This document provides an overview for angel investors focusing on key aspects of deal structuring, terms, due diligence, and valuation. It covers essential topics such as understanding deal terms, capitalization tables, securing economic rights, and managing founder and due diligence issues. Additionally, it emphasizes the importance of negotiation and thorough evaluation of investment opportunities.

1. Doing the Deal:
Structure, Terms, Due Diligence, Valuation:
An Overview for the Angel Investor
Presented by:
David Emerson
Disclaimer: Legal, Tax, Int’l, etc. Harvard Business School Angels
emerson@post.harvard.edu
February 5, 2013 david@emersonlegal.com

2. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Some Basic Deal Issues
1. Deal funnel. What is my role? Lead? Trickle-down
theory. Fundamental Resource Limitation Dilemma.
2. Red Flags / Know When to Walk Away
3. Respect the norm, but Make an Occasional Exception
4. Understand the Deal Terms
5. Capitalization Table and Pricing (Pre/Post-Money)
6. Securing Key Financial and Information Rights
7. Surfacing Issues / n-Way Competing Interests /
Alignment / Game Theory / Scenarios
8. Due Diligence – Resources/ Reliance / All parties /
Reputation
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3. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Understand The Deal Terms
1. Convertible Note + Warrant Transactions
» Conversion Terms / Discount (Warrant Coverage) / Conversion
Pre-Money Cap/ Amendment
» Don’t expect note to be paid / Convert to what?
» Series Seed Preferred Alternative
2. Preferred Stock Transactions
» Reps + Warranties, Disclosure, Setting Terms for Future Deals,
Position re Future Rounds / It’s all Negotiable and ..more
importantly…Renegotiable
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4. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Capitalization Table and Pricing
1. Understanding The Cap Table / Liquidation
Preference and Multiple / Priority / Size of Round
2. Option Pool Size / Budgeting / Customary Terms
3. Valuation: comps, multiples, DCF, assets, macro-
economic cycle
4. To Infinity and Beyond: Planning for sequential
round price appreciation
5. Vesting of Founder Interests / Sweat Equity / $$$
6. Recapitalizations / Cram-Downs, Pivots and Resets
/ Soft Landings
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5. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Liquidation Preference Dynamics
Extremely Simple Example
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6. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Liquidation Preference Dynamics
Somewhat More Complex Example
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7. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Securing Core Economic and Info Rights
1. Protection Against Buyer’s Regret: Anti-dilution
Rights (weighted avg./full ratchet); Staggered
closing / milestones
2. Voting Rights / Aggregate or Series / Proxy / Drag
Along / Tag Along
3. Information Rights
4. Blocking Rights
5. Right of First Refusal / Participation Rights
6. Advisory Board? Director? Fiduciary Duty / Liability
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8. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Getting Issues on the Table
1. Importance of Reps + Warranties and Disclosure
Schedule
2. Nebulous IP Ownership Issues (transfer to NewCo?)
3. Cap Table land mines and rats nest complexity
4. Litigation time bombs – valuation adj.
5. Problematic Contracts / Compliance / Informalities
6. Problems - Knowing What to Cure and When
7. Upside and Downside Exit Strategies – Who gets
what?
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9. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Founder Issues
1. Allocation of Equity
2. Sophistication / Experience (use of advisers)
3. Honesty / Personal Integrity / Know success and
failure
4. Stock Vesting – reset of vesting
5. Power issues – Titles / Multiple founders/ Control
6. IP issues – Past Employers, Outsourcing
7. Board Seats / Balance of Power
8. Employment Agreements / Non-competes
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10. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Due Diligence Issues
1. Fundamental Resource Limitation Dilemma. Avoid
duplication of effort / team approach / reliance
2. Systematic – checklist approach
3. Reflect findings in reps / warranties
4. Deep Domain Expertise - Ph.D., market, contacts
5. That’s nice, but how do you make money? Quality
of revenue / earnings
6. Detailed Financial model – unstated assumptions
7. Meet with Founders, key management
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11. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Intellectual Property Due Diligence
Overview
■ Do you have the deep Domain Expertise?
■ Types of Available IP
■ Patent reality vs. Patent fantasy - value/enforcement
■ Patent Strategy 101
■ Traps for the Unwary
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12. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Types of Available IP
Patent
Two-
Legged IP
Trademark
&
Know-How
NewCo
Trade
Copyright
Secret
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13. Thank you.