5. Division of Financial Returns
Abschnittsübersicht
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Let us now look at the first major deal element, the allocation of the financial returns of a venture between the entrepreneur and the investor. Four sections of the term sheet are typically dedicated to this topic, namely:
- Dividend terms
- Liquidation preference
- Conversion rights
- Redemption rights
We discuss the most important deal terms of these sections and show how they affect the return allocation during the investment period as well as at the end of the investment period. As we will see, liquidation preference and conversion rights introduce non-linearity to the return allocation between the entrepreneur and the investor. This non-linearity will allow us to kill multiple birds with one stone:
- Bridge valuation gaps
- Align the incentives of the investors and the entrepreneurs
- Screen out less confident entrepreneurs.
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This tool helps you to assess how important deal elements such as dividend rights, liquidation preference, participation rights, and conversion rights affect the allocation of value and control between the founders and the VCs.