What Price Adjustments Do You See Prior To Closing In A Financing?

Q:  Can you please explain what sort of adjustments you should expect to the price that a VC promises in a term sheet between the signing of the term sheet and signing of a final stock purchase agreement (SPA)?

A: (Jason)  To answer your question, we first need to determine what the definition of "price" is.

I don’t care what price per share I pay.  It’s an irrelevant number.  What’s relevant is the pre-money valuation.  That, along with my investment will determine what percentage of the company that I own post investment.  For more on this, see this prior post

If the question is "how often do I see the pre-money valuation change from term sheet to SPA" that answer is almost never.  Only in rare cases of something material happening to the company, I tend to think "a deal is a deal."  If something that bad happens to warrant a price change, it’s probably more likely that the entire deal falls apart.

The only other situation that could potentially change the valuation / price is if something is found in diligence that wasn’t known to the VC at the time of term sheet.  For instance, if founders have deferred salaries or have debt that need to be paid back and a large chunk on the financing is going to be immediately used, this too might change the economics.

If you define price as the "price per share" (not having anything to do with valuation), then I would tell you that I think EVERY deal that I’ve been involved with has had a price adjustment during this period.  The price per share is based on the outstanding equity of the company and rarely does this get 100% figured out until right before closing. 

  • Amr

    Thank you for your answer – this is very useful. One more question in this regard (and forgive me if it sounds very basic) but what sort of adjustments should you expect to the price per share? i.e. what are main changes that you need to expect or account for (I would have thought the list stops at dividends and capital increases)? Many thanks!

  • question

    interesting post. youre comment about debt repayment/deferred salary spurred a question for me–1. if one has invested a low six-figure amount of personal funds to seed their company, how much of a strain is it to get this paid back as one of the uses of capital in a series A of apprx $1.5m? i had assumed that i would not be able to recoup this money in a fundraising. 2. i also assumed i would not be able to claim deferred salary. how common/uncommon is it to get a small(but material) portion of a series A to cover such costs? i've assumed that this is just part of the sweat equity put in/part of what gets built into the valuation of my stock.

    • Aziz Grieser

      I am amazed that you have these questions after plunking down “low” six figures of your own investment.

      If I had to answer your question, I'd say that your VC investor doesn't want surprises. They'd probably be ok with you paying off a portion of your debt or picking up half your regular salary, if continuing without their assistance was going to bankrupt you shortly, but only a portion so that you would still have some skin in the game. It sounds to me like you are in no danger of running short of personal fund to finance your own debt and pay your own salary, and it will sound that way to a VC too.

  • I agree! Great posting. I would definitely say that if something so material came up that it would change the price, your deal is in serious jeopardy.