About Jim D. Ray Expertise Jim Ray is coordinator of a regional venture capital network, serving entrepreneurs and investors seeking funding relationships. Ray is an experienced entrepreneur and is presently involved in the operations of several business concepts, including a national commercial real estate company and a web design firm. Areas of expertise include the overall startup funding process; writing venture capital proposals; and win-win exit strategies for existing private funding relationships.
Expert: Jim D. Ray Date: 6/10/2005 Subject: Milestones & Dividends
Question Hi Jim,
I'd like to first thank you for providing assistance to people on the internet free of charge. This is a really noble thing to do.
I'm trying to learn the details of the term sheet currently. I've some questions about the capital injection by the VC in tranches. The second tranch of capital will only be given out only if the company hits the milestone set forth in the term sheet. My questions are:
What is the logic behind this structure?
What should the entrepreneur be careful of?
Is this considered to be unusual?
What typically are used as milestones?
What if milestones are surpassed by a large amount, does the company receive a higher valuation?
Another question has to do with dividends. Under this provision:
"Annual 8% dividend on the Series A Preferred Stock, payable when and if declared by Board, and prior and in preference to any declaration or payment of other dividends on Common Stock; dividends are not cumulative. For any other dividends or similar distributions, Preferred Stock participates with Common Stock on an as-converted basis.“
From what I understand this is a entrepreneur favorable provision since the dividends are non-cumulative and declared on discretion of the board. However I'm still quite confused over the distribution of the dividends. In an event that dividends are declared, the board has to first declare dividends for the preferred shareholders then only the common shareholders. Am I correct? Would it be possible that after declaring dividends to preferred shareholders, the board might decide that they do not declare dividends to common shareholders?
Thank you in advance. Your help is really much appreciated.
Yours sincerely
Joe
Answer Saturday, June 11, 2005
2:22 AM CDT
Hello, Joe:
Excellent questions! Let's get right to them --
Certainly, it is acceptable for your investor-partner to require the attainment of specific, tangible milestones before injecting additional funds into your startup. This not only safeguards the investor from a major loss, but forces you as the entrepreneur to develop a business founded on solid, "real" accomplishments defined by the forces of the market.
The goals, objectives, or tasks to be achieved before receiving additional funds should be realized during the negotiation process. The same applies to contingencies, such as that of graduated valuation dependent on a multi-level scale of achievement.
Regarding dividends: I will defer this question to your attorney, as corporate law varies from state to state.
Joe, I hope this information helps point you in the right direction. Should you think of other questions or need further guidance, please feel welcome to write me again anytime.
