Slides for YetiZen Speaks: Top 3 Term Sheet Mistakes Founders Make presented by Stephanie Zeppa. To watch a video of the complete talk where you will learn the 3 terms startup founders agree to only to regret later please visit https://youtu.be/GCdvoEZYeNY?t=1s

1. Navigating Your
Series A Round
Presentation to
September 2015
Stephanie L. Zeppa, Esq.
Co-Leader, Social Media and Video Games Group
Sheppard Mullin Richter & Hampton LLP
Top Three Term Sheet
Mistakes Founders
Make
Presented by:
Stephanie L. Zeppa, Esq.
Sheppard Mullin Richter & Hampton LLP

2. Unknowingly Giving Away the Farm
▪ How? Liquidation Preferences
▪ Liquidation rights determine the allocation of the
proceeds when a start-up is sold.
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3. Example: Participating Preferred Stock
▪ Figure 1a:
Fully participating
▪ Figure 1b:
Participating with a 3x
cap
▪ Figure 1c:
Nonparticipating
Source: Michael Klausner and Stephen Venuto, Liquidation Rights and Incentive Misalignment in Start-up Financing, Cornell L. Rev.,
vol. 98, 1407 (2013).
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4. Diluting Stock Causes Destablization
▪ How? Full Ratchet Anti-Dilution Used Instead of
Weighted-Average
▪ Conversion price of the preferred stock outstanding prior
to a “down round” is reduced to a price equal to the price
per share paid in the dilutive financing.
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5. Example: Full Ratchet Anti-Dilution
▪ Full Ratchet
– Series A Adjustment
• Conversion price of Series A
becomes $0.50/share
• The number of common shares
issuable upon conversion becomes:
(2,500,000) * ($1.00/$0.50) =
5,000,000 shares
• Series A conversion rate of 2:1
– Series B Adjustment
• Conversion price of Series B
becomes $0.50/share
• The number of common shares
issuable upon conversion becomes:
(2,000,000) * ($2.00/$0.50) =
8,000,000 shares
• Series A conversion rate of 4:1
▪ Weighted Average
– Series A Adjustment
• (7,000,000 + 1,000,000)
(7,000,000 + 2,000,000)
= $1.00 * (8/9) = $0.88
• The number of common shares issuable upon
conversion becomes: (2,500,000) x ($1.00 /
0.88) = 2,812,500 shares
• Series A Conversion Rate of 1.125:1
– Series B Adjustment
• (7,000,000 + 500,000)
(7,000,000 + 2,000,000)
= $2.00 * (7.5 / 9) = $1.67
• The number of common shares issuable upon
conversion of Series B becomes: (2,000,000)
x ($2.00 / $1.67) = 2,400,000 shares
• Series B Conversion Rate of 1.20:1
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6. Founders Are Beholden to Inept CEO
▪ How? Not Having Board Designee
Separate from CEO
▪ The right to appoint the common
stock designee may be subject to
additional requirements.
▪ Example:
– The typical Board of Directors of a post-Series A company
is composed of:
• 1-2 investor designees
• 1 common stock designee
• 1 CEO director
• 1 at-large director
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7. Questions?
Stephanie Zeppa
Partner, Emerging Growth
Silicon Valley / San Francisco
Direct: (650) 815.2646
Cell: (415) 342-0927
Email: szeppa@sheppardmullin.com
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8. Representative Videogame Clients
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