Slides from NY Tech Alliance Event - Financing Strategies for Early-Stage Companies Presented at EisnerAmper on April 25, 2019

1. FINANCING STRATEGIES FOR EARLY-STAGE COMPANIES:
SESSION 2 IN THE FOUNDATIONS OF ENTREPRENEURSHIP SERIES
Panelists
¨Paul Ellis, Paul Ellis Law Group (Moderator)
¨Randall Clark, Gunderson Dettmer
¨Kris Brown, Tech-Life Sciences Group, Goodwin Procter LLP
¨Alan Wink, EisnerAmper
¨Charlie O’Donnell, Brooklyn Bridge Ventures
April 25, 2019| EisnerAmper |750 3rd Street

2. Disclaimer
The materials and information contained in this presentation are presented for
informational purposes only and do not constitute advertising, solicitation or legal
advice. Although care has been taken to ensure that the materials are correct, complete
and up-to-date, the presenters and their firms assume no responsibility therefor.
Accordingly, you should not act or rely on any information in this program without
seeking the advice of an attorney licensed to practice law in your jurisdiction.
The materials contained in this presentation do not create and are not intended to
create an attorney-client relationship between you and any of the presenters.
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3. 3

4. Paul Ellis
Paul Ellis counsels on issues including VC and early-stage financing, joint
venture and strategic partnering relationships, mergers and acquisitions,
employment, equity plans, commercial agreements, and, together with his
colleagues, protection and licensing of intellectual property. Beyond his
practice with emerging tech companies, he has represented established
companies in industries including telecommunications, healthcare,
manufacturing, banking, real estate, consumer products and entertainment.
Paul is a board member of the New York Technology Alliance (NYTECH), and
leads NYTECH’s series of legal events. He has represented companies
ranging from startups to multinationals, as well as funds and individual and
institutional investors.
Paul Ellis
Managing Partner
Paul Ellis Law Group LLC
212.949.5900, x301
pellis@pelglaw.com
www.pelglaw.com
Practice
• Financing/Venture
Capital
• Mergers and Acquisitions
• General Corporate/
Contracts
• Intellectual Property
Education
• Harvard University, B.A.
• Georgetown University
Law Center, J.D.
Bar Admission
• New York
4

5. Kris Brown
Kris Brown is a corporate law partner in the Tech-Life Sciences Group at
Goodwin Procter LLP in New York City, as well as an active tech and life-
sciences focused angel investor. He counsels domestic and global early
stage companies, venture capital funds and corporate strategic investors,
like the corporate venture arm of Johnson & Johnson, and BMWi Ventures.
In addition, Kris sits on the board of advisors for Venture for America.
Kris Brown
Partner
Tech-Life Sciences Group
Goodwin Procter LLP
212.813.8821
Kbrown@goodwinlaw.com
www.Goodwinlaw.com
Practice
• Life Sciences
• Venture Capital
• Life Sciences IPOs and
Capital Markets
• Life Sciences Emerging
Companies
Education
• Brown University, B.A.
• Boston University School
of Law, J.D.
Bar Admission
• New York
• Massachusetts
• California
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6. Randall Clark
6
Randall advises startup companies throughout their life cycles on a broad
range of legal and business issues and transactions, including debt and
equity financings, tender offers and acquisitions. He also represents
venture capital funds in domestic and cross-border investments.
Randall Clark
Venture Capital and
Startup Lawyer
Gunderson Dettmer
212.430.3132
rclark@gunder.com
www.gunder.com
Practice
• Emerging Companies
• Venture & Growth
Financings
• Mergers and Acquisitions
• Public Offerings / Public
Companies
• Investor Side Financings
Education
• The University of Texas at
Austin, B.S.
• The University of Texas at
Austin, B.B.A.
• Harvard Law School, J.D.
Bar Admission
• New York

7. Alan Wink
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Alan Wink, CPA
Director - Capital Markets
EisnerAmper
732.243.7196
alan.wink@eisneramper.com
www.eisneramper.com
Specialties
•Strategic & Business
Planning
•Capital Structures
•Mergers & Acquisitions
•Capital Formation-Angel
Financing, Venture Capital,
Private Equity
•Technology
•Life Sciences
•Green Tech
Education
• Rutgers University:
Accounting/Business
Administration
• Rutgers Graduate
School of
Management: MBA,
Finance
Associations
• New Jersey Technology
Council: Board Member;
Electronics, Advanced
Materials & Manufacturing
Track Advisory Board
• Jumpstart NJ: Board Member
• Association for Corporate
Growth
Alan has 20 years of financial and consulting experience. Alan spent several
years as Director of Financial Analysis for AmBase Corporation (NYSE),
where he led approximately $2 billion of corporate acquisition activity. He is
also a past Vice President of Capricorn Management, a $100 million private
equity fund specializing in restructuring and turnaround opportunities.
Alan has worked with many early stage and emerging growth companies on
developing the appropriate capital structure for their position in the business
life cycle. He maintains an active contact base with angel investors, venture
capital funds and private equity funds.

8. Charlie O’Donnell
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Charlie O’Donnell
Founder
Brooklyn Bridge Ventures
charlie@brooklynbridge.vc
www.brooklynbridge.vc/
Specialty
• Early Stage
Investments
Education
• Fordham University,
B.S.
Associations
• Tech:NYC Leadership
Council
• Founder, Brooklyn
Bridge Park Boathouse
Charlie O'Donnell has been an active member of the NYC startup community for over
15 years, with a reputation of being the most accessible early stage investor in
New York. After being hired as the first analyst at Union Square Ventures and
helping to open First Round Capital's first NYC office, he founded Brooklyn Bridge
Ventures in 2012.
Brooklyn Bridge Ventures has made over 60 investments since it was founded, making
it one of the most active funds investing in pre-seed and seed rounds in the city. It
often leads or co-leads, investing in a wide variety of startups founded by a
diverse pool of founders including The Wing, Petal, Clubhouse, Hungryroot, Ample
Hills Creamery, Canary, goTenna and Imagen, among others. The fund was the first
to be launched in Brooklyn--where he was born and raised

9. What We Will Cover Today
¨ Your financing strategy – key considerations
¨ Bootstrapping and other strategies to delay or avoid VC/angel financing
¨ VC/angel financing – costs and benefits
¨ What VCs are looking for
¨ How much should you raise?
¨ Valuation
¨ What type of investment structure/instrument should you use?
¨ Common Stock
¨ Convertible notes (and safes) – review of most significant terms
¨ Convertible Preferred stock – review of most significant terms
¨ Securities laws – staying out of trouble
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10. 2018 - A Record Setting Year for the VC
Industry
¨ $130.9B was invested in 8,948 deals across the U.S.
¨ First year since the height of the dot.com boom that VC investment surpassed $100B
¨ Later stage deals seem to dominate; 60% of the capital invested was for deals of
$50M or larger
¨ Q1 2019 did not show any signs of a slowdown with $32.6B invested; second
highest quarterly capital investment total in the last decade
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11. Alternatives to VC/Angel Financing
¨ “Bootstrapping”:
¤ Compensation alternatives (deferred/reduced salaries; equity grants)
¤ Personal savings, credit cards, home equity loans
¤ Day jobs; consulting services - hybrid business models
¤ Creative equipment procurement (used, borrowed, shared)
¤ Creative facilities solutions (home offices, virtual offices, shared offices,
incubators)
¤ Careful management of working capital (A/R, A/P, inventory)
¤ Maximizing benefit of government tax incentives
¤ Customer advances/prepayments (often staged)
¤ SBIR, ESDC and other government grant and loan programs
¤ Non-equity crowdfunding
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12. Alternatives to VC/Angel Financing (Cont.)
¨ Alternative sources of equity/debt financing
¤ Friends/family/co-founder investments/loans
¤ Customer-financing
¤ Supplier/vendor-financing
¤ Strategic partnerships/alliances
¤ Small-business loans/micro-financing
¤ Equity crowdfunding
¨ Potential cost of alternative strategies
¤ Slower growth may result in a missed market opportunity
¤ Certain types of businesses require significant investment
¤ Cash shortages may keep founders focused on surviving, rather than thriving
¤ Can result in failure of the business for lack of funds; if the business fails,
lack of outside financing could end up being financially devastating as
founder may have assumed 100% of risk
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13. Understanding the Players – Angels
¨ The term “angel” covers a lot of ground:
¤ Can be an experienced investor, but not necessarily - usually an individual, but
also early stage funds, family offices, etc.; distinguish from friends and family
¤ Not a cohesive group like VCs – can operate in highly-disciplined networks, in
loose affiliations or on their own
¤ Generally make smaller investments than VCs
¤ May or may not have industry expertise
¤ Motivations can vary broadly – rarely is angel investing someone’s “day job”
¨ Strengths – can offer significant funding on reasonable terms earlier than many
VCs, as well as useful guidance and contacts; can be less demanding on exit timing
¨ Limitations – not generally a source of further funding; less sophisticated angels can
expect terms that are over-reaching; investment process can be uncertain; investor
relations can be time-consuming
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14. Understanding the Players – Venture
Capitalists
¨ VC’s usually invest third party funds which they have raised through a fund or series
of funds. A venture capital fund is:
¤ A pooled investment vehicle
¤ Raises investment funds from institutional investors (like pension funds) and family
offices who participate in the fund as limited partners
¤ The fund is professionally-managed by individuals with finance, business
management and technical expertise
¤ The managers typically earn compensation in the form of 20% of the profits of
the fund (plus a 2% management fee)
¤ A fund typically invests in numerous, often high-risk, “portfolio” companies
¤ Funds generally have a term (often 10 years) during which they need to make
and then liquidate their investments
¤ Funds often have particular focus with respect to industry sector, investment size
and financing stage
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15. Understanding the Players – Venture
Capitalists (Cont.)
¨ Benefits of VC financing:
¤ Can be a fast way to ramp up operations
¤ Allows management to focus on core objectives (as opposed to fundraising)
¤ Can be available in larger amounts
¤ The right VC can lend portfolio company increased credibility with prospective
customers, partners, key employees
¤ VCs can add significant value beyond initial funding:
n Strategic industry and business advice
n Disciplined focus on business objectives
n Contacts – strategic partners, customers, advisors, portfolio companies, etc.
n Additional funding (either directly or through contacts)
n Can be of particular assistance in identifying exit opportunities
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16. Understanding the Players – Venture
Capitalists (Cont.)
¨ Disadvantages of VC Financing:
¤ Can be expensive in terms of valuation/dilution
¤ Many VCs will not invest in small or early rounds
¤ Fund structure generally demands VCs focus on achieving an exit at a certain
rate of return within a fixed time-frame
¤ Shared control – board structure and seats; veto and consent rights; risk of
founders being excluded from strategic decision-making; replacement of
CEO/COO with outside, experienced personnel
¤ Fund structure limits pursuit of non-monetary business objectives – “pure” science
and similar objectives
¤ Time-consuming to find, negotiate and close
¤ Transaction costs can be significant – standardized docs can reduce costs
¨ Bottomline? – VC financing can be very valuable for the enterprise, but it is critical
that interests and objectives are aligned
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17. What VCs Look For
¨ What do VCs look for in an investment opportunity?
¨ Numerous relevant factors, none of which are mandatory, but the short list includes:
¤ A large, growing market
¤ A proven management team
¤ Protected (protectible), preferably disruptive, product/technology
¤ Barriers to entry
¤ Market acceptance
¨ Remember your company is being evaluated as an investment opportunity, first and
foremost – they want to hear how you will make them and their investors a lot of
money
¨ Don’t focus too much on the technology – make sure you also display your
knowledge and understanding of the product, the industry and a coherent
marketing strategy – many great products fail because they couldn’t get to (or got
beaten to) market or were out-competed in the market.
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18. Valuation
¨ For early-stage companies, valuation is an art, not a science – the valuation reflects
what investors are willing to offer
¨ Concept: pre-money value + investment = post-money value
¨ Company-specific issues in negotiating valuation:
¤ Market opportunity – size, rate of growth, competition
¤ Management – credentials, track record, drive, vision
¤ Product/Solution – achievable, salable, scalable, timely, protectible
¤ Progress – how far along is the company in execution?
¨ Better answers = reduced risk = higher valuation
¨ Your best valuation comes through having more than one investment offer
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19. Types of Securities
¨ Types of securities most often used in early-stage companies:
¤ Common stock – typically reserved for founders and incentive programs
¤ Convertible Notes
¤ SAFEs – Simple Agreement for Future Equity
¤ Convertible preferred stock
¨ Assumption here is that we are working with a C corp, but see Session I --
Organizing the Entity (on website) for discussion of pros and cons of various types
of entities
¨ Similar investment structures can be applied to LLC’s
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20. Convertible Notes
¨ Usually converts to security sold in next round that is of at least a specified minimum
size (a “Qualified Financing”)
¤ Usually converts at a discount to next-round pricing (typically 10% to 30%)
¨ Avoids negotiations over valuation, rights, etc. (but if there is a cap on conversion
valuation, the cap introduces a negotiation over valuation)
¨ In the absence of a cap, a delay in closing the next round can result in valuation
higher than expected by investors
¨ Next-round investors can try to renegotiate
¨ Faster and less expensive to negotiate and close than preferred, but more complex
than a SAFE
¨ As a loan, it pays interest, may be secured and (if not converted) must be repaid
ahead of equity
¨ Multiple series of convertible notes can be issued
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21. Convertible Notes: Principal Terms
¨ Amount to be offered
¨ Term
¨ Interest rate
¨ Conversion rights
¤ Minimum qualified financing size to trigger automatic conversion
¤ Typically converts into next round of convertible preferred stock
¤ Discount to purchase price (can increase over time)
¤ Cap on valuation
¨ Rights upon a liquidity event (prior to conversion or maturity)
¨ Rights upon maturity (prior to a liquidity or conversion event)
¤ To be repaid?
¤ Convert to common, existing round of preferred?
¨ Security; collateral
¨ Can majority (or greater) in interest of holders amend terms
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22. SAFE (Simple Agreement
for Future Equity)
¨ Similar to a convertible note, but differs in important respects:
¤ No interest is paid
¤ No maturity date
¤ May lack a qualified financing threshold
¤ Upon an acquisition converts into common or is repaid
¨ Comes in several versions:
¤ With or without a valuation cap
¤ With or without a conversion rate discount
¨ Benefits:
¤ Standardized
¤ Reduces time spent in negotiations
¤ Lowers legal fees
¨ Standard form needs to be modified for LLCs
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23. Convertible Preferred
¨ Gives investor downside protection through preferred return
¨ Can increase returns for investor though participating preferred provisions
¨ Protective provisions give investor veto over exits, financings, transactions and other
significant events
¨ Allows for attractive, low-priced stock options on common stock
¨ Strengthens balance sheet, compared to debt
¨ Multiple rounds are designated by letter – “Series A”, “Series B”
¨ Convertible preferred holders more likely to preserve rights in next round than if
they’re holding SAFEs or convertible notes
¨ Most complex and expensive, but use of standardized agreements helps to control
costs
¨ Standard in most VC deals and in many sophisticated angel deals
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24. Principal Terms (Cont.)
¨ Liquidation Preference
¤ Liquidation preference is the amount preferred investors get back before
common holders in the event of sale, liquidation, etc.
¤ Limits investor’s downside risk while increasing returns
¤ Can significantly limit returns to common and impact valuation
¤ Can be expressed as a multiple – 1x, 2x preference
¤ Participation rights – none, full or capped?
¨ Option Pool
¤ Founders and investors want sufficient option pool to incentivize employees
¤ But is pool set before or after investment – who gets diluted?
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25. Principal Terms (Cont.)
¨ Redemption rights
¤ Mandatory buyback, at election of investors
¤ Guarantees investors an “exit”
¤ Often requires 3 annual payments beginning in year 5
¤ Usually provides for a premium
¤ Penalty for failure to redeem – investor takes board seats
¤ Seldom exercised – often used as hammer to force other action
¨ Anti-Dilution
¤ Protects investors from dilution in a “down round”
¤ Comes at expense of common holders
¤ “Full ratchet” or “weighted average”
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26. Principal Terms (Cont.)
¨ Protective Provisions (voting/veto rights)
¤ Actions for which investor approval required – a “veto” right
¤ Typically: merger, sale or acquisition; future financings, debt financing; etc.
¤ Significant shift of control – often heavily-negotiated
¨ Board Composition
¤ Investor presence on Board can provide advice, contacts, credibility, but has
significant impact on control over company, conduct of board proceedings and
strategic direction; even a non-voting observer can have a meaningful impact
¤ Key issues – Board composition (independent director?), minimum % ownership to
maintain board seat
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27. Other Convertible Preferred Provisions
¨ Dividends
¨ Conversion Rights
¨ Information Rights
¨ Registration Rights
¨ Right of First Refusal
¨ Transfer Restrictions
¨ Drag-Along/Tag-Along Rights
¨ No-Shop Provisions
¨ Legal Fees
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28. Securities Laws
¨ A very broad topic – we will be touching on the fundamental issues
¨ The three ways that securities are sold:
¤ Pursuant to a registration statement under the Securities Act
¤ Pursuant to an exemption that has been identified and complied with
¤ Illegally (in violation of federal/state securities laws)
¨ What is a security?
¤ For current purposes, what is important to know is that it includes common and
preferred stock in your corporation, SAFEs, convertible notes of the type we
have covered here, LLC interests (in most cases), as well as rights with respect to
the foregoing (options, warrants, etc.)
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29. Securities Laws (Cont.)
¨ What situations are covered by the securities laws?
¤ Issuing equity or debt securities to founders
¤ Issuing equity or debt securities to investors, regardless of amount or relationship
– i.e., including to friends and family (formally or informally) at the very
beginning of the company’s existence
¤ Issuing or promising equity to employees and consultants (whether formally
documented or in “handshake” deals)
¤ Issuing or promising equity to board members, advisors, celebrity spokespersons
¤ Issuing or promising equity to customers, vendors, your landlord, etc.
¤ Issuing or promising equity to finders, brokers, placement agents
¤ As well as any other situation in which a security is being issued
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30. Securities Laws (Cont.)
¨ How does one comply with the securities laws?
¤ See your lawyer
¤ Common exemptions used by early-stage companies include Regulation D (“Reg
D”), especially Rule 506(b)
¨ Summary of provisions of Rule 506(b)
¤ Permits investment amount of any size
¤ Sales permitted to an unlimited number of accredited investors and up to 35
non-accredited investors (must be “sophisticated”)
¤ No specific written disclosure requirements, but antifraud rules still apply
(certain disclosure required to non-accredited investors)
¤ General solicitation and general advertising prohibited
¤ Form D filing required with SEC
¤ Limited state securities (“blue sky”) filings may be required
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31. Securities Laws (Cont.)
¨ Other issues
¤ Working with and paying “finders”
¤ Consequences of non-compliance with securities laws
n SEC and/or state enforcement actions
n Civil and criminal penalties – company, officers and directors
n Rescission rights
n Becomes a disclosure issue
n Could derail an IPO or acquisition
¨ In summary, securities laws are not overly burdensome for early-stage companies;
but if not timely complied with, cleaning up violations after the fact, if possible at
all, is time-consuming and expensive
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32. Questions?
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33. “Extra Credit”
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34. Developing A Financing Strategy – Key
Considerations
¨ Objectives – a big exit or long-term ownership
¨ Timing considerations:
¤ Competitive environment
¤ First-mover advantage
¤ Patience of founders for a slow (and cash poor) ramp-up
¤ Nature of business – is it an early stage cash flow generator?
¨ Amount of funding needed to achieve objectives
¤ How much; How soon?
¤ Generally staged
¨ Tolerance/need for guidance and control
¨ Need for contacts into industry
¨ Interest in pursuing objectives beyond a significant exit
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35. Identifying Appropriate VCs
¨ VCs often have a particular focus – industry, investment amounts, development stage
of company
¨ Do your homework. Don’t submit your startup social networking play to a VC
focused on expansion stage clean tech
¨ Resources to educate yourself:
¤ Online listings
¤ VC websites
¤ VC attorneys, accountants
¤ VC “fairs”
¤ Networking events
¤ Other entrepreneurs
35

36. Making the Connection
¨ An introduction through a mutual contact, an advisor, etc., significantly increases the
chances of success
¨ Possible sources of an introduction
¤ An entrepreneurial friend
¤ Your attorney or accountant
¤ Someone at one of the VC’s portfolio companies – research
¤ Mutual acquaintances, even once or twice removed
¨ Venture fairs can be a valuable way to make a connection
¤ VCs do attend them
¤ Can be worth the price, but do your homework first
¨ Least likely path to success? – an unsolicited email query
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37. The “Elevator Pitch”
¨ The key elements include (use a one sheet executive summary to provide details):
1. What the company does
2. What is the market need – the customer’s pain point
3. Why your solution is better
4. How much you need and projected return
5. Anticipated use of the funds
6. Accomplishments to date
7. Customers/relationships/testimonials/feedback
8. Previous accomplishments of management team
¨ Other considerations
1. Frontload the best stuff (it could be a short elevator ride)
2. Passion is critical
3. Make sure you explain the technology in simple terms, but don’t get lost
in it – what you are selling is an investment opportunity
4. Establish a tangible “next step” – a meeting, a phone call, something
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38. Amount To Be Raised
¨ Rule #1 – Don’t run out of cash
¨ The questions – how much to raise and when do I raise it?
¨ The answers – raise more than you think you will need, and then some, and start
earlier than you think necessary
¨ Simple truths – everything is more expensive and takes longer than expected
¨ Staged financings – fund to the next milestone. A lower raise now causes less
dilution to founders. On the other hand, A larger raise now results in greater
security at the cost of the founder’s percentage interest
¨ Linkage of funding to interim targets? – can lead to unexpected problems. Avoid
when you can.
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39. Due Diligence
¨ Can start upon first contact with VC and continue until closing
¨ Starts with business – product, financials, customers
¨ What needs to be reviewed in legal diligence
¤ Corporate records – minute books, stock ledger
¤ Financial records
¤ Commercial agreements
¤ Intellectual property records – patent and trademark filings, NDAs
¤ And much, much more
¨ Protect your critical assets – diligence is a process; be careful when, how and to
what extent you turn over the crown jewels
¨ When to start preparing – earliest stages of company’s existence
¨ If your records are well-organized, that will increase the chances of closing with VC,
and will speed the financing process
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40. Term Sheet Fundamentals
¨ Not usually legally-binding (except for confidentiality and no shop/ lock-up
provisions)
¨ Benefits
¤ Provides a framework for negotiation, and then drafting agreements
¤ Increases clarity, avoids misunderstanding
¨ Even if not binding, has substantial “moral weight”
¨ First draft generally presented by the investor
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41. Financing: various stages and needs
41
Lifespan of
a business
“Idea”
Implementation of
strategy/revenue stage
Execution of idea/
build prototype
Organization
of startup
company
Exit
Optimize potential
And operate
Financing
Financing Financing
Financing
Financing

42. Venture Capital: Example of an Early
Stage Valuation Methodology
¨ A venture investor's valuation methodology may begin with an internal benchmark for return
on investment. Because early stage investments are by definition highly risky, a VC investor
may benchmark a minimum return of 10 times his initial investment, or “10x” for very early
stage investments
¨ If the company requires, for example, $2,000,000 for a very early financing round, the VC
will analyze the company’s industry, technology, products and potential sales, market and
market share, margins and profits to determine whether a $2,000,000 investment could yield
10x or $20,000,000 or more upon exit in 5 to 7 years (a typical VC investment time frame)
¨ The VC will roughly estimate the potential value of the company at exit, the amount of dilution
which is anticipated in future rounds (including for management incentives) and determine what
percentage of the company he would have to take in the early round to end up with a
percentage interest upon exit (IPO or acquisition) worth no less than $20,000,000
¨ If the VC determines that a plausible exit value of the company is $100,000,000, and it
requires a return of no less than 10x (or $20,000,000) upon exit, and it anticipates that
additional rounds and options will result in diluting its initial investment by one-half, it would
require an initial 40% equity interest for its initial $2,000,000 investment (20% of
$100,000,000 at exit = $20,000,000 or 10 x $2,000,000)
¨ In this example, the implied post money valuation of the company is $2 million/.40 or
$5,000,000
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43. Snapshot: Equity Structure
43
Common
Stock
Preferred
Stock
Convertible
Debt+ +
Founders, employees,
Board members and
advisors
Investors Investors
• Voting rights
• Options
• Vesting
• Equity to industry
experts and
celebrities?
• Dividend preference
• Liquidation preference
• Voting rights
• Pre-emptive rights
• Redemption rights
• Protective provisions
• Debt convertible into
next equity round
• No voting rights

44. Comparing Equity and Debt
¨ Equity (shares of stock)
¤ An ownership interest in the equity of the company that entitles the holder to
share in the profits and in management, through voting rights
¤ Upon liquidation, holder receives payment following payment of debt and
preference to preferred stock
¨ Debt
¤ A loan requiring repayment of the principal amount plus, generally, interest that
is sometimes secured by company assets
¤ Upon liquidation, debt holders paid prior to equity holders
¤ No right to share in the profits or management of the company
¨ Variations
¤ Convertible notes – debt that is convertible into equity
¤ Convertible preferred stock – equity that has certain features of debt
44

45. Common Stock
¨ Basic, undifferentiated equity interest in the company
¨ Same type of equity held by founders
¨ Offers no downside protection for investors
¨ Provides founders with maximum return and maximum control (subject to
Shareholders Agreement or other investor contractual rights)
¨ Generally lower value than convertible preferred stock (depending on other
contracts)
¨ Not unusual for a friends and family round, but no VCs and few sophisticated
angels will invest into common. But selling common stock to investors complicates
employee options
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46. Securities Laws – Additional Info
¨ Accredited Investors:
¤ Natural persons with net worth (excluding primary residence) over $1 million or
income level of $200,000 (individual) or $300,000 (joint) in preceding two
years and reasonable expectation of same level in current year
¤ Entity with assets greater than $5 million not formed for specific purpose of
acquiring the securities offered
¤ Certain types of financial institutions
¤ Directors, executive officers and partners of issuer
¨ Ban on general solicitation and general advertising:
¤ Prohibition on general advertising and solicitation to the public
¤ Boundaries of permissible conduct not well-defined
¤ A pre-existing relationship is one way, although not necessarily the only way, to
establish the absence of general solicitation
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