by David Ambler & Seth Gottlieb, Cooley This session is a must-attend for any early stage startup looking to raise capital, and wanting to learn more about the various forms of capital and when to use them. Join David Ambler, a corporate attorney at Cooley LLP, as he covers startup financing strategies, including debt and equity, common financing terminology, and best practices for fund raising.

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Private Company Financing
Terms and Trends
David Ambler
Seth Gottlieb
August 2017

2. What We’ll Cover
Commentary on the financing environment
Early-stage financing structures
Data

3. Cooley – Who are we?
Cooley
David & Seth
Cooley GO

4. High-level Commentary
The Current Financing Environment

5. Primary forms of Early-stage Financing
Equity
Convertible Debt
Safes

6. Equity
Classic venture model
Rights, preferences and privileges
The investor drives timing and terms

7. Option Pools and Vesting
• Option Pools
• Typically specified as a % of the fully diluted
• Best if you have a plan and “budget”
• Investors will frequently require specific vesting schedule
• Vesting
• Term (4 years is typical) and “cliff” (1 year)
• Founders and re-vesting
• Single and double triggers for accelerating vesting
• Single: “The company is sold.” -or- “You are fired.”
• Double: “The company is sold and you are fired.” 7

8. Convertible Debt
“Parking” an equity investment
A history lesson
Basic terms
Rolling closes
Intended to be simple
The company drives

9. Convertible Promissory Notes / SAFEs
• Convertible Promissory Notes
• Maturity Date (typically 1-2 years)
• Interest Rate (typically between 3% and 7%)
• Secured vs Unsecured
• Most Favored Nations Clause?
• Conversion (Qualified Financing)
• Discount
• Valuation Cap
• Conversion (Non-Qualified Financing)
• Change of Control (Premium? Convert to Common?)
• What about SAFEs (Simple Agreement for Future Equity)?
9

10. Safes
A second history lesson
The new “company favorable”
Basic terms

11. Data
Equity Financing Terms and Trends

12. PitchBook Q2 2017 Global League Tables Report
*All league tables are compiled using the number of completed VC rounds in Q2 2017.

13. Breakdown by Series
Seed Series
Series A
Series B
Series C
Series D or higher
2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2
26% 26% 27% 24%
29%
22%
33% 30% 33% 38%
33%
37%
23%
22%
22% 16% 16% 20%
10%
16% 10%
10% 10% 11%
10% 13%13%
8%6%
8%
Deal Breakdown By Series
Quarter of Close Date
2015 Q4 to 2017 Q2

14. Percentage of Up, Down and Flat Rounds
Down
Flat Round
Up
2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2
10%
19%
14%
18%
14% 13%
82%
11%
75%
11%
85%
75% 75% 76%
6%6%
Up, Down and Flat Rounds
Quarter of Close Date
2015 Q4 to 2017 Q2

15. Median Pre-Money Valuation by Series
Seed Series
Series A
Series B
Series C
Series D or higher
2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2
$50M
$100M
$150M
$200M
$250M
$300M
$350M
$400M
$450M
Median Pre-Money Valuation
Quarter
2015 Q4 to 2017 Q2

16. Pre-Money > $100M
2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2
17.2%
15.9%
21.8%
15.8%
19.0%
13.2%
Pre Money >$100M
Quarter of Close Date
2015 Q4 to 2017 Q2
2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2
17.2%
15.9%
21.8%
15.8%
19.0%
13.2%
Pre Money >$100M
Quarter of Close Date
2015 Q4 to 2017 Q2

17. Q2 2017 - Transaction Volumes Slow
on Mixed Deal Terms
In the second quarter of 2017, both deal volumes
and aggregate dollars raised increased markedly
from prior quarters.
The median pre-money valuation for Series
A deals reached $22 million in Q2, a level
not seen since this report commenced more
than ten years ago.

18. Resources – Get Smart!
Feld/Mendelson termsheet series
Cooley GO
Mark Suster and Brad Feld posts
NVCA model documents
YC posts on SAFEs

19. Matrix of Typical VC Terms
Term Less Aggressive Middle of the Road More Aggressive
Dividends Paid when, as and if paid to Common Non-cumulative at [X]% in preference to
Common
Cumulative (stock or cash)
Liquidation Preference Non-participating Capped participation Fully-participating
Multiple preference
Anti-dilution Broad-based
weighted average
Narrow-based
weighted average
Full ratchet
Milestone-based
Redemption No redemption Cost Cost/FMV/multiple of operating metric
Board Composition Founder controlled Independent tie-breaker, may include limited
preferred director control
Preferred controlled and/or extensive preferred
director controls and Common Director elected by
founders then providing services
Protective Provisions Class-specific, only as required by law Class-specific, many restrictions Series-specific, many restrictions
Registration Rights Piggy-back only or demand with Key Holder
rights as well
Limited S-1 and S-3 demand rights and
Piggy-back.
S-1 and S-3 demand rights and Piggy-back with low
threshold trigger, limited cutback and/or shorter/fewer
permitted blackout periods
Pay to Play None Loss of antidilution protection or other limited
rights for failure to participate pro rata
Convert to common if don’t participate pro rata (may
be at conversion ratio, 1:1 or more punitive multiple,
e.g. 100:1)
Drag-Along Separate vote of Common and Majority of
Preferred
Board, Majority of Founders then providing
services and Super-Majority of Preferred
Majority of Preferred and Board