Angel Investment Securities
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Presentation on Investor Term Sheets and Angel Investment Securities

Presentation on Investor Term Sheets and Angel Investment Securities

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  • 1. Angel Investment Securities Pillsbury Winthrop Shaw Pittman LLP October 15, 2008 Pillsbury Winthrop Shaw Pittman LLP
  • 2. Introduction Steven L. Meltzer, Esq.  Striking Resemblance to Fred Flintstone 2 |
  • 3. Introduction Kevin R. Learned, Esq.  Always wins office Halloween costume contest 3 |
  • 4. Types of Securities Common Stock Convertible Notes Preferred Stock 4 |
  • 5. Common Stock Typical security issued to Founders and family/friend Investors No inherent economic advantage for the Investors over the Founders Investors can be protected through contractual arrangements  Stockholders Agreement  Voting Agreement (giving the Investors a Board seat)  Right of First Refusal and Co-Sale Agreement 5 |
  • 6. Example (Common Stock) Investment of $1 million  Founders: Bill Gatesly and Steve Casey each own 150,000 shares of Common Stock of Slushy Software, Inc., valued at $3 million  Investors: Warren Buffer and Donald Trumpet each purchase 50,000 shares of Common Stock for $10 per share, for a total investment of $1 million 6 |
  • 7. Example (Common Stock) Post-closing capitalization  Slushy Software, Inc., valued at $4 million  Warren and Donald own 100,000 shares of Common Stock (25%)  Bill and Steve own 300,000 shares of Common Stock (75%) 7 |
  • 8. Example (Common Stock) Sale for $20 million  Warren and Donald receive $5 million  Bill and Steve receive $15 million Sale for $2 million  Warren and Donald receive $500,000  Bill and Steve receive $1.5 million 8 |
  • 9. Convertible Notes Typical security offered to sophisticated Investors prior to a Series A Preferred Stock round Hopeful bridge to a Series A financing Avoids setting valuation of the Company Allows Investors to piggy-back 9 |
  • 10. Convertible Notes Debt security rather than an equity interest  Senior to Founders and other equity holders  Generally unsecured  Interest rate typically at 8% per annum, non-compounding  No voting rights or control over the Company  Mandatory Conversion  Automatically converts into subsequently issued equity securities  Conversion price at a discount to price paid by new investors - 10% is a typical discount  Automatically converts into subsequently issued equity securities  Conversion price at a discount to price paid by new investors - 10% is a typical discount  Investor may convert to Common Stock at any time  Conversion price at an agreed future valuation of the Company 10 |
  • 11. Example (Convertible Notes) Investment of $1 million  Founders: Bill Gatesly and Steve Casey each own 150,000 shares of Common Stock of Slushy Software, Inc.  Investors: Warren Buffer and Donald Trumpet each invest $500,000 into Slushy Software, Inc. Purchase convertible notes at 8% per annum, non-compounding, with an optional conversion price based on a Company valuation of $10 million 11 |
  • 12. Example (Convertible Notes) Post-closing capitalization  Warren and Donald together hold convertible notes in the aggregate principal amount of $1 million  Bill and Steve together own 300,000 shares of Common Stock (100%)  The sale of Convertible Notes does not establish a valuation for Slushy Software, Inc. 12 |
  • 13. Example (Convertible Notes – Successful Exit) Sale for $20 million after two years  Warren and Donald elect to convert their notes into 39,366 shares of Common Stock (outstanding principal and interest / per share conversion price) OR ($1,160,000 / ($10,000,000 / # shares of Common Stock following conversion))  Warren and Donald receive approximately $2.32 million ($20,000,000 x (39,366 shares of Common Stock / 339,366 shares of Common Stock))  Bill and Steve receive $17.68 million 13 |
  • 14. Example (Convertible Notes – Unsuccessful Exit) Sale for $2 million after two years  Warren and Donald do not convert their notes  Warren and Donald receive $1.16 million in principal and interest  Bill and Steve receive $0.84 million 14 |
  • 15. Common Stock vs. Convertible Notes Sale for $20 million after two years $17,680,000 $20,000,000 $15,000,000 $16,000,000 $12,000,000 Founders $8,000,000 $5,000,000 Investors $2,320,000 $4,000,000 $0 Common Stock Convertible Notes Security Purchased 15 |
  • 16. Common Stock vs. Convertible Notes Sale for $2 million after two years $1,500,000 $1,600,000 $1,160,000 $1,200,000 $840,000 $800,000 $500,000 Founders Investors $400,000 $0 Common Stock Convertible Notes Security Purchased 16 |
  • 17. Preferred Stock Typical security offered to Angel Groups, Venture Capitalists and other sophisticated Investors Dividends at 8% per annum, non-compounding Convertible into Common Stock  Automatic Conversion  Consent of the holders of Preferred Stock  IPO  Optional Conversion Liquidation preference over Founders set forth in charter documents  Double Dip  Double Dip, subject to a cap  Single Dip 17 |
  • 18. Example (Preferred Stock) Investment of $1 million  Founders: Bill Gatesly and Steve Casey each own 150,000 shares of Common Stock of Slushy Software, Inc.  Investors: Warren Buffer and Donald Trumpet each purchase 50,000 shares of Series A Preferred Stock for $10 per share, for a total investment of $1 million 18 |
  • 19. Example (Preferred Stock) Post-closing capitalization  Warren and Donald own 100,000 shares of Series A Preferred Stock (25%)  Bill and Steve own 300,000 shares of Common Stock (75%) 19 |
  • 20. Example (Preferred Stock – Double Dip – Successful Exit) Sale for $20 million after two years  Warren and Donald receive $1.16 million in liquidation preference, including dividends  Warren and Donald receive an additional $4.71 million in pro rata distribution (25% x ($20 million - $1.16 million))  Warren’s and Donald’s total proceeds equal $5.87 million  Bill and Steve receive $14.13 million in pro rata distribution (75% x ($20 million - $1.16 million)) 20 |
  • 21. Example (Preferred Stock – Single Dip – Successful Exit) Sale for $20 million after two years  Warren and Donald convert their Preferred Stock to Common Stock 1:1  Warren and Donald receive $5 million  Bill and Steve receive $15 million 21 |
  • 22. Comparison of Securities – Successful Exit Sale for $20 million after two years $20,000,000 $17,680,000 $15,000,000 $15,000,000 $16,000,000 $14,130,000 $12,000,000 $8,000,000 $5,870,000 $5,000,000 Founders $5,000,000 Investors $4,000,000 $2,320,000 $0 Common Convertible Preferred Preferred Stock Notes Stock (Double Stock (Single Dip) Dip) Security Purchased 22 |
  • 23. Example (Preferred Stock – Double Dip – Unsuccessful Exit) Sale for $2 million after two years  Warren and Donald receive $1.16 million in liquidation preference, including dividends  Warren and Donald receive an additional $0.21 million in pro rata distribution (25% x ($2 million - $1.16 million))  Warren’s and Donald’s total proceeds equal $1.37 million  Bill and Steve receive $630,000 (75% x ($2 million - $1.16 million)) 23 |
  • 24. Example (Preferred Stock – Single Dip – Unsuccessful Exit) Sale for $2 million after two years  Warren and Donald do not convert their Series A Preferred Stock  Warren and Donald receive $1.16 million in liquidation preference, including dividends  Bill and Steve receive $840,000 ($2 million - $1.16 million) 24 |
  • 25. Comparison of Securities - Unsuccessful Exit Sale for $2 million after two years $1,600,000 $1,500,000 $1,370,000 $1,160,000 $1,160,000 $1,200,000 $840,000 $840,000 $800,000 $630,000 $500,000 Founders Investors $400,000 $0 Common Convertible Preferred Preferred Stock Notes Stock (Double Stock (Single Dip) Dip) Securities Purchased 25 |
  • 26. Additional Terms for Series A Preferred Stock There are many more protections available to holders of Preferred Stock than for holders of Common Stock 26 |
  • 27. Additional Terms for Series A Preferred Stock Anti-dilution protection  Stock splits, stock dividends and recapitalizations  Dilutive issuances Redemption rights Election of Board Members Voting rights  Voting on an as-converted basis  Separate statutory voting rights  Separate vote for significant actions (negative covenants) 27 |
  • 28. Additional Terms for Series A Preferred Stock Information rights Registration rights Rights of First Refusal Co-Sale Rights Drag Along Rights 28 |
  • 29. Additional Terms for Series A Preferred Stock Many of these rights usually appear in contracts separate from the Company’s organizational documents  Investor Rights Agreement  Registration Rights Agreement  Voting Agreement  Right of First Refusal and Co-Sale Agreement 29 |
  • 30. Founder and Employee Matters Option Pool and Restricted Stock  New option grants for employees, directors and consultants subject to vesting  Previously issued Founder stock subject to vesting  Acceleration of Vesting Proprietary Information and Inventions Agreement Restrictions on Founder Stock Sales Key-Man Insurance 30 |
  • 31. Other Matters No Shop Agreements Indemnification protection for directors and officers Assignment by Investors Investors’ legal fees and expenses Due diligence Budget Finder fees Confidentiality 31 |
  • 32. Conclusion Any Questions? 32 |