This document provides an overview of the venture capital financing process from idea to IPO. It discusses key topics such as the venture capital model, ideal venture capital investors, preliminary considerations for financing, the term sheet, deal documentation, diligence process, side letters, common pitfalls, and closing and post-closing issues. The presentation is intended to provide a general educational overview rather than legal advice for any specific situation.
3. IMPORTANT CAVEATS
Today’s Discussion is General Information
We will be discussing general principals and concepts,
which may not be applicable to your specific situation.
Answers to your questions during this presentation are
not, and should not be taken, as legal advice.
For any particular issues you would like to discuss,
please feel free to reach out to me after this
presentation.
klgates.com 3
4. OVERVIEW
My Background
Venture Capital Model
Ideal Venture Capital Investors
Preliminary Considerations
The Term Sheet
Deal Documentation
Diligence
Side Letters
Common Pitfalls
Closing and Post-Closing Issues
klgates.com 4
5. BACKGROUND
Corporate attorney with a practice
focus on Emerging Growth and
Venture Capital.
I work out of our San Francisco
office and have worked with
companies throughout the US and
the world.
I enjoy working with and helping
entrepreneurs on startup
adventures from startup to liquidity.
klgates.com 5
Alidad Vakili
Counsel
+1.415.882.8039
alidad.vakili@klgates.com
7. VENTURE CAPITAL MODEL
What are VCs looking for when they invest in a
company?
Short Answer – a homerun
Management
Market
Great technology / product
Scalable business
klgates.com 7
8. IDEAL VENTURE CAPITAL INVESTORS
Investor Objectives
Traditional VC Funds
Generally have a 10 year life span
Create a portfolio of companies where a few will generate
large returns
Other investors have different objectives
Angel investors
Strategic investors
Corporate VC Funds (different than traditional VC Funds)
klgates.com 8
9. IDEAL VENTURE CAPITAL INVESTORS
Company Objectives
Smart money – investors that will add value beyond
their $ investment
Investors who will be supportive of the company
Investors who know the company’s industry
Investors who are interested in helping grow the
business
klgates.com 9
11. PRELIMINARY CONSIDERATIONS
Definitions:
Pre-money valuation – the value of the company before
the next round investment
Post-money valuation – the value of the company after
the round of investment
Issued and outstanding basis – all stock issued and
outstanding
Fully-diluted basis – all common stock issued and
outstanding, plus all securities that can be converted to
common stock (e.g., preferred stock, warrants, options,
shares reserved for equity compensation)
Priced Rounds Nomenclature
klgates.com 11
12. PRELIMINARY CONSIDERATIONS:
DEFINITIONS ILLUSTRATED
klgates.com 12
Pre-Money Valuation: $40,000,000
New Investment: $10,000,000
Post-Money Valuation: $50,000,000
Price/Share: $1.25
Fully Diluted Pro Forma Cap Table
Pre-Money Post-Money
No. of Shares Ownership % No. of Shares Ownership %
Common 20,000,000 62.50% 20,000,000 50.00%
Preferred 5,000,000 15.63% 5,000,000 12.50%
Options (if exercised) 2,000,000 6.25% 2,000,000 5.00%
Warrants (if exercised) 1,000,000 3.13% 1,000,000 2.50%
Notes (converted) 500,000 1.56% 500,000 1.25%
Safes (converted) 500,000 1.56% 500,000 1.25%
Remaining Option Pool (not yet exercised) 2,000,000 6.25% 2,000,000 5.00%
New Option Pool 1,000,000 3.13% 1,000,000 2.50%
New Investment 8,000,000 20.00%
Total Shares 32,000,000 100.00% 40,000,000 100.00%
New Investment Shares = $10,000,000 (new investment) / $1.25 (price/share) = 8,000,000
Format and figures are for illustrative purposes only
13. THE TERM SHEET: TYPICAL TERMS
How much of the company is being sold
Dividends
Liquidation preferences
Voting rights
Protective provisions
Optional and mandatory conversion
Anti-dilution protection
Registration rights
ROFR and co-sale rights
Drag along
Pro rata rights
Vesting for founders
Documentation
Attorneys’ fees
Legal opinion
No Shop/Exclusivity and confidentiality provisions
Whether investors will get a board seat and/or board observer rights
klgates.com 13
14. DEAL DOCUMENTATION
Main Financing Documents
Stock Purchase Agreement
Disclosure Schedules
Amended and Restated Certificate of Incorporation
Investors Rights Agreement
Voting Agreement
Right of First Refusal and Co-Sale Agreement
Other documents
Closing checklist
Board and stockholder consents
Waivers
Side letters
Pro Forma Cap Table
Legal opinion
Cleanup
klgates.com 14
15. DEAL DOCUMENTATION: SIDE LETTERS
Letter agreements outside main deal documents
Typical rights include
Information / inspection rights
Observer seat
Pro Rata Rights
Commercial agreements
Other risk-mitigating related covenants
klgates.com 15
16. DILIGENCE PROCESS
Steps
Organize company records
Set up a data room
Diligence request list
Topics
Corporate records
Capitalization
Business plan and financials
Intellectual Property
Material Agreements
Employment
Disputes and Litigation
Subsidiaries
Miscellaneous
klgates.com 16
17. INTERPLAY BETWEEN THE DEAL
DOCUMENTS AND DILIGENCE
Diligence –
The process investors use to identify and assess risk.
Deal Documentation –
The representations in the stock purchase agreement provide
statements of fact regarding categories of risk, which when read
in connection with the disclosure schedule accurately conveys
the information investors can use to assess risk.
Covenants, commonly in the Investors’ Rights Agreement are
contractual obligations that the company must undertake post
closing.
klgates.com 17
18. KEY DILIGENCE ISSUES
Ownership of intellectual property
Capitalization issues
Grants of stock options
Securities law compliance
klgates.com 18
19. CLOSING AND POST-CLOSING ISSUES
Closing Logistics and Order
Board consent
Stockholder consent
Filing charter
Satisfaction of closing obligations
Exchange of signature pages (held in trust pending closing)
Release of signature pages and wiring of funds
Closing – signatures pages released and funds received
Typical post-closing action items
Securities filings
228 Notices
Issuing stock certificates
Closing binder
klgates.com 19
20. COMMON PITFALLS
Not being ready
Not preparing before you start negotiating your term
sheet
Negotiating your term sheet before you seek legal
guidance
Negotiating before you have created a proforma cap
table
Finders
Securities law issues
Not having good clean company records
klgates.com 20