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BUSINESS FUNDAMENTALSBOOTCAMP II   VENTURE CAPITAL ROCKS         William Contente         GESMER UPDEGROVE LLP            ...
You can’t always get what you want… but if you try sometimes, you might find, you get what you need.                 -Mick...
We won’t get fooled again.        VALUATION
VALUATION is a constant         source of confusion.             SPELL OUT:Pre-moneyFully Diluted – Elaborate if Necessa...
And I still haven’t found        what I’m looking forIdentify your investors, indicate  who’s committed and for how  much....
I love you more today             than yesterdayCUMULATING DIVIDENDSAnnual Rates of 6-8% are most common
That’s one for you,           nineteen for meLIQUIDATION PREFERENCESNon-ParticipatingParticipatingParticipating w/varia...
NON-PARTICIPATING                             PREFERRED/COMMON                                                CONVERTIBLE ...
PARTICIPATING                                 PREFERRED/COMMON                                       PARTICIPATING CONVERT...
It’s alright ma,           I’m only bleedingANTI-DILUTION PROTECTIONFull RatchetWeighted Average
ANTI-DILUTION EXAMPLEASSUME:1MM shares outstanding @$5/shareOld Money = 100K shares (10% of the 1MM)New Money purchases...
ANTI-DILUTION EXAMPLEWeighted Average Anti-   Full Ratchet Anti- dilution:                 dilution: Old Money goes from ...
Because I told you before,        you can’t do thatVOTING, PROTECTIVE PROVISIONS Consent of Preferred Needed to:Reduce th...
If you want it, here it is, come and get it,         but you’d better hurry          ‘cause it’s going fastREDEMPTION RIGH...
R-E-S-P-E-C-TBOARD REPRESENTATIONBalance of Board is always discussedFounders frequently give up control, even in a Seri...
I’m gonna get my share of what’s minePRE-EMPTIVE RIGHTSMaintain percentage ownershipAllocate ALL of next round to invest...
In-A-Gadda-Da-Vida, BabyREGISTRATION RIGHTS“The most heavily negotiated, and least important, part of any deal.”Language...
She’s my best friend’s girl –          she used to be mineRIGHT OF FIRST REFUSAL/CO-SALERarely contentious
You’re the reason I’m movin’ onTAG/DRAG ALONG RIGHTSSimplify ExitEliminate Appraisal Rights
Take another little piece       of my heart now, babyFOUNDER VESTING; OPTION VESTING
I can’t get no satisfaction, and I tried…CAPS ON TRANSACTION COSTSGenerally OK to cap the investor T/A costs paid by the C...
And you know something is happening here, but you don’t know what it is,          do you, Mr. Jones?INFORMATION RIGHTS
If I catch you with another man,          that’s the end, little girlNO SHOP CLAUSE
Stayin’ AlivePAY-TO-PLAY PROVISIONSLose pre-emptive rightsLose anti-dilution protectionConvert to Common Stock
Don’t think twice, it’s all rightSIGNATURE LINEUsually non-binding except forNo-Shop ClausePayment of Transaction Expens...
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Contente business bootcamp ii

  1. 1. BUSINESS FUNDAMENTALSBOOTCAMP II VENTURE CAPITAL ROCKS William Contente GESMER UPDEGROVE LLP March 25, 2011
  2. 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. 3. We won’t get fooled again. VALUATION
  4. 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. 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. 6. I love you more today than yesterdayCUMULATING DIVIDENDSAnnual Rates of 6-8% are most common
  7. 7. That’s one for you, nineteen for meLIQUIDATION PREFERENCESNon-ParticipatingParticipatingParticipating w/variations (caps, multiples)
  8. 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. 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. 10. It’s alright ma, I’m only bleedingANTI-DILUTION PROTECTIONFull RatchetWeighted Average
  11. 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. 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. 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. 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. 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. 16. I’m gonna get my share of what’s minePRE-EMPTIVE RIGHTSMaintain percentage ownershipAllocate ALL of next round to investors
  17. 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. 18. She’s my best friend’s girl – she used to be mineRIGHT OF FIRST REFUSAL/CO-SALERarely contentious
  19. 19. You’re the reason I’m movin’ onTAG/DRAG ALONG RIGHTSSimplify ExitEliminate Appraisal Rights
  20. 20. Take another little piece of my heart now, babyFOUNDER VESTING; OPTION VESTING
  21. 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. 22. And you know something is happening here, but you don’t know what it is, do you, Mr. Jones?INFORMATION RIGHTS
  23. 23. If I catch you with another man, that’s the end, little girlNO SHOP CLAUSE
  24. 24. Stayin’ AlivePAY-TO-PLAY PROVISIONSLose pre-emptive rightsLose anti-dilution protectionConvert to Common Stock
  25. 25. Don’t think twice, it’s all rightSIGNATURE LINEUsually non-binding except forNo-Shop ClausePayment of Transaction Expenses (sometimes)

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