Jul 26, 2021 • 54M

Term sheets are F*ing complicated; Kushal Bhagia explains them best!

How valuations work, types of rights put in SHAs & more!

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Exploring the start up world in India and learning from some of the most accomplished entrepreneurs, investors, and CXOs in India. Part of turnaround.substack.com
Episode details

Why this topic for this season’s first episode - A few days ago, one of my best friends from college got an offer from a Thrassio like set up to buy X% stake in her D2C company. Now she had bootstrapped and built this business from absolute zero to a multi-crore turnover company with ~30% margins on each sale! Yet she felt absolutely lost and helpless during the negotiations because she had no clue how pre-money and post-money valuations worked. As a builder and an operator, her primary skill set was building stuff. On the other side of the table were multiple ex- PE guys whose only job was to do these calculations and negotiations inside out.

At that stage, I realised how important it is to understand how valuations, dilution and investor rights in term sheets work. I figured, if ever I want to start up myself - THEN would NOT be the right time to know about these basics.

Moreover, working at start ups mean you’re working for ESOPs and to know what the value of ESOPs could be at various stages, one must understand how dilution and liquidation preferences work.

So, in this episode of the Use Case podcast, I’m thrilled that Kushal Bhagia, who is the founder and CEO of First Cheque, could join us to explain these important concepts. He’s a super founder friendly investor who has been trying to educate the market on these concepts with his Youtube series called “Know your termsheet”.

These are some of the things we cover in this episode. They’ll help you make sure you’re getting a fair deal.

  • 04:00 - Context setting

  • 07:50 - Your company has a value only because an investor is putting money in it - fir that new shares are created -> dilution happens; pre-money and post-money explained with an example

  • 13:20 - Key items agreed in a term sheet; terms and conditions that come with this collateral free money that you get; tag along rights, pre-emptive rights.

  • 26:00 - If an exit happens, in what order and how much will people get money; preferential shares, participating and non-participating shares

  • 35:00 - Special case of accelerators, pre-seed rounds, convertible debt (YC specific - SAFEs)

  • 44:00 - What bets do VCs like to make? Honestly, expect a no.

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