Introduction to Venture Capital Financing
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Introduction to Venture Capital Financing

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Explores what venture capital financing is, transaction documents, and various deal terms.

Explores what venture capital financing is, transaction documents, and various deal terms.

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Introduction to Venture Capital Financing Introduction to Venture Capital Financing Presentation Transcript

  • Introduction to Venture Capital Financing Ed Pease Gary Schall November 4, 2013 Attorney Advertising
  • Venture Capital Financing What is a venture capital transaction?  Type of private equity capital typically provided for earlystage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or sale of the company  Venture capital investments are generally made as cash in exchange for shares in the invested company  This session is about traditional venture capital financing, not new crowdfunding approaches to financing. Source: Wikipedia © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 2
  • Venture Capital Financing Securities Law Compliance  Under federal securities laws, every issuance of a security must either be registered under the Securities Act or exempt from registration  All issuances of securities that are not being registered with the SEC must also be reviewed for compliance with state securities laws, or so-called "blue sky" laws Securities law compliance is not addressed in this presentation © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 3
  • Transaction Documents Pre-Closing Term Sheet Certificate of Incorporation Signing and Closing Operative Documents Ancillary Documents • Stock Purchase Agreement • Management Rights Letters • Investor Rights Agreement • Voting Agreement • Director Indemnification Agreements • Right of First Refusal and CoSale Agreement • Legal Opinion of Company Counsel © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 4
  • Transaction Documents Term Sheet  Summarizes the principal terms of the transaction  Generally not legally binding, except for confidentiality and exclusivity provisions © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 5
  • Deal Terms Term Sheet Offering Terms  Closing Date  Investors  Amount Raised  Price Per Share  Pre- and Post-Money Valuation  Current and Pro Forma Capitalization © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 6
  • Deal Terms Term Sheet Binding Provisions  No-shop / Exclusivity  Confidentiality  Expenses © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 7
  • Transaction Documents Stock Purchase Agreement  Sets forth the basic terms of the purchase and sale of the preferred stock to the investors and identifies the other financing documents  Typically fully negotiated and approved by the Board and stockholders but not signed until after the Certificate of Incorporation is filed © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 8
  • Deal Terms Stock Purchase Agreement  Type and Amount of Shares  Purchase Price  Representations and Warranties of Company, Founders and Investors  Conditions to Closing/Closing Deliverables  Counsel and Expenses © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 9
  • Transaction Documents Pre-Closing Certificate of Incorporation  Establishes the rights, preferences, privileges and restrictions of each class and series of the company’s stock  Filed with the Secretary of State of the state of the company’s incorporation © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 10
  • Deal Terms Certificate of Incorporation  Pay-to-Play – If an investor does not participate in a future financing, its preferred stock automatically converts to common stock or a “shadow” series of preferred stock without anti-dilution and/or other rights  Redemption Rights – At election of preferred holders as a class after 3-5 years – All or portion – Price can be original purchase price plus dividends or FMV © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 11
  • Deal Terms Certificate of Incorporation  Dividends – When, as and if declared or paid on common – Accruing / cumulative  Liquidation Preference – Non-Participating – Participating © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 12
  • Deal Terms Certificate of Incorporation  Anti-dilution Provisions – Weighted average – broad v. narrow (i.e., exclude common stock equivalents and shares reserved for issuance under incentive plans) – Full ratchet © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 13
  • Deal Terms Certificate of Incorporation  Director Voting Rights – Right of a class of stock to elect one or more directors  Protective Provisions – Right of a class of stock to approve key matters (e.g., equity issuances, transactions) © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 14
  • Deal Terms Certificate of Incorporation  Optional Conversion  Mandatory Conversion – At a qualifying IPO or upon a class vote © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 15
  • Transaction Documents  Investor Rights Agreement – Covers ongoing rights and obligations of investors and ongoing obligations of the company, including registration rights and company covenants  Voting Agreement – Agreement among stockholders, generally investors and founders to vote shares for various matters, including board designees and drag-along rights  Right of First Refusal and Co-Sale Agreement – Grants rights to the company and investors on sales of stock by founders and “key holders” Closing Operative Documents © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 16
  • Deal Terms Investor Rights Agreement – Registration Rights  Registrable Securities  Demand Registration  Registration on Form S-3  Piggyback Registration  Expenses © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 17
  • Deal Terms Investor Rights Agreement – Investor Rights and Covenants  Management and Information Rights  Right to Maintain Proportionate Ownership (“preemptive rights”)  Matters Requiring Investor Director Approval  Lock-up in an IPO © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 18
  • Deal Terms Investor Rights Agreement – Company Covenants  Non-Competition and Non-Solicitation and Agreements  Non-Disclosure and Developments Agreement  Board Matters  Employee Stock Options  Key Person Insurance  Other Covenants © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 19
  • Deal Terms Voting Agreement  Board size and composition  Increase common stock to cover conversion of preferred stock  Drag-along – Holders of specific percentage of stock can require all holders to vote for certain matters © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 20
  • Deal Terms Right of First Refusal and Co-Sale Agreement  Right of First Refusal – Company has primary right of first refusal – Investors have secondary right of first refusal if company does not exercise in full  Right of Co-Sale (“tag along”) – If company and investors do not exercise their right of first refusal, investors can sell some of their stock Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/codeof-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 21