Seed financings enable a startup to put together its initial team, build a working prototype, and begin to test the market. Often these investments are made via convertible debt or SAFEs. Veteran Silicon Valley startup and corporate attorney Jason Putnam Gordon will cover the following topics: 1. Required corporate structure 2. Legal considerations when pitching investors for seed financing 3. Differences between using convertible debt and SAFEs 4. Key terms and considerations when raising seed funding 5. Common mistakes and pitfalls that companies make when raising seed funding via convertible debt and SAFEs 6. How to close your seed financing 7. Important post-closing tasks 8. And much, much more Come with your questions and get ready to be excited about seed financings! . About the Speaker Jason Putnam Gordon is a results-oriented corporate attorney practicing in the Venture Capital and Emerging Growth Companies group in Polsinelli’s San Francisco office. Jason has a passion for working with experienced entrepreneurs and executives to make their vision a reality. In his practice, he regularly represents companies throughout their life cycle in matters related to venture capital financing, strategic corporate relationships, corporate formation, complex mergers and acquisitions, sales, and divestitures. With industry focuses on consumer goods and technology, because of his broad skill set and deep network, Jason regularly works in wide array of verticals including artificial intelligence, virtual reality, augmented reality, video games, software, hardware, life sciences, the internet of things and agricultural technology. Jason works with companies based locally, elsewhere in the U.S. and internationally. Jason brings a unique skill set to the negotiating table and to litigation-minimization strategies in the board room. He started his career as a federal law clerk in the United States District Court for the Eastern District of Pennsylvania and then continued as a litigator handling corporate, securities, intellectual property, and commercial litigation before establishing a transactional practice. Outside of the office, Jason is dedicated to his family and has a passion for skydiving and indoor body flight. If you have any questions regarding the content of this presentation, you can reach Jason at: JGordon@polsinelli.com

1. How to Raise Seed Funding for Your Startup:
Convertible Notes and SAFEs
Presented on July 23, 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
• Considerations When Pitching Investors
• Financing Options
• Key Terms and Considerations
• Common Mistakes
• How to Close Your Seed Financing
• Important Post-Closing Tasks
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
Structural Considerations
 Almost always a Delaware C-
Corp.
 Seed funding – Capital to put
together prototype and initial
team.

7. 7
• Compliance with securities laws.
• Investors with whom you have a preexisting substantial
relationship.
Considerations When Pitching Investors

8. 8
• 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
• Venture Rounds (different presentation)
 Series Seed and Series A
Financing Options

9. 9
• Convert to future equity securities at a negotiated discount to a
future qualified equity financing
 This avoids valuing the company
 Far less expensive than Series Seed or Series A round
Convertible Securities

10. 10
• 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.)

11. 11
• Generally up to 18-24 months
 Should be trying to time this with some cushion when you’ll
have a venture round.
• Pay attention to California Financing Law, which applies to persons
“engaged in the business of a finance lender or broker.”
Make sure the financing fits into an exemption.
Maturity*

12. 12
• Can be as low as AFR.
Otherwise, imputed interest issues.
• Can be as high as 10% in CA
Double check the usury laws.
Interest Rate*

13. 13
• 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 Terms

14. 14
• Conversion Price Cap
• Conversion upon a change of control/sale
• Optional Conversion upon maturity or something less than a qualified
financing
Conversion Terms Cont.

15. 15
• Convertible Notes – Generally one or two documents (in addition to
corporate authorization and/or side letters)
Purchase Agreement and a Convertible Security
• SAFEs – Generally one agreement (in addition to corporate
authorization and/or side letters)
Structure

16. 16
• 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

17. 17
• 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

18. 18
 Non-Compliance with Securities Laws
 Thinking that there are “standard” terms
 Finders
 Side Letters
 Failure to obtain proper corporate authorization
Common Pitfalls

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