2. WSGR
Advise more than 300 public and 3,000 private enterprises
Advise more U.S. technology companies on their initial public offerings than
any other law firm (Capital IQ)
Advise more technology companies on their M&A transactions than any
other law firm (Bloomberg)
Represent more companies that receive venture financing than any other law
firm (Dow Jones VentureSource/ PitchBook)
Most frequently hired securities litigation firm in the country (Securities
Law360)
Selected for inclusion in the Intellectual Property Hot List (The National Law
Journal)
2
3. WSGR
3
IPO/Early Public
Company
Multibillion-Dollar
Global/Mature
Public Company
Entrepreneur/
Start-up/
Venture Capital
Complex Business Litigation
Antitrust
Securities Litigation
White Collar Crime & Government Investigations
Energy & Infrastructure Finance
Debt Finance
Mergers, Acquisitions & Business Realignments
Intellectual Property Litigation
Intellectual Property Counseling & Patents
Trademarks, Copyrights & Advertising
Fund Services
Venture Financing
Early Corporate Organization
Global Outsourcing Transactions
Corporate Governance
Public Company Disclosure & Reporting
Export Controls
Tax – Domestic & International
Public Offerings
Real Estate & Environmental
Employment Law
FDA Regulatory & Healthcare Law
Technology Licensing & Transactions
Employee Benefits & Compensation
Pro Bono
Consumer Regulatory & Privacy
4. High Level Trends in Early Stage Financings
Pre-Seed is the new Seed; Seed is the new Series A; Series A is the new
Series B
Massive late stage rounds
New sources of money (China, Russia, Middle East, India)
More international startups
Investors care more about pro rata rights
SAFEs gaining ground
4
5. The New Start-up Financing Ecosystem
5
Incubation
(under $100K)
Pre-Seed
(Under $500K)
Seed ($1M-
$5M)
Series A ($5M
to $15M)
Series B (Over
$15M)
Large Venture
Funds
Small Venture
Funds
Super Angels
& Micro-VCs
Angels, Incubators
& Accelerators
Pre-Seed is the new Seed
Seed is the new Series A
6. Preparing for Financing
Organization of the company
Founder and team equity
IP protection
– Intellectual property is an important corporate asset, so taking steps to ensure
that it is properly assigned to the company is essential.
– Assignment of IP by founders
– Confidentiality and Invention Assignment Agreements with employees and
contractors
– Data privacy and protection
– Trademarks, copyrights, trade secrets, patents and other registrations
Record keeping
6
7. Types of Early Stage Investment
Key Elements
of a Financing
Size – how much money should be raised
Source – where is the money coming from
Type of Security
Valuation required – does the investment require a
valuation of the company?
Debt based/interest – does the investment mean a
growing debt load?
Impact on control rights
Liquidation preferences
7
8. Types of Early Stage Financings
8
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
9. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
9
• Founder funding and self funding
• Varies in size based on company’s means
and needs
• Type – common stock or promissory notes
• Important to document capital contributions
and the expectations for equity, repayment
or conversion
• Expectations of repayment upon a future
financing may not be met
• Valuation must be handled carefully
10. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
10
• Converts into later round preferred stock if
sold to investors in connection with later
financing
• Intended to solve founder sale of common
at preferred price affecting common FMV
• Must be fully vested (or potentially
considered compensation income)
• Typically, not more than 25% of founders
equity is Series FF
• Cannot be subject to board discretion to
allow conversion
11. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
11
• Highly dependent on facts and circumstances
• Varies in size though usually less than
$50,000
• Type – common stock, promissory notes
(convertible or non-convertible), contributions
to capital
• A valuation may be required
• Equity or debt
• Usually no impact on control rights
• Typically no liquidation preference
• Potential downsides
• Risks to personal relationships
• Investors usually have no experience to bring
to the table
• These investments are usually not sources of
a large amount of money
• Familiarity with investors can lead
entrepreneurs into the trap of inadequate
documentation
12. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
12
• Contracts with lead customers/early adopters
for funding in exchange for early access to
the developed product or service.
• Varies in size
• No valuation, typically no debt or equity
issued
• Later strategic deals may involve ROFR or
ROFN
• No liquidation preference
• Contracts can raise important issues
including:
• Commercial rights and restrictions
• Ownership and rights in intellectual property
• Confidentiality
• Early strategic agreements can make or
break a company
13. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
13
• A promissory note for the full investment
amount with an interest rate and a maturity
date
• Typical maturities are one year
• Automatic conversion on a “qualified
financing”
• Optional conversion on other financings
• Discount and/or warrants on conversion
• Premium on a change of control
• Valuation caps for conversion
• The larger the convertible debt financing, the
less likely it is to be combined with the new
money in a preferred stock financing
14. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
14
• Essentially a convertible note that lacks and
interest rate provision or maturity date
• Not debt, the instrument is best
conceptualized as a placeholder for which the
investor pays full value up front in exchange
for a future security at a later date
• Perceived to be founder friendly
15. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
15
• SAFE: Simple Agreement for Future Equity
• Another form of convertible equity
• Like convertible security it strips the debt like
attributes from the convertible note
• Drafted to be layperson friendly as
accessibility is prioritized over
comprehensiveness - only 6 pages long
• It has the backing of Y Combinator and its
partners
16. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
16
• Size – varies
• Source – angel investors; accelerators
• Valuation – no
• Debt based – no
• Control rights given up – typically no
• Liquidation preference – yes
17. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
17
• Common stock at founder price
• Plus convertible equity for $15-$100K
• YC, AngelPad, TechStars
• Avoid creating a high common stock FMV
• Additional “blind pool” financing
18. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
18
• Size – $50,000 to $1M
• Source –a single investor or a group of
affiliated investors
• Type – common stock, convertible debt,
promissory notes
• Valuation – depends on if debt or equity
based
• Control rights – depends on the size of the
round, may include a board seat, protective
provisions and participation rights
• Liquidation preferences – yes if preferred
stock
19. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
19
• Simplified series A financing documents
available at http://www.seriesseed.com/
• Designed to save time and money relative to
traditional equity based financing documents,
they omit specific provisions in an effort to
simplify
• What they’re missing relative to traditional
series A documents
• Dividend preference
• Registration rights
• Anti-dilution protection and other protective
provisions
• Voting agreements
• Comprehensive representations and
warranties
20. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
20
• Size – roughly $500,000, typically not larger
because of investors’ desire for protective
provisions
• Source – Angels, Friends and Family
• Type - preferred stock
• Valuation required – yes
• Debt based/interest concerns – no
• Control rights given up – often include a
board seat, participation rights and protective
provisions
• Liquidation preference – yes 1x non-
participating typical
21. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
21
• Lots of groups call their own documents
“series seed” and these can differ from the
standardized documents. Be wary.
• The provisions are relatively inelastic and
cannot be easily customized
• They contain fewer investor protections by
default
• New documents often have to be drafted for
later rounds and things like the certificate of
incorporation must be amended
22. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
22
• The practice of funding a project or venture
by raising money from large numbers of
people, typically over the internet
• It can be conceptualized in two different
contexts
• Preselling a product – pebble smartwatch,
Shenmue III
• Selling equity in a company
• This is an evolving area of the law. The
passage of the Jumpstart Our Business
Startups Act (JOBS Act) in 2012 created
opportunities for funding based on the sale of
equity or debt through the internet, but details
and a clear regulatory structure have been
slow to emerge.
23. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
23
• SEC Guidance
• Companies will be allowed to raise a
maximum aggregate amount of $1 million
through crowdfunding offerings in a 12-month
period. Companies must disclose:
• The price to the public of the securities or the
method for determining the price, the target
offering amount, the deadline to reach the
target offering amount, and whether the
company will accept investments in excess of
the target offering amount
• The company’s financial condition
• Reviewed or audited financial statements
• A description of the business and the use of
proceeds from the offering
• Information about officers and directors as
well as owners of 20% or more of the
company
• Certain related party transactions
24. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
24
• Dangers of Crowdfunding:
• Securities laws are complicated and securities
offerings are subject to strict reporting
requirements. Failure to comply with
securities laws can lead to penalties and
problems down the road with future offerings
• Be cautious with Crowdfunding websites.
Some websites allow the dissemination of
investment information to anyone browsing
the internet. This can constitute a securities
law violation. It’s best to know the website you
are dealing with and know who your
information is being disseminated to
• Since it involves disclosing your company and
idea, this funding is more appropriate for
some types of start-ups than others
• Established sites that limit access are
preferred
25. Types of Early Stage Financings
25
• Size – varies. Typically $2-10 million
• Source – venture capital investors, often
several
• Type – preferred stock
• Valuation – Yes
• Debt based – Not typically
• Control rights given up – Yes, at least a board
seat
• Liquidation preference – Yes
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
26. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
26
• Choosing the right VC Partner
• What network does the specific partner you
are working with bring to bear?
• What past experience does that partner have
that might be helpful if on your board?
• Speak to members of that partners current
and past portfolio
• How involved will the VC Partner want to be in
your company
27. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
27
• Key Parts of a Series A Term Sheet:
• Valuation
• Pre and Post Money Valuations
• Option Pool
• Dividends – Non-Cumulative
• Liquidation Preference
• Initial Preference
• Participating or non-participating
• Participation caps
• Non-cumulative
• Antidilution – broad-based weighted average
• Board Composition
• CEO seat
• Founder Vesting
• Drag Along
• Protective Provisions
28. Types of Early Stage Financings
Bootstrapping
Founder Preferred
Friends and Family
Customer Funding
Convertible Debt
Convertible Equity
SAFE Instruments
Incubators
Angels
Seed Rounds
Crowdfunding
Series A Venture Round
28
• Valuation Jargon
• “3 on 3” means $3M pre-money with $3M
round
• With a $6M post-money ($3+$3)
• VCs will own 50% of the company
• Let’s assume the required option pool is 15%
• This is what the cap table will look like:
• Investors 50%
• Founders 35%
• Option Pool 15%
29. ASAF KHARAL
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road, Palo Alto CA 94304
Direct: 650-320-4557
akharal@wsgr.com
Thank You
30. PALO ALTO
650 Page Mill Road
Palo Alto, CA 94304-1050
Phone 650.493.9300
Fax 650.493.6811
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Our Offices
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Phone 323.210.2900
Fax 866.974.7329
BEIJING
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China
Phone +86.10.6529.8300
Fax +86.10.6529.8399
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Phone +852.3972.4955
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Phone +32.2.274.57.00
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UNITED STATES
ASIA EUROPE
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Phone 415.471.3940
Fax 866.974.7329
31. www.wsgr.com
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