This presentation was given by Dave Young (Cooley) on 9/19/13 for Angel Bootcamp, a one day conference for angel investors to learn strategies and perspectives from active investors in Los Angeles.

1. © 2012 Cooley LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, CA 94306
The content of this packet is an introduction to Cooley LLP’s capabilities and is not intended, by itself, to
provide legal advice or create an attorney-client relationship. Prior results do not guarantee future outcome.
Angel Investing: Terms
and Issues
David Young, Cooley LLP
Santa Monica, California

2. www.cooley.com
Initial Considerations
 Convertible Notes or Preferred Stock?
 Size of Round
 Lead Investor?
 Company to pay legal fees of investor?
 Due Diligence
 Series A Funding Risk

3. www.cooley.com
Convertible Notes
 Investment that is effectively “parked” as debt until
valuation is determined
 Converts automatically to equity upon “Qualified
Financing”
 Discount: 10 to 30% (20% most common at early stage)
 Interest: 5 to 8%
 Maturity Date
 Typically Unsecured

4. www.cooley.com
Convertible Note Origins
 Short-term bridge to next equity round
 Advantages for company:
 Quicker/cheaper
 Avoids setting valuation
 Advantages for investor:
 Quicker/cheaper
 Avoids setting valuation
 Assurance of “VC negotiated bells and whistles,” but at discount
 Downside protection

5. www.cooley.com
Convertible Notes: Evolution at Early Stage
 Amounts Increased to be Round of Financing not Bridge
 Alternative to seed equity round
 Company can use proceeds to scale valuation prior to next round
 Investor Responses
 Capped Valuation (protection, or proxy for valuation?)
 Change of Control Provisions
 Optional conversion at valuation cap or other fixed price
 Multiple return on investment (2x most common)
 Unlimited upside vs. downside protection (but consider acqui-hire
situation)
 Optional Conversion into Common or Preferred upon maturity at pre-
determined price

6. www.cooley.com
Convertible Notes: Low Valuation Caps
 Investor has unlimited downside protection
 Company fix: Do a priced preferred stock round
 Investor can receive multiple liquidation preference
 Company fix: conversion into shadow series, or conversion of
discount into common stock
 Funky stock option pool math
 Company fix: adjust formula
 Interest Rate can be viewed as windfall to investor
 Company fix: Low interest rate (IRS imputed rate) if low cap

7. www.cooley.com
Preferred Stock Financing
 Valuation:
 15 to 25% for $1 million?
 Size of Raise is Critical
 Small investment may justify lower valuation than industry norms
 Transaction Documents:
 “Series A” forms
 Short-form Seed forms
 Caution: Investor-favorable terms can backfire
 This dynamic simplifies deals

8. www.cooley.com
Preferred Stock Financing Terms
 Liquidation Preference (participating or non-participating)
 Dividend (cumulative or non-cumulative)
 Board Seat
 Protective Provisions
 Anti-Dilution (broad-based weighted average)
 Redemption
 Right of First Offer
 Registration Rights
 Information Rights
 Co-Sale Rights

9. www.cooley.com
Angel Investments
Thank You!
David Young
Cooley LLP
dyoung@cooley.com