During this webinar, you will learn the basics of the venture model and path along with the necessary steps to take so that your company’s legal structure is an attractive investment. The discussion will cover: 1. Why a Delaware C-Corp is the most-common structure 2. How to document the relationship of the founders and early employees 3. The typical funding stages of a successful startup 4. An overview of convertible debt and SAFEs 5. Why it’s critical to run pro forma cap tables before financings 6. What happens in a venture financing 7. Why compliance with securities laws is important 8. Common legal mistakes in raising capital 9. And much, much more Come with your questions and get ready to be excited about venture funding!

1. How to Position Your Startup for Venture
Capital Funding
Presented on July 2, 2020 by Jason Putnam Gordon
Email: jgordon@polsinelli.com

2. 2
• Today’s Discussion is General Information – Not Legal Advice
• We will be discussing rules and exceptions. Those rules, exceptions, and
exceptions to the exceptions may not be applicable to your situation.
• You need to retain competent legal counsel to review all facts and
circumstances before weighing in with advice.
• Off-the-cuff answers to your questions are not, and should not be taken as,
legal advice.
Important Caveats

3. 3
• My Background
• Structural Considerations
• Documentation for Founders and Early Employees
• Funding Stages
• Overview of SAFEs and Convertible Debt
• Venture Financings
• Common Mistakes
Overview

4. 4
• Venture Capital and Emerging Growth Company attorney—practicing law
since 2005.
• Polsinelli is an Am Law 100 firm with approximately 900 attorneys in over
twenty offices throughout the US.
• My office is in San Francisco, but I work with companies throughout the
US and the world.
• I love working with entrepreneurs on financings and as outside general
counsel.
My Background

5. 5
• Who is in a startup?
• Who is a founder?
• Is this your first startup?
• Who has previously had a successful exit?
• Who is interested convertible debt; SAFEs/convertible equity; or preferred
financings?
What is your Background?

6. 6
Big Picture
Create Increasing Value
Idea(s)
(Intangible Assets)
Technicians who have
skills like: sales,
marketing, business
acumen
(Services)
Investors
(Capital)

7. 7
Big Picture
Create Increasing Value
Idea(s)
(Intangible Assets)
Technicians who have
skills like: sales,
marketing, business
acumen
(Services)
Investors
(Capital)
Company Increases in Value

8. 8
Structural Considerations
 Almost always a Delaware C-
Corp.
 Seed funding – Capital to put
together prototype and initial
team.

9. Founder and Early Employee
Documentation
 IP Assignments
 Vesting
 Transfer Restrictions
 Shareholder Agreements
 Restrictions in bylaws
 Stock Purchase Agreements

10. 10
• Convertible Debt/Equity
 Also known as bridge notes
 Convertible debt is the parent of convertible equity, which
can also be known as a SAFE Instruments
• Priced Rounds (different presentation)
 Series Seed and Series A
Initial Financing Options

11. 11
• Maturity*
• Interest Rate*
• Conversion Terms
• Amendment Terms, e.g., majority in interest
• Remaining Terms
 It’s not that common to negotiate these
• (*For Convertible Notes, not SAFEs)
Convertible Securities (Cont.)

12. 12
• Mandatory conversion at a discount of price paid in Next Qualified
Financing
Series Seed/A needs to meet the definition of a “Qualified Financing”
Equity financing
Minimum size, e.g., “$2,000,000”
Discount has to be reasonable or later investors will not go for it. 20-25% is
typically reasonable.
• Conversion Price Cap
• Conversion upon a change of control/sale
• Optional Conversion upon maturity or something less than a qualified
financing
Conversion Terms

13. 13
• Convertible Securities
Upsides:
Most common; cheaper, simpler;
No valuation of the company, nearly impossible at this early stage,
and helps justify law FMV for stock options/restricted stock
Downsides (At least for Convertible Notes)
This is debt and may be required to be paid at some point
Extra liquidation preference above all other equity, unless otherwise
handled
Decisions Decisions

14. 14
• Subject to securities laws of US, states, and potentially
foreign jurisdictions.
• Potential Exemptions
Reg D
4(a)(2)
25102(f)
Reg S
Securities Laws and Potential Exemptions in CA

15. 15
 Non-Compliance with Securities Laws
 Not managing cap tables
 Thinking that there are “standard” terms
 Finders
 Side Letters
 Failure to obtain proper corporate authorization
 Not forming an entity or the right entity
 Not getting vesting agreements in place
 Not filing 83(b) elections
 Not paying attention to securities laws
 Risk of employment-law issues
 Undocumented stakes in the company
 IP that resides in other entities
 Tax issues – E.g., federal, state, local
Common Pitfalls

16. Polsinelli PC provides this material for informational purposes only. The material provided herein is general and is not intended to
be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances,
possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an
attorney-client relationship.
Polsinelli is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results;
that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and
should not be based solely upon advertisements.
© 2020 Polsinelli® is a registered trademark of Polsinelli PC. Polsinelli LLP in California. Polsinelli PC (Inc.) in Florida.
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