Attorney Hans Kim of Wilson Sonsini Goodrich & Rosati will review recent trends in start-up financings, including SAFE instruments, convertible equity, series seed, crowdfunding etc. Hans will also review key terms of Series A financings and important steps that every start-up should take to avoid issues that can delay or derail early stage financings.

1. August 25, 2016
Early Stage Financing for Startups
Hans Kim
Wilson Sonsini Goodrich & Rosati
Direct: (650) 849-3021
hkim@wsgr.com

2. Leader in Venture Financings and IPOs
Since
1961
More than
700
Attorneys
3,000+
Private Clients
300+
Public Clients
13
Offices Worldwide

3. Topics
1. Current State of Early Stage Financings
2. Early Stage Financing Structures
3. Convertible Securities
4. Preferred Stock
5. Dilution
6. Crowdfunding
7. Q&A

4. Current State of Early Stage
Financings

5. Recent Trends (2016)
• Valuation Check:
Valuations have returned to more reasonable levels. Early stage
deal volume has decreased.
• Overhang of angel/seed companies:
Companies that cannot sustain valuations may be left without
future ability to raise capital.
• Difficult to Raise Series A:
Companies need to show significant traction to raise Series A.

6. First financings dropped significantly thus far in 2016.

7. Increasing difficulty in raising money post angel/seed…

8. Graduation rates to Series A continue to fall...

9. Angel/seed activity by quarter
 Angel and seed investors are becoming more selective -- recalibrating risk tolerance
in volatile markets.

10. Tale of Two Valleys
• It has never been easier to raise
financing for a startup.
• It has never been more difficult to
raise financing for a startup.

11. Financing Strategy
• Make sure you raise enough to get traction to
raise a Series A… or have a plan to raise
additional financing to get there.
Series A might be the 4th round of financing:
 Friends & Family
 Pre-Seed (Accelerator/Incubator)
 Seed (Angels)
 Series A
• Succeed or fail quickly…

12. Startup Financing Ecosystem
Incubation
(under $100K)
Pre-Seed
(Under $500K)
Seed ($1MM-
$5MM)
Series A ($5MM
to $15MM)
Series B (Over
$15MM)
Large Venture
Funds
Small Venture
Funds
Super Angels
& Micro-VCs
Angels, Incubators
& Accelerators
Pre-Seed is the new Seed; Seed is the new Series A

13. 1,297 companies since 2005
1,500 companies in over 50 countries
Over 800 companies
Over 100 companies

14. Early Stage Financing Structures

15.  Common Stock
 Debt
 Convertible Debt/Convertible Securities (including SAFE, KISS)
 Series Seed
 Series A Preferred Stock
Early Financing Structures
* Limit to accredited investors.
* Avoid finder’s fees.

16. Convertible Securities

17. Evolution of Convertible Securities
2007… 2010 2012 2013 2014
Convertible
notes gain
traction for
startup
financing.
Feb. 2010
“Series
Seed”
Ted Wang
Aug. 2012
“Convertible
Security”
Founder Institute/
WSGR
Dec. 2013
“SAFE”
Y Combinator
July 2014
“KISS”
500S

18.  Debt Features: interest rate and maturity date.
 Converts into preferred stock upon a qualified financing.
 Discount and/or valuation cap.
 Other negotiable terms:
- liquidation overhang
- sale of company premium
- most favored nation provision
- preemptive rights.
Convertible Notes

19.  Similar to Convertible Note but not
debt.
 No interest rate, no maturity date.
 Converts into preferred stock upon
a qualified financing.
 Discount and/or valuation cap.
 Other negotiable terms:
- liquidation overhang
- sale of company premium
- most favored nation provision
- preemptive rights.
Convertible Security

20.  Converts into shadow preferred
stock to avoid extra liquidation
preference.
 Pro rata rights agreement for future
financing after conversion (not the
next financing)
 Four versions on the YC website:
− Cap, no discount
− Discount, no cap
− Cap and discount
− MFN, no cap, no discount
SAFE: Simple Agreement for Future Equity

21.  Adopted and promoted by 500S as a
“balanced” instrument.
 Two versions:
− Equity Version (convertible security)
− Debt Version (convertible note)
 Discount and valuation cap.
 Converts into shadow series preferred stock.
 Corporate transaction: convert to common at
the cap or payment of 2X amount invested.
 Most favored nation provision at the option of
the individual investor.
 Major Investor ($50,000) rights:
− Preemptive rights in amount invested
(including next round)
− Information rights
KISS: Keep it Simple Security

22.  Often requested in SAFE and other convertible note
financings to provide investors with additional rights.
 Information rights.
 Pro rata investment rights.
 Most favored nation.
 Board observer (or director).
 Protective provisions (distributions, redemptions
incurrence of debt, sale of company/liquidation etc.).
Side Letters

23. Liquidation Overhang
 Example:
Series A price = $1.00/share
Conversion price = $0.50/share
Investor converting $1MM note would receive $2MM of Series
A liquidation preference.
 Solution 1: Convert to preferred stock at the Series A price
($1MM of Series A) and provide the discount in common
stock ($1MM of common based on Series A price).
 Solution 2: Set up shadow series (Series A-1, A-2) with each
series having a per share liquidation preference matching the
amount invested.

24. Preferred Stock Financings

25. Convertible Security vs. Preferred Stock
Why convertible
security?
 Simpler
 Faster
 Cheaper
Why preferred stock?
 Convertible security with price
cap sets valuation anyway.
 Convertible security with price
cap may result in worse
economics for company upon
conversion.
 Preferred stock may be QSBS.
 Avoid issues with maturity.
 Some investors refuse to invest
in convertible securities.

26.  Simplified Series A documents (no negotiation)
– No anti-dilution
– No registration rights
– No voting agreement
– No co-sale
– No legal opinion
 Beware of fake Series Seed
– Some investors take a Series A term sheet and simply call it
Series Seed
Series Seed Preferred Stock
www.seriesseed.com

27. Series A Preferred Stock
 Valuation
 Liquidation preference
 Board seats
 Protective provisions
 Founder stock vesting and acceleration

28.  Amended and Restated Certificate of Incorporation
 Series A Stock Purchase Agreement
 Investors Rights Agreement
 Right of First Refusal and Co-Sale Agreement
 Voting Agreement
Series A Preferred Stock Documents

29. Dilution

30. Initial Capitalization
Bill
45%
Ted
45%
Option Plan
10%

31. Early Stage Financing
Bill
40.5%
Ted
40.5% Option Plan
9%
Angel
10%

32. Series A Preferred Stock
*SAFE/Convertible
Notes convert into
10%.
*Investors require
increase in available
pool.
Bill
25%
Ted
25%
Option Plan
15%
Angel
10%
Series A
25%

33. Crowdfunding

34.  Estimates that over $1 billion in total funding was collected in 2015.
 KickStarter: $590 million in 2015. Over $2 billion pledged since
2009, 100,000 projects funded, 11 million+ backers (charges 5% fees
plus costs).
 Indiegogo: $233 million in 2015. $900 million raised since 2008,
650,000 projects, 10 million+ backers in 223 countries.
 GoFundMe: Over $2 billion raised since 2010. Personal funding and
charity.
* Oculus Rift virtual reality headset raised $2.4 million on Kickstarter before sale
to Facebook.
Rewards Based Crowdfunding

35. Crowdfunding
Syndicate Funding (AngelList, FundersClub)
Accredited Investors/General Solicitation (Rule 506(c))
Regulation A+ (Mini-IPO)
Regulation Crowdfunding through funding portals

36. @Wilson Sonsini
www.wsgr.com
Thank you!
Hans Kim
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road, Palo Alto, CA 94304
hkim@wsgr.com
Office: (650) 849-3021
Mobile: (650) 272-8564