Optiguard, Inc.: Series A–Round Term Sheet

Abstract

"OptiGuard. Inc.: Series A–Round Term Sheet" focuses on an entrepreneur in the cybersecurity industry who is attempting raise a first round of venture financing in November 2015. To date, the firm has been unsuccessful in attracting funding from venture capitalists (VCs) and has instead relied on a small seed round from local investors. With funds running short, the entrepreneur is again attempting to raise funds from VCs. During this process, it receives a bridge loan from a reputable venture capital firm to tide it over until it can complete a Series A round with the same firm. In November 2015, it receives the terms for a $5 million Series A round, and the students must evaluate the adequacy of the offer in light of other comparable financing rounds and how the terms will affect the future performance and other aspects of the firm in light of the high likelihood of future financing rounds. The case's main teaching purpose is to provide a basic understanding of the legal and financial issues encountered in early-stage investments. The case incorporates the term sheet for the proposed Series A round, and the pre–Series A capitalization of the company. The study questions pose several direct questions to the students to help them focus on the features of the term sheet that have the largest impact on the company's valuation and control.The case has been used successfully in an MBA-level entrepreneurial finance and private equity course, and a JD/MBA course in private equity. To facilitate preparation of the case, the materials include a student spreadsheet file (UVA-F-1798X) of the case exhibits, a detailed teaching note (UVA-F-1798TN), and an instructor file (UVA-F-1798TN).The companion note, "Early-Stage Term Sheets" (UVA-F-1730), is a useful background reading for the case. Excerpt UVA-F-1798 Rev. Sept. 5, 2017 OptiGuard, Inc.: Series A-Round Term Sheet In November 2015, Richard Mannix, CEO of OptiGuard, Inc., was in the process of seeking additional financing for his young cybersecurity company. Up to this point, Mannix had been unsuccessful in attracting venture-capital (VC) funding, and had only been able to raise $ 315,000 in seed capital from angel investors to develop the firm's first security-software applications. During the summer of 2015, with funds growing short, he began to search again for additional VC funding. In September 2015, he secured a bridge loan of $ 350,000 from Woodland Venture Partners (WVP), a Boston-based VC firm, which gave the firm some breathing room until a Series A–round financing could be completed. The bridge loan was straight debt, and repayment was contingent upon the completion of a Series A round. In November, Mannix was finally able to secure an offer from WVP for $ 5.0 million in convertible preferred stock. While Mannix welcomed the offer, he was uncertain whether the terms of the proposed agreement and the amount offered met his company's growing needs. With only $ 5.0 million coming from the Series A round, OptiGuard would likely need additional funds within two years. Further, WVP's experience had primarily been in funding health care–oriented start-ups, and it had less experience in technology-based investments. Mannix needed to resolve two issues before he could make a decision on WVP's offer: whether $ 5.0 million was enough for more than 40% of the firm's equity, and how the proposed contract terms would play out in the likely event of subsequent funding. . . .