Saturday, March 10, 2007

Term Sheet Terms: Dividends

I'm not certain if this is a fairly recent term added to the term sheets post-bubble or was there all along, but remember some people being surprised when they saw there was a dividend attached to the term sheet we received in 2002. It was for 10%. When included, I've seen them range from 5% to 10%. I was doing a bit of research and came across BF's post from a couple of years ago and he puts the range at 5-15%.

Some example language from a recent term sheet states:

Non-cumulative dividends will be paid on the Series B Preferred at the rate of 8% of the Original Purchase Price per annum, payable when, if and as declared by the Board of Directors, and prior and in preference to any declaration or payment of dividends to holders of the Series A or Common Stock. For any other dividends or similar distributions, the Series B Preferred will participate with the Series A Preferred and Common Stock on an as-converted basis.

So what does all this mean?

Non-cumulative dividends, as Mr. Feld says are benign, since they only kick in when declared, as opposed to their stick-it-to-you cumulative dividend brother which assumes a yearly dividend. Reportedly, the non-cumulative rarely get declared by the board. So, if the VC is foisting cumulative dividends, you should push back if possible.

Original Purchase Price is just the price per share that was paid in the investment round.

When and if as declared by the Board of Directors - This is an important point, since it only takes effect if the Board votes to issue a dividend, and makes the most sense for the company

Bottom line - A dividend normally gets included in today's term sheets and are innocuous if non-cumulative and only when declared by the Board.

1 comment:

Dealblawg said...

If you want to learn more about various flavors of dividends, a good resource are the Model NVCA documents, found here:

Dividends are absolutely customary in pretty much any investment deal, and 8-10% is the general range.

Dimitry Herman

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