yeah, I need to actually get a job.

This is not going to work out for me. I've got to pay the bills, blah, blah, blah. I can't do this. And they walk away with 20%, 30%, 40%, of the company. It's like the company is done at that point in time. Like, you're not going to be able to raise from an institutional investor, and if that's your goal. Like, there's other ways to get things done, but you've basically eliminated the opportunity to raise from an institutional at that point in time. So as you try to do some sort of recap transaction, but it becomes difficult, and you run into legal issues as a result of that as well. So you've got to be very, very mindful with your equity.

It's so interesting, I find. Founders will negotiate tooth and nail over valuation with a VC, but they'll give away equity freely to advisors that don't do anything for the company, right? Like, you give so much equity away, and you got to-- like, it's always good to compensate people, and you should reward people for effort for the company, but you've got to be very mindful that once the equity goes, like, you can't get it back, typically. So it's very important to manage it accordingly.

And you've got to sort of look at the metrics of seed. Like, by the A round, the target is around 50% of the company is owned by management and founders. Like, that's sort of the goal post. Most companies don't get there. That's the ideal scenario.

Some people are better than that. But if you're sort of beyond that and you're, like, down to 30%, it gets the investors quite apprehensive about making the investment because of the lack of skin in the game.

JAMIE ROSENBLATT: Yep. So one example-- so a couple examples that I think might be useful. One of our portfolio companies, the biggest issue at the outset was there were five founders. And if you look at the metrics, the number one reason that companies fail early on is because a founder leaves, and the team falls apart. And we weren't sure if we wanted to do the deal or not.

But what we basically-- we decided we were going to move ahead, but we were just going to put reverse vesting on everyone. We were going to reset them so that they started from zero. And within four months, one of the founders left. And it was seamless, and it was easy, and it was unproblematic.

And they've gone on to raise a really large financing. They're down in the US. And it was not a problem at all. And it just went to show that one, these issues will come up, and two, you can take steps to protect yourself against them when they do come up. And so yeah. Yeah.

AUDIENCE: So we we're spending a lot of time working on our shareholder agreement, and then someone eventually came in and said, keep it simple because when you eventually raise money, they'll put in all those terms and everything for you on site. Do we mean after the fact, we're too laid back?

CHAD BAYNE: The problem is you've got this gulf between when you set up the company, and you guys are heads down building it versus the time you actually raise money and having an actual institutional investor sort of dictate what the terms ought to be. Very few times the angel investors will get into that discussion. There are always circumstances where they will, but it's more often than not, they won't.

So if you have a situation where-- all you're doing is creating a situation which is rife with risk. If one of the founders ultimately leaves and leaves with the equity, right, and you don't actually have anything in writing to say that founder's equity is going to be clawed back by the company, you end up with a situation where that founder's walked away with 20%, 30%, 40% of the company, and then by the time you get to the financing round, you're in trouble, right? So it's pretty simple to put in some sort of reverse vesting arrangement. Whether or not you have a full shareholder's agreement or not, just ensuring that the company can buy back the equity if the founder's no longer there is absolutely critical.

JAMIE ROSENBLATT: Yeah. I think early o-- I mean, it's a balancing act, right? You don't want to over-optimize, over-invest early on. So my recommendation is if you are against the idea of sort of just setting up these basic agreements, you don't want to spend that cash, then just make sure you avoid sort of the scarlet letter offenses, right?

Like, don't give an advisor 10%. Advisors have been useful in my experience in two ways, either as a marketing tool because you can throw them on your deck and say, hey, look at this guy. He's invested in us. Or this girl, she's invested in us.

Or the second way is you eventually end up hiring them as an employee. Those are the two ways that they're valuable. And to be honest, I don't think that you should-- my personal opinion is I don't think that most advisors should be taking any equity, really. If you're in an advisory capacity, generally, you've had some level of success, and that's why people are seeking you out.

Speak with your cash. Invest if you really want a piece of the action. Don't take equity for free. I just think it's a little bit greedy, but that's my opinion. So team. Any other questions there? Yeah.

AUDIENCE: What about [INAUDIBLE] options per [INAUDIBLE] as opposed to [INAUDIBLE]

CHAD BAYNE: It's the same thing.

AUDIENCE: You have protection in vesting.

CHAD BAYNE: Well, if it's-- same thing. You give them equity with a reverse vesting. You give them options. It ends up the same place. Just don't give people equity with no strings attached to it for free. Like, that's the worst scenario, right?

JAMIE ROSENBLATT: I'm not sure that it's in here. No, it's not. So if you go to-- we touched briefly on OK, what does it look like to-- what does a good cap table versus a bad cap table look like?

And one place that I direct people a lot is Capture.IO. They released a white paper that-- so Capture.IO is cap table management software. I don't recommend that you sign up or pay for it or anything like that.

But what is interesting is 20,000 companies or 5,000-- somewhere between 5,000 and 20,000 companies are on the platform, private companies, largely startups. And so they get to aggregate all that data, and they can make some interesting insights. And so they release a sort of annual survey of what cap tables look like at every round.

And so if you go and download that white paper, you'll see that at seed stage, generally 50% of the equity sits with the founders. And then by series A, 50% of the equity sits with founders plus employees . And then after that, it drops below that, and the majority of the company is held by non-operating people in the company.

But if you just want to get a sense of sort of where market plays, I think that's actually a very useful benchmark because if you look like their cap tables on there, that aggregate measure, then empirically, you are probably OK. So check that out. So really quickly, just being aware of time actually, maybe we should just skip ahead here. I think the rest is--

CHAD BAYNE: Self-explanatory.


CHAD BAYNE: Self-explanatory.

JAMIE ROSENBLATT: Yeah. Self-explanatory. Yes. OK, so the investment process at the seed stage.

Evaluation criteria. OK. Bottom line, team, market, product, and traction. Those are the sort of three buckets that VCs are looking for.

So really quickly, team. There are points in your favor and points not in your favor. Points in your favor would be things like they are a repeat entrepreneur. They have domain expertise. It's a well-rounded team composed of people with complementary skill sets. Those are all great things.

Things that don't militate in your favor, they're a sole founder. If you have a fleshed out team, great. If you're a one-man gang or a one-woman gang, that's not OK because the sort of analogy is-- or the way I think of it is, like, what happens to your sales results when you get sick? No one's making those calls. Your MR is going to go into the toilet.

So there was one deal that we looked at that ended up getting funded, but she was a sole founder. She was kick-ass. She was the definition of tenacity. I always say, like, you put five walls in front of her, she'd run through five, and now she'd build the sixth so that she could run through that one as well.

Awesome founder. Domain expertise, the whole thing. But she was the only person at the company at the time. And so we said, you know what? Talk to us once you get some people around you.

Within two months, you had hired a CTO, a COO, and then she got funded by someone else who took the risk that we didn't. So you know, was that a miss? Maybe, but she recognized, at least from our feedback, that she needed to get a team in place, and she worked to do that quickly.

The other thing that I'll say is market size is something that people look at frequently and early on and frequently. And that's just the concept of venture scale returns and what that actually means. The way I like to think of it is we have $50 million to-- fund two was $50 million. We promised our investors that we're going to return 3x, so that means $150 million is going to return to our investors. That's what we have to generate.

The way venture returns work is generally three companies are going to return the majority of that $150 million, and best case scenario, we're going to own 10% once all is said and done in each of those companies. So to do that, that means that each of our 10% stakes has to be $50 million, implying that the company is worth $500 million. The company is worth $500 million, and they don't own more than 20% of their market. That's probably a $2.5 billion market, which might set the floor for what you might traditionally call venture scale market sizing. That's, like, a very quick and dirty way of thinking about it.

But the point is, you can be-- the richest people, at least I know, are guys or girls that run private companies, non-venture companies. They just own 100% of a smaller pie. And so you can do incredibly well.

This is not to say that, like-- venture capital in general is just a bizarre sort of financing mechanism that imposes a lot of crazy things. Like, they'll say a $500 million market isn't big enough. Well, that's insane. I could be really, really rich operating in a $500 million market.

But we have obligations to our investors, and we believe that a large market is one of the key factors in achieving those objectives. Yeah. Any questions on VC criteria or investment criteria?

CHAD BAYNE: This is super important to understand because if your market's not big enough or your idea is not big enough, you're wasting your time pitching a venture. There are other options potentially for raising capital. Venture just may not be the right area to target, right? Venture scalable businesses are a very unique class of business, and there has to be a big, big opportunity.

Without that, most of the venture investors will just-- they won't even give you the time of day. They'll just pass because it's not worth their time because the metrics of how funds have to return. And that's what a lot of companies don't understand. They think VCs is just about investing in a company. It's not. It's a very specific asset class.

JAMIE ROSENBLATT: Absolutely. The investment process typically actually looks the same. You meet with someone, a non-partner from the fund, but on the investment team. Sometimes they have the ability to say yes. More often, they simply have the ability to say no or not push it along the funnel.

And then from there, you'll meet with a partner or someone with the capacity to write a check. And then diligence is generally actually later than I think a lot of people realize in terms of there will be some technical conversations. Maybe we'll bring in some experts to help us in areas, i.e. quantum computing, that we didn't know anything about, or-- well, now we do, but then we didn't. Or there will be always background checks.

And at least one deal that Golden and Osler were involved with resulted in the implementation of mandatory background checks for each and every person in the company moving forwards. That was the last deal I worked on at Osler. No connection to my leaving Osler.

Anyways, so yeah. And then often, like, customer calls, stuff like that. And this last point I think is sort of interesting because Chad talked about the timing of the process when we said VCs invest in lines, not dots. So there was a survey of 500 VCs. The source is linked.

The average time was 40 days in terms of once it got into the proper investment funnel, like, i.e. you had your first meeting with the team to close, 40 days. 41% had said that they've done it in less than 30 days. But once you factor in all the other stuff, it's still much longer.

So we had two deals. The two most recent deals we did, one we met and closed within 20 days, the other I have been tracking since the first day I started at the fund over 18 months ago. So one took 18 months, the other took just under three weeks. Those are outliers, but expect that the 18-month one is probably closer to the norm than the three-week one.

CHAD BAYNE: Especially it again depends on the investors. Like, US investors, because of the relative competitiveness of the US market, move a lot faster than Canadian investors, generally. That's not to say Golden moves slowly, they don't. But a lot of investors in this ecosystem move relatively slowly in comparison, and some investors too will sign up term sheets before even doing any diligence, which is, as far as I'm concerned, is a big no-no.

But like, typically, a lot of diligence is front loaded with early stage investors. They get to a point where they're comfortable with the business, and really with the diligence they're doing post-term sheet is just perfunctory. It's confirmatory diligence rather than actual deep dive.

Other thing important with the process is this process gets extended depending on the stage you're at. This may work for a seed stage investment, but it gets extended out for later rounds, and there may be more complicated diligence being done. There may be more meetings. It could take up to six meetings, for example, before you actually get to a term sheet, depending on the size.

You're also going to face a barrier. Regardless, once you start going beyond our borders, you're going to face a barrier by virtue of the fact you're a Canadian company. So that's a reality, and it's going to take-- it's going to be a higher bar, and it's going to take more time for investors to get comfortable with the company because they're beyond-- having a local proxy like a Golden or whoever else helps a lot. So if you're going to pitch US investors, understand that it could take a lot longer to actually get them enamored of the company because it's getting on a flight. It's another jurisdiction altogether. So.

JAMIE ROSENBLATT: Yeah. Seed stage companies in particular, like, work with a ton of other early stage funds, and one thing that's consistent is the concept of boots on the ground is highly valued by seed stage funds. And what that means is they want a local partner, someone that can work closely with the company at that early stage when they need more help on average. And so it's a very good point.

This is just-- I thought it was kind of interesting. It was for some internal stuff that we were doing. But this is what our funnel looks like. So fund two-- fund one, we saw 1,080 deals. Fund two, so far we've seen 2,252 deals.

And all the way at the end of the funnel is the 35 companies combined that we've invested in. And then what you'll see on the-- so I guess the takeaway there is we see a lot of companies, and we can only say yes to so many. Because I can assure you that there are a lot of companies that we would have loved to have invested in or that we loved but we still had to pass on because we only have so much capital to deploy, and the bar is high and, in some respects, getting higher.

There was a great article by Andrew Chen, the former lead growth guy from Uber, basically saying it's cheaper to start a company than ever. That means the bar is higher, was the real takeaway of the story, at least for me. Saying as technology becomes cheaper, expectations become higher from early stage companies. And I think the difference between fund one and two reflects that.

So structuring the term sheet. I'm just going to hop right into the provisions, I think. So economic provisions that are going to be set out in the term sheet. And again, think of the term sheet as the blueprint for the relationship that you're going to have with your investors going forwards.

Chad mentions a lot like a marriage. Wattpad celebrated its 10-year anniversary, and we were, like, one of the earliest investors in that, and we continue to be on the board. So 10 years later, we're still working intimately close with that company. So it's not an exact-- I know for a fact at least a couple friends, and I'm only 30, whose marriages have lasted less time than ours with Wattpad, so there you go. But yeah. So talking about valuation price, I think this is the one that founders are disproportionately sensitive to when I think the real thing that they should be sensitive to is probably ownership. So--

CHAD BAYNE: And speed to getting a deal done.

JAMIE ROSENBLATT: Yeah. Yeah, yeah. So long story short, like, a $10 million pre-money valuation is not always better than a $5 million valuation. One of the thing-- and I've chatted with some people in the room about this, so they already know my feelings, but for everyone else here, if you get a $10 million valuation at the seed stage before you have customers, before you have sales, et cetera, et cetera, all you've done is raise the expectations for the next round of financing that comes your way.

And what I mean by that is OK, well, investing in a $10 million company is a lot different than investing in a $100 million company. A $100 million company, you've already baked in that certain achievements, that you understand product market fit, that you have a scalable acquisition strategy, that your product is defensible, right? And so it gives you very little wiggle room to fail when you take money too-- too much money too early and at too high a valuation.

CHAD BAYNE: It's very important-- this is a very important thing to understand. Your company is not worth that, OK? Just, like, let's be very honest with-- like, in this early stage, early stage valuations is an ownership allocation exercise based on check size and based on what the investor really needs to get from an ownership perspective of the company. Some investors are 20% owners, so they'll back stall based on what you need to get you. And investors are focusing on the next value inflection point, when you're actually going to have to raise and get to a higher valuation.

The first two rounds, you're seed and you're A. You can slice and dice seeds, seed-plus, whatever. But those two are what we call early stage. It's all about ownership allocation, right? And the reason why you can get those valuations is because of we get into liquidity preference and the protection of the money. It's first out.

So even if the company only sells for what the investors put in, they're still getting their money back. So there's a way, from a economics perspective, that's how you can get higher valuations. When you get to a B round and beyond, those are actually rounds based on metrics. You got the real metrics of the company. So you've got to ensure that the rounds that you've raised at, seed and A, you can actually grow into real valuations that are based on metrics.

And if you can't get there, and if you raise too high, we see a lot of companies do this, raise from angel investors at a ridiculous $25 million pre-money valuation at a seed stage. It seems nice. You have much more of the company. But the problem is raising the next round, there's going to be resistance A, to raise at a potential down round, or you're just never going to get there from an investor perspective because they're just going to say, like, that's ridiculous in terms of the valuation or your expectations. So it's very important.

Take money from the right investors at the right valuation, and even if you have to take less, it's actually way more advantageous going forward. I don't know if you people watch Silicon Valley. There's a great episode where they're talking about taking money into the company, and the one guy who's talking to said, I didn't know you could actually take less money.

Like, that's what you need to really be thinking about. Like, you got to take the right amount of money, and you got to also plan for contingencies. But don't take too much, and also, make sure you take it for the right investor at the right valuation. So.

JAMIE ROSENBLATT: One point that's a question that often gets asked is, like, how much money should I raise? And like, how should I think about that? And so there's a variety of ways. But I think the foundational point is plan for somewhere between 18 and 24 months. No longer than that. Because after 24 months, the world has shifted beneath your feet, and you can't forecast that far into the future at this stage of the game.

So if you have a functional financial model and you have an understanding of what levers you need to pull and how much they're going to cost to achieve your goals over the next 6, 12, 18 months, that's the benchmark that you should be using. Like, you don't need $10 million because if you get $10 million now, you're never going to have to raise again. Optimize for that 18-month raise because it strikes the best balance between dilution and, I guess to go back to the point about high leverage behaviors, it's the most high leverage amount that you can get. It gets you the furthest with the least dilution, in my opinion.

CHAD BAYNE: And again, sort of that time frame has to be tied to an actual strategic plan. What are you going to do to get from point A to point B so that when you're at-- you've run out of the money or getting close to running out, you're at now a much more valuable situation for the company where you go raise at a higher valuation, right? Like, it's got to be tied-- like, you can't just say, well, we're going to hire a bunch of people, and we're going to have 18 months of runway. There's got to be a real defined plan as to what you're going to do with the company, and if you don't have that, go back to the drawing board before you start talking to investors.

JAMIE ROSENBLATT: One of the last things we do before making decision on investment is really-- we play a forcing function where like, you need to set out the benchmarks or your expectations as to what this round of capital is going to do for the company. What does success look like to you at the end of this capital, once it runs out? And so we work with them a lot on that.

And then the first thing we do after we raise and close the round is sit down and figure out, OK, what's the monthly or what's the reporting mechanism look like? What's that template look like? How are we going to benchmark whether or not you're on that trajectory so that we can see the early warning signs, and we can adjust the plan as necessary?

So you know, the game is not played on paper, so to speak. It's played in the real world. But that doesn't stop you from trying to sort of forecast what things look like going forwards.

The next point, founder vesting. I think we talked about this. Securities. So you know, the big distinction here is between priced rounds and non-priced rounds. The general wisdom or the general thing people say are priced rounds are better because they give certainty. So priced round refers to when you say, my company is worth $4 million.

A non-priced round says, OK, here's a convertible note, or here's a SAFE, or here's a KISS. And it will either convert at a discount to the next round or at some valuation cap. So it's not officially priced. It will be priced at the next round.

So priced rounds, people say it's great because it provides certainty, but it's more expensive and takes longer. And then for non-priced rounds, people say, well, it gives flexibility. It allows you to get the deal done, and it's just quicker, cleaner, easier. You can kick the can down the road.

Personally, the only time that people get confused are with non-priced rounds. So I think the simplicity's bullshit. Everyone's like, wait, wait, wait. How does it convert? Is it pre-money? Is it post-money?

People just get confused about it. For my money, I think that priced rounds are far, far better, but that's just me. I don't know if you have an opinion.

CHAD BAYNE: Yeah. Like, I think it's better to do a non-priced round at the earliest stages of the company if you're just bringing in your friends and family and fool's capital, and your early investors, with institutionals, it's always going to be a priced round. Very rarely it's non-priced, but there's a time and a place for it, and ultimately, it's a conversation with your advisors and the people around the table. But we don't try to spend a lot of time on priced rounds at the early stages of the company because it's sort of a risk-reward benefit. Like, if the company's super early, then it's just easier to get the capital, and we'll kick the can down the road, but once an institution comes in, I'd almost always recommend a priced round.

JAMIE ROSENBLATT: So I did include that capture data. It's actually there. It probably doesn't show up so well.

But orange represents employee and founder ownership, and blue represents investor ownership, and it goes by round. So you can see that blue starts small and gets bigger and bigger, faster and faster. But I'll link you to the actual data later. So I don't know how we're doing for time. So--

CHAD BAYNE: We have a few minutes left.


CHAD BAYNE: Yeah. Less than.

JAMIE ROSENBLATT: So fuck, why are we talking still? Guys, any questions?

CHAD BAYNE: It ends at 1:30, right?

AUDIENCE: Yeah, I think you can go over the time limit.

CHAD BAYNE: Let me just move my meeting then.

JAMIE ROSENBLATT: You can get out of here. I'm good till--

CHAD BAYNE: Yeah, that's fine.


CHAD BAYNE: I just push this.

JAMIE ROSENBLATT: No, but are there any questions at this point? I mean, I can flip through the deck. If you guys see something that's interesting, by all means, stop us. But at this point, I'd rather hear what's on your mind than continue to ramble. They say the longer you're silent, the probability of someone asking a question increases, so there we go.

AUDIENCE: It's interesting to know, and I don't understand this very well, but what are some of the things that difficult to understand, but is easy to deliver on. So you mentioned the three [INAUDIBLE] investments. What kind of time frame do you set in that regard and what other things are you talking about that we should invest in?

JAMIE ROSENBLATT: It's actually a really good question. So the time-- generally, you'll have a term, like, 10 years for the fund, and then the first five years is spent deploying the capital, and the next five is spent harvesting the capital. And I mean, that can vary, could be six and four, whatever.

The reality is you want to return capital as quickly as possible that satisfies the actual quantum required. So SkipTheDishes, for instance, was a great exit for us. It sold to Just Eats for $100 million with potential for $200 on the earn out. We owned a nice percentage of it, and they sold within 18 months of investing. I mean, that IRR was crazy and was amazing.

Wattpad, on the other hand, ten years, no liquidity event. Would we do that deal again? 1,000 times out of 1,000 times. That was an amazing deal, and people are jealous who aren't in it, right?

So I think the takeaway there is expectations from our investors, things are going well, and they can see they're going well. If there hasn't been a liquidity event, will they get impatient? Sure, but they'll live with it.

The answer is always the sooner you turn capital to your LPs, the happier they are, but if things are going well and you can point to why they're going well and how you're just sort of waiting for something that will materialize, it's just taking a little longer, they will deal with that too. So we're never going to force the sale of a company because we got to satisfy-- you know, because if we force the sale of a company too early, one, we'll look like idiots, and two, no founder will ever work with us again because we're the guys that sold their company out from under them. And by the way, we only own 10% of your company, so we can't force that function either.

CHAD BAYNE: Yeah, depending on the fund and where it sits in the funding cycle, like, growth stage funds, their time horizon's typically three to five years to get out. Receipt stage fund, just by its nature, is going to have a longer time horizon. Notwithstanding the way fund docs work, the investors are typically not going to be as active in trying to actually push out all the investments. Like, a typical later stage fund, investors will be a bit more keen to basically start liquidating the fund at an earlier stage. Then again, it's all dependent on the type of economics [INAUDIBLE].

Most funds, again, they're always looking for sort of a 3x return on the fund. That's sort of the benchmark. But again, the sooner you get the money out, the better.

And in this-- things have evolved considerably since when I started practicing many moons ago. Before, there was never the opportunity to actually do secondary sales, whereas it's a much more common thing now, where liquidity events may not have happened in a M&A transaction or an IPO, where later investors are basically taking out earlier investors, taking out their positions in the company because of their desire to come into the company at a later stage because they have different economics they're looking at. So early investors are going to get out, or they'll get a huge chunk out and maybe still riding some of the capital of the company. So it's a very different-- it's a very different environment these days than when I first started where there was, like, no desire ever to ever do a secondary. There's either IPO liquidity, and that was it.

JAMIE ROSENBLATT: And a interesting sidebar, maybe totally boring for some, but blockchain potentially changes all of this in a really interesting way. I highly recommend you listen to the 20-minute VC podcast with Harry Stebbings and the guy from Science VC, which is a VC that just raised-- basically ICO'd their fund, raised on a-- tokenized their fund. And so they have a really interesting discussion about VC LP. LP are the ones that invest in our funds, they're our investors, and how tokens may or may not enable liquidity for them.

It's only 20 minutes. It's worth your time. I listened to it on my drive down two days ago. I thought it was really good.

CHAD BAYNE: It was good.

JAMIE ROSENBLATT: Yeah. Oh, yeah. Yeah. Anyways. So I mean, questions? Any more questions? Otherwise, I'll tell you what to look for in an investor. No, we got a question.

AUDIENCE: Did you get any metrics on [INAUDIBLE]

JAMIE ROSENBLATT: Yeah. It depends. It can take one of two-- bridge financing is when it sort of falls in between the traditional seed A, B, et cetera. And so it can take one of two forms.

It's when things are going well for the company, but they just need a little bit more cash to get to the metrics that matter for the next stage of financing. In that case, you'll usually get a small bump in valuation so that you're avoiding too much dilution, and so it looks exactly how it's described, which is a slightly better round than what you just did. Generally less money goes into the company than went in the previous round. It's just enough to get you to that next stage of financing.

So the most recent example-- and by the way, we love them because we think it aligns everyone really, really well. It gives us a chance to top up our equity before you go out for that monster round. It gives you a chance to not force your company out into market too early where it might be disadvantageous.

So we really like it. The most recent one we did was-- I think it was basically a 30% increase in-- sorry, double the valuation. It was $1 million in when we had previously invested $2 million into the company, and we're hopeful that it will lead to a really, really good outcome.

The second scenario, sorry, is when things are not going well and you need that lifeline. Best case scenario, it's a flat round, so same value-- you don't want to mess the company up. You don't want to make it so that they'll never be able to raise again. But you're not going to pay up if they haven't been performing. So best case, flat.

CHAD BAYNE: And it depends on the psyche of investors. Some investors are incredibly punitive. Others are less so. So it all depends.

We've seen some incredibly destructive bridge rounds that ultimately essentially destroy the companies. Or we've seen other ones that have been-- that have been fine, right? They're essentially flat rounds that allow the company to continue on. The flat round-- if the company's going sideways, the flat round is probably the best you can hope for. It may be a flat round plus some equity kicker like a warrant or something like that.

But it will all depend, right? Some investors go for the jugular, which I think is, from my perspective, doing this for the many years that I've done it, is actually the worst thing. It actually creates a downward spiral for the company. So.

PRESENTER: I think let's leave it there. I think Chad and Jamie can stick around for a couple minutes afterwards and go over the assignment. So thank you guys for that presentation. I know we got cut short, so we didn't get into the kind of specific economic terms of these term sheets, but there's a great book for those of you who are kind of learning more. I didn't write it, but I am promoting it.

JAMIE ROSENBLATT: Best book in the game right there. That is the best book.


PRESENTER: And Jason Mendelson. It's called Venture Deals, Be Smarter Than Your Lawyer and Venture Capitalist. [INAUDIBLE].

JAMIE ROSENBLATT: Do you like the shameless self-promotion?

CHAD BAYNE: Yeah, it's good.

PRESENTER: And then another [INAUDIBLE] forms on your table. If you just take a few minutes to fill that out, that'll be helpful for us just to improve these lunch and learn sessions. If you have any topics that you want us to cover, let us know. And our next session's going to be October 12, a Thursday, so you'll get an invite for that soon. We're going to be covering commercial leases and also commercial insurance for your startup as well. So it's a--

JAMIE ROSENBLATT: Fascinating stuff.

PRESENTER: --session. And then last but not least, Jamie, here's a little thank you--


PRESENTER: --for coming in and sharing your--

JAMIE ROSENBLATT: This is actually the wine that I left in my office when I moved home.

CHAD BAYNE: Exactly.

JAMIE ROSENBLATT: All right. Thanks, guys. Yeah, I can stick around for--