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Equity > Equity Investment Term Sheets - Pg. 66

Financing a Game Development Venture 66 Financing Vehicles Once you have people willing to give your company cash, how do you take it in, and what do you give them in return? Your two options are equity and debt, discussed in the following sections. Equity Equity is ownership of the company. Equity in a corporation, LLC, and partnership are called stock, membership interests, and partnership interests, respectively. These are discussed more fully in Chapter 2, "First Steps." This section will address the different terms involved in an equity financing. Note that these issues are more likely to come up in a later financing for more money: the first financing, often Figure 3.5. These are a few of the many flavors of securities. called a seed round, is usually a small initial offering of common stock to insiders like friends and family or hands-off angel investors. As mentioned before, venture capitalists are unlikely to ever beat down a developer's door because generally the profits are not sufficient or predictable. How- ever, as the development industry matures and different business models are explored by devel- opers, the returns offered by those projects may be more interesting to investors. Investors may have different needs from the founder-employees, and may require special in- struments (types of investment). When an investor wants to share profits, but is not as interested in controlling the company, the company can issue different kinds or classes of equity that do not have the same voting rights as other classes. For instance, an LLC owner can be a managing member who has control over daily business and whose approval is required for certain actions, or a regular member, who may be more or less passive, depending on how the LLC operating agree- ment is written. A C-corporation may issue different classes of stock to investors that don't have the same voting rights as those held by founder-employees. On the other hand, some investors want a preferred return (also called a liquidation preference ), meaning that in case the business has to liquidate, the investor will be repaid before certain other equity investors. This can be achieved in a corporation by issuing preferred stock, which has certain rights by law and as written in the company's charter documents (see Chapter 2). Other entity types simply need to draft specific purchase agreements and other documents to achieve this end. Equity Investment Term Sheets Institutional investors usually want preferred stock because it receives a liquidation preference and it can be customized with a host of rights giving them more control over the company. The rights given to the investor will vary depending on the investor's investment objectives and relative bar- gaining power. These rights can be tailored by various agreements, such as a purchase agreement, investor rights agreement, or charter documents, to fit just about any needs. The investor's demands may differ based on the investor type, objectives, and sometimes even on geography (the West Coast ­ East Coast thing continues, to say nothing of U.S. versus Europe versus Asia). Your in- vestor's wish list will be set out in an offer, also known as a non-binding term sheet, which may include any number of the following terms: