Term Sheet Tips: Effective Valuation and Warrant Coverage

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Early stage entrepreneurs often get caught up in negotiating valuation while failing to consider the impact of other critical terms of a financing transaction.  There is a great post on Venturehacks about the impact of an oversized option pool on a Company's effective valuation (i.e., the valuation that would put the founders in the same position as without such deal term).

Warrant CoverageThe same analysis can be applied to warrant coverage.   See our previous post "What is a warrant?" for background.

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What is a warrant?

A warrant is a security that gives its holder the right to exercise the warrant at a set exercise price for a given period of time and receive shares of stock of the Company.

Warrants are very similar to stock options except that they are typically used for investors, strategic partners, and other third parties (i.e. not for employees, consultants, advisors, or board members of the Company). Similar to stock options, warrants provide upside to the holder without requiring an immediate investment in the Company.

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