UVA Venture Capital Case Study: OptiGuard Inc. Term Sheet Analysis

This assignment analyzes the venture capital term sheet of OptiGuard, Inc., a cybersecurity company, focusing on the perspective of Richard Mannix, the CEO. It examines the implications of a Series A round with Woodland Venture Partners (WVP) and considers different exit scenarios (down round, flat, up round) and their impact on investor payouts, specifically addressing liquidation versus conversion preferences for investors. The analysis extends to the investor-friendliness of the term sheet, the impact of a potential Series B round, and Mannix's arguments for a higher valuation of the company. The document covers key elements such as ownership percentages, board representation, anti-dilution provisions, and the valuation of the company, providing a comprehensive overview of venture capital financing and term sheet negotiations. The assignment also includes assumptions related to bridge loans, convertible preferred stock, and the calculation of returns for investors in various scenarios. This assignment provides a comprehensive overview of the venture capital financing process, term sheets, and exit strategies.

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Institution Affiliation
Name of Student

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A) If the term sheet is closed and there is an exit after the Series A round, how much do
different investors get paid?
To make the decision regarding how much the investor will be paid in case the term sheet
is closed and there is an exit it is important to consider various exit scenarios. The three possible
exit scenarios should be down round, flat and up round. However, to calculate the amount that
investors get during exit we have to consider the capsize table and use it to determine the amount
that the investors will get if they decide to either liquidate or convert. The following assumptions
are instrumental in determining the amount that each investor gets in different exit scenario.
Assumptions
The ownership percentage is calculated based on the shares
We assume three exit scenarios
Down round= $5000000
Flat =$1250000
Up round=$2000000
If the investors decide to liquidate Woodland Venture Partners (WVP) gets its initial investment
them what remains is equally shared among the other investors.
WVP is a holder of preferred, that is, In case of either of the exit scenarios WVP can decide to
either liquidate or convert
We assume that the 6 month repayment of the bridge loan was in equal installments where two
months were paid and the remaining amount converted to preferred.
Interpretation
if we assume a five million exit scenario and the investors decide to liquidate WVP gets its initial

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investments and the rest of the investors get zero. If we consider the $12.5 million and $20
million exit scenarios WVP would still get its five million and the other investors would equally
share what remains. The table below shows the amount that they get upon liquidation.
However, if the investors decide to convert at different exit scenarios the individual investors
will get the following amounts.
Therefore, at $12.5 million WVP may either decide to liquidate or convert because the
amount that they get will be equal in either scenario. At $20 million, WVP will likely convert
instead of liquidate. The liquidation amount is $5 million which less than the conversion amount
at 8 million is. At %20 million exit scenario other investors are also likely to convert instead of
liquidate because they will get values higher than their invested amounts.

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B) Is this term sheet investor friendly or founder friendly? Why?
The term sheet is investor friendly. The term sheet is investor friendly because the
investor (holders of preferred) have a lower risk of losing their investment in case of liquidation.
For instance, WVP is certain that at any given exit scenario it will get its initial investment or at
least some percentage of the initial investment when the exit scenario presents a value less than
their initial investment. The founders are less privileged here because they only get their
investment when there is a flat round or an up round. The term sheet is also investor friendly
because at an up round, the investor gets to convert instead of liquidating so that it gets a return
higher than the initial investment [1].
Based on board representation the term sheet can also be perceived as investor friendly
because the preferred are granted three slots out of seven at the board as long as they maintain a
25% financial investment or more. With three members of the board the investors are privileged
because their interests as stakeholders are greatly catered for when the organization is making its
decisions. The decisions made by the company are likely to have a positive impact on the
investors when they are well represented.
On liquidation, preference is given to holders of preferred shares. The investor holds a
large amount of the shares of 40% of total equity at a share price of the initial purchase price. At
any moment of liquidation and any value of the firm at liquidation, the investor is always entitled
to be the favored. On conversions, preferred shareholders have the rights to convert to common
shares. From the sheet, the investor who holds preferred shares, has a higher percentage of shares
of the company and receives higher profits on conversion at the expense of the common
shareholders. The provisions for Antidilution favor the investor as the conversion price of the

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Preferred is subject to adjustments. The investors, who hold preferred shares, have an
antidilution protection on the weighted average of any additional shares to the company [1].
C) How does the answer in part A change if there is a Series B round?
If there is a series B round the answer in part A records some slight changes. First we have to
make a number of suitable assumptions that will enable us to make the necessary
Assumptions
The ant dilution conversion rate is 1.30
The New VC series B convertible preference is $ 32 million
The money value of the investors is calculated by multiplying the shares time the share value.
However, if we do not know the share value of the investors share we assume that it is $4 (the
“original purchase price”).
At the end of series B round the investors can either convert or liquidate
We assume three exit scenarios
Down round= $30,000,000
Flat =$38,500,000
Up round=$45,000,000
WVP and New VC series B convertible preference are holders of preferred while the rest of the
investors are considered holders of common and preferred. That is, in the event that the exit
scenario is a down round WVP and New VC series B convertible preference share the sum based
on the ratio of their contribution.
We assume that the 6 month repayment of the bridge loan was in equal installments where two
months were paid and the remaining amount converted to preferred.

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Interpretation
When the investors decide to convert at the three scenarios they get a value of:
However, when they decide to liquidate the investors will get:
This implies that for the series B payoff, WVP and New VC series B convertible
preference would opt for liquidation when the exit is a down round or a flat round. The decision
is important because they get a percentage of their investment if it is a down round and the whole
initial investment if it is a flat round. However, in the event of an up round the two investors will
prefer conversion over liquidation. The remaining investors will prefer conversion over
liquidation because in either exit scenario they get to come out with a given amount of income.

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When series A converts and series B liquidates series B will obtain the same amount in all the
three exit scenarios. The other investors who decide to convert as new VC series B liquidates
will get more returns on their initial investment. Based on the different situations it is important
for series B to convert rather than exit especially in case of a flat and up round.
D) Suppose you were Mannix. Prepare a document to argue for a higher valuation.
OptiGuard, INC.
Reason for Higher Valuation
The OptiGuard INC is a cybersecurity company dealing with security for confidential
information in mobile device. It involves in software development for reducing the risk of
exposure to unauthorized persons which can lead to great financial repercussions. The company
is led by an experienced personnel with great minds right from the President and founder
Richard Mannix with over 10 years of experience, Timothy Geren the National Sales Director
with an MEng in computer and systems engineering and Carl Bolencamp the Chief Technology
Officer with over 22 years of experience in the computer industry with a PhD in computer
science.
The company is young but steadily growing over the past years of operation with
financial struggles over the same period. The company began with few individual investments

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from few parties starting with the founder as shown in the table below excluding 248,000 options
not granted.
The company did secure a VC funding from WVP of $5 million which did well for the company
and gave a post money valuation of 12.5 million for series A-Round as shown in the term sheet
capitalization table below.

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There have been exits for the VC funding in a number of cybersecurity firms which gives
high hope for the funding needed by the company for sustainable growth. The exits are shown in
the sheet below over the period shown.

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OptiGuard INC, has shown the desire to stay in the market and compete favorably with
the market forces in the cybersecurity business. There has been a fourfold increase in investment
in the sector of cybersecurity over the period 0f 2010 to 2015 of $163.7 to $654.7 investments
[1]. With the over 50 exits for M&As VC and the steadily increasing investment in the IT sector
from the VCs, additional funding will be of great help for OptiGuard INC. With an additional
funding, the company is expected to boom as it has a steady upward growth in the market.
Reference
1. University of Virginia. Optiguard, Inc.: Series A-Round Term Sheet. DAREN Business
Publishing. 2020;:17.