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  • 1. BUSINESS FUNDAMENTALSBOOTCAMP II VENTURE CAPITAL ROCKS William Contente GESMER UPDEGROVE LLP March 25, 2011
  • 2. You can’t always get what you want… but if you try sometimes, you might find, you get what you need. -Mick Jagger
  • 3. We won’t get fooled again. VALUATION
  • 4. VALUATION is a constant source of confusion. SPELL OUT:Pre-moneyFully Diluted – Elaborate if NecessaryOption Pool ImpactDO NOT BE CREATIVE. AT ALL. EVEN A LITTLE.
  • 5. And I still haven’t found what I’m looking forIdentify your investors, indicate who’s committed and for how much.What gaps remain?
  • 6. I love you more today than yesterdayCUMULATING DIVIDENDSAnnual Rates of 6-8% are most common
  • 7. That’s one for you, nineteen for meLIQUIDATION PREFERENCESNon-ParticipatingParticipatingParticipating w/variations (caps, multiples)
  • 8. NON-PARTICIPATING PREFERRED/COMMON CONVERTIBLE PREFERRED/COMMON $25.00 $20.00Stock Price $15.00 $10.00 $5.00 $0.00 2M 4M 6M 8M 10M 12M 14M 16M 18M 20M Preferred Stock Payment in $/Sh $10.00 $10.00 $10.00 $10.00 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00 Common Stock Payment in $/Sh $0.00 $2.50 $5.00 $7.50 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00 Purchase Price (Millions)
  • 9. PARTICIPATING PREFERRED/COMMON PARTICIPATING CONVERTIBLE PREFERRED/COMMON $30 $25 $20Stock Price $15 $10 $5 $0 2M 4M 6M 8M 10M 15M 20M Preferred Stock Payment in $/Sh $10 $12 $14 $16 $18 $23 $28 Common Stock Payment in $/Sh $0 $2.00 $4.00 $6.00 $8.00 $13.00 $18.00 Purchase Price (Millions) Preferred Stock Payment in $/Sh Common Stock Payment in $/Sh
  • 10. It’s alright ma, I’m only bleedingANTI-DILUTION PROTECTIONFull RatchetWeighted Average
  • 11. ANTI-DILUTION EXAMPLEASSUME:1MM shares outstanding @$5/shareOld Money = 100K shares (10% of the 1MM)New Money purchases 100 shares @$1/share
  • 12. ANTI-DILUTION EXAMPLEWeighted Average Anti- Full Ratchet Anti- dilution: dilution: Old Money goes from  Old Money goes from 100,000 shares to 100,000 shares to 100,080 shares 500,000 shares 10% to 10.006%  10% to 35.712%
  • 13. Because I told you before, you can’t do thatVOTING, PROTECTIVE PROVISIONS Consent of Preferred Needed to:Reduce the Rights of Preferred SharesDo another Financing
  • 14. If you want it, here it is, come and get it, but you’d better hurry ‘cause it’s going fastREDEMPTION RIGHTSPresent in most VC dealsAlmost never exercisedWatch out for renegade investors
  • 15. R-E-S-P-E-C-TBOARD REPRESENTATIONBalance of Board is always discussedFounders frequently give up control, even in a Series A roundOutside Directors encouraged
  • 16. I’m gonna get my share of what’s minePRE-EMPTIVE RIGHTSMaintain percentage ownershipAllocate ALL of next round to investors
  • 17. In-A-Gadda-Da-Vida, BabyREGISTRATION RIGHTS“The most heavily negotiated, and least important, part of any deal.”Language only a lawyer could loveYou’re at the Underwriter’s mercy anyway
  • 18. She’s my best friend’s girl – she used to be mineRIGHT OF FIRST REFUSAL/CO-SALERarely contentious
  • 19. You’re the reason I’m movin’ onTAG/DRAG ALONG RIGHTSSimplify ExitEliminate Appraisal Rights
  • 20. Take another little piece of my heart now, babyFOUNDER VESTING; OPTION VESTING
  • 21. I can’t get no satisfaction, and I tried…CAPS ON TRANSACTION COSTSGenerally OK to cap the investor T/A costs paid by the CompanyDangerous to cap Company T/A costs
  • 22. And you know something is happening here, but you don’t know what it is, do you, Mr. Jones?INFORMATION RIGHTS
  • 23. If I catch you with another man, that’s the end, little girlNO SHOP CLAUSE
  • 24. Stayin’ AlivePAY-TO-PLAY PROVISIONSLose pre-emptive rightsLose anti-dilution protectionConvert to Common Stock
  • 25. Don’t think twice, it’s all rightSIGNATURE LINEUsually non-binding except forNo-Shop ClausePayment of Transaction Expenses (sometimes)