Legal Landmines – Raising Capital
Mick Bain
Janene Ásgeirsson
April 29, 2014
WilmerHale
Setting the Stage – the Company
- Stage of the Company
- Funding needs of the Company: both today and
over time...
WilmerHale
Setting the Stage – the Investors
- Friends and Family
- Crowdfunding
- Social/ product funding (e.g., Kickstar...
WilmerHale
Setting the Stage – What do Investors
Care About?
Angels and VCs rank their priorities in a deal very different...
WilmerHale
Setting the Stage – What do Investors
Care About?
- Great Team
- Sound Business Proposition
- Solid Business Pl...
WilmerHale
Setting the Stage – How do VCs Work
and What do they Want?
- Funds are partnerships (sometimes limited liabilit...
WilmerHale
Setting the Stage – How do VCs Work
and What do they Want?
General Partner LLC
Limited Partners
(individuals an...
WilmerHale
Setting the Stage – How do VCs Work
and What do they Want?
- How do VCs decide what to invest in?
- What are th...
WilmerHale
Setting the Stage – What do Companies
Care About?
- Money
- Help
- Limited dilution/High valuations
- Terms the...
WilmerHale
Types of Financing Structures
- Cash Loan
- Common Stock
- Preferred Stock
- Convertible Debt
WilmerHale
Compare Structures with Goals
Money? Help? Limited
Dilution?
Company
Friendly
Terms?
Good
Precedent for
Future
...
WilmerHale
Convertible Debt Terms
- How it works
- Benefits
- Postpones valuation discussion (but see “caps”)
- Postpones ...
WilmerHale
Convertible Debt Terms
- Typical terms
- Interest rate
- Maturity date
- Automatic conversion in a “Qualified F...
WilmerHale
Preferred Stock Terms
3 categories of terms:
- Economic
- Control
- Everything Else (TSTDM)
WilmerHale
Preferred Stock Terms
ECONOMIC TERMS
- Pre-money valuation
- Option Pool
- Liquidation Preference
- 1x
- Multip...
WilmerHale
Preferred Stock Terms
ECONOMIC TERMS
- Anti-Dilution
- Weighted-average
- Full ratchet
- Redemption Rights
- Pr...
WilmerHale
Preferred Stock Terms
CONTROL TERMS
- Voting Rights and Covenants
- Board Composition and Representation
- Drag...
WilmerHale
Preferred Stock Terms
Everything Else
- Registration Rights
- Information Rights
- Right of First Refusal and C...
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Legal Land Mines: Raising Capital

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Starting a new company is hard, but putting in place the right legal framework for your business doesn’t have to be...
Dive deep into the most important issues relating to raising capital for your company with insight from Mick Bain and Janene Asgeirsson, two experts on start-up law from WilmerHale. Having worked with hundreds of entrepreneurs and start-ups, Janene and Mick will answer the questions that you haven't even thought to ask.

What You'll Learn:
Financing structures and terms
How to comply with security regulations
Types of investors to work with and why

Published in: Business, Economy & Finance
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Legal Land Mines: Raising Capital

  1. 1. Legal Landmines – Raising Capital Mick Bain Janene Ásgeirsson April 29, 2014
  2. 2. WilmerHale Setting the Stage – the Company - Stage of the Company - Funding needs of the Company: both today and over time - Key business objectives and milestones to be achieved - Future inflection points
  3. 3. WilmerHale Setting the Stage – the Investors - Friends and Family - Crowdfunding - Social/ product funding (e.g., Kickstarter) - Government grants - Angel investors - Venture Capital investors - Strategic investors
  4. 4. WilmerHale Setting the Stage – What do Investors Care About? Angels and VCs rank their priorities in a deal very differently Business Attributes Angel VC Investor’s possible involvement 1 3 Investor’s strengths filling gaps in business 2 5 Geographically close 3 6 Potential exit routes (liquidity) 4 1 Investor’s understanding of business 4 2 Presence of (potential) co-investors 6 4 Source: Angel Investing: Matching Startup Funds with Startup Companies – A Guide for Entrepreneurs, Individual Investors and Venture Capitalists (Jossey-Bass).
  5. 5. WilmerHale Setting the Stage – What do Investors Care About? - Great Team - Sound Business Proposition - Solid Business Plan - Technical/IP Advantage - Customer and Market Due Diligence - Execution
  6. 6. WilmerHale Setting the Stage – How do VCs Work and What do they Want? - Funds are partnerships (sometimes limited liability companies) - Where do they get their money?  Capital Contributions: GPs – 1%. LPs – 99%  Funds last 10 years. Therefore they need to raise money about every 3- 5 years.
  7. 7. WilmerHale Setting the Stage – How do VCs Work and What do they Want? General Partner LLC Limited Partners (individuals and institutions) 1% of capital / 20% of Profit portfolio company portfolio company portfolio company 99% of capital / 80% of ProfitFund (2-2.5% total commitments) General Partner LLC Limited Partners (individuals and institutions) portfolio company portfolio company portfolio company 99% of capital / Fund Management Fee
  8. 8. WilmerHale Setting the Stage – How do VCs Work and What do they Want? - How do VCs decide what to invest in? - What are their expectations?  VC Funds want a 30% return to compensate for risk and liability  This translates to a 3x return of capital over the life of the fund  The home run (10x) pay-offs provide most of the return % of Deals $ million of Capital Return Multiple Return % of Return Home Runs 10% $ 22 10 $ 220 72% Other Wins 30% $ 28 3 $ 84 28% Losers 60% $ 40 0 $ - 0% Expenses $ 10 Total 100% $ 100 3 $ 304 100%
  9. 9. WilmerHale Setting the Stage – What do Companies Care About? - Money - Help - Limited dilution/High valuations - Terms they can live with – today and tomorrow - Speed, efficiency and limited expenses
  10. 10. WilmerHale Types of Financing Structures - Cash Loan - Common Stock - Preferred Stock - Convertible Debt
  11. 11. WilmerHale Compare Structures with Goals Money? Help? Limited Dilution? Company Friendly Terms? Good Precedent for Future Rounds? Speed/Low Cost? Cash Loan Y N Y N N ? Common Stock Y N N N N ? Convertible Debt Y Y ? ? Y Y Preferred Stock Y Y ? ? Y N
  12. 12. WilmerHale Convertible Debt Terms - How it works - Benefits - Postpones valuation discussion (but see “caps”) - Postpones many terms - Creditor status - Fast - Less expensive
  13. 13. WilmerHale Convertible Debt Terms - Typical terms - Interest rate - Maturity date - Automatic conversion in a “Qualified Financing” - Optional conversion at maturity (common or preferred?) - Conversion discount - Conversion cap - Optional conversion if no financing (common or preferred?) - Sale terms - Warrant coverage
  14. 14. WilmerHale Preferred Stock Terms 3 categories of terms: - Economic - Control - Everything Else (TSTDM)
  15. 15. WilmerHale Preferred Stock Terms ECONOMIC TERMS - Pre-money valuation - Option Pool - Liquidation Preference - 1x - Multiple - Participating Preferred - Accruing Dividends
  16. 16. WilmerHale Preferred Stock Terms ECONOMIC TERMS - Anti-Dilution - Weighted-average - Full ratchet - Redemption Rights - Preemptive/ Participation Rights
  17. 17. WilmerHale Preferred Stock Terms CONTROL TERMS - Voting Rights and Covenants - Board Composition and Representation - Drag Along Rights - Vesting
  18. 18. WilmerHale Preferred Stock Terms Everything Else - Registration Rights - Information Rights - Right of First Refusal and Co-Sale
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