During this webinar you will learn the basics of the venture model and path along with the necessary steps to take so that your company’s legal structure is an attractive investment. The discussion will cover: 1. Why a Delaware C-Corp is the most-common structure 2. How to document the relationship of the founders and early employees 3. The typical funding stages of a successful startup 4. An overview of convertible debt and SAFEs 5. Why it’s critical to run pro forma cap tables before financings 6. What happens in a venture financing 7. Why compliance with securities laws is important 8. Common legal mistakes in raising capital 9. And much, much more

1. © Copyright 2021 by K&L Gates LLP. All rights reserved.
Jason Putnam Gordon, K&L Gates LLP
December 30, 2021
How to Position Your Startup
for Venture Capital Funding
Idea to IPO

2. IMPORTANT CAVEATS
 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.
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3. OVERVIEW
 My Background
 Structural Considerations
 Entity Form
 Typical Financing Stages
 Documentation for Founders and Early Employees
 An Overview of SAFEs and Convertible Debt
 Overview of Valuation & Dilution—Pro Forma Cap Tables
 Overview of Venture Financings
 Common Pitfalls
 Q&A
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4. Background
 Venture Capital and Emerging
Growth Company attorney-
practicing law since 2005.
 My office is in San Francisco,
but I work with companies
throughout the US and the
world.
 I love working with
entrepreneurs on financings, as
outside counsel, and on exits.
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Jason Putnam Gordon
Partner
+1.415.882.8124
Jason.Gordon@klgates.com

5. Review of Audience Survey
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6. Structural Considerations
 Typically a
Delaware C-Corp.
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7. FOUNDER AND EARLY EMPLOYEE
DOCUMENTATION
 IP Assignments
 Vesting
 Stock Options
 Restricted Stock
 Transfer Restrictions
 Shareholder Agreements
 Restrictions in Bylaws
 Stock Purchase Agreements
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8. FINANCING OPTIONS
 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
 Y Combinator developed the SAFE
 Venture Rounds
 Series Seed and Series A
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9. CONVERTIBLE SECURITIES
 Convert to future equity securities at a
negotiated discount to a future qualified equity
financing
 This avoids valuing the company
 Far less expensive than a venture round like a Series
Seed or Series A round
 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
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10. CONVERTIBLE SECURITIES (CONT.)
 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)
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11. CONVERSION TERMS
 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 Price Cap
 Conversion upon a change of control/sale
 Optional maturity conversion
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12. FOUNDATIONAL BASICS – VALUATION
AND DILUTION
 Pre-money valuation – the value of the company
before the next round of investment.
 Post-money valuation – the value of the
company after the round of investment.
 Fully-diluted basis – all common stock issued
and outstanding, plus all securities that can be
converted to common, plus (typically) the shares
reserved for equity compensation.
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13. FOUNDATIONAL BASICS – VALUATION
AND DILUTION
 Very Simple Example (not factoring in the option pool or
any other equity)
 Pre-money $10,000,000
 10,000,000 shares split among three equal founders
 Founder A = 3,333,333 shares or 33%
 Investment $3,000,000 at $1.00/share ($10,000,000 pre-
money/10,000,000 outstanding shares) (Post-money is
$13,000,000)
 Founder A = 3,333,333 of ~25% with a paper value of
$3,333,333
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14. FOUNDATIONAL BASICS – EXAMPLE
CONTINUED
 Basic Examples with Convertible Securities
 If there had been $450,000 convertible security with 25%
discount only, holder would have received 600,000 shadow
shares. $450,000/((1-.25)*$1.00)
 This example ignores the circular math: in determining the price the new
money will pay and on which the discount will be applied, the investor will
include the shadow shares in the fully diluted basis.
 If there had been a $450,000 convertible security with
$5MM cap only, holder would have received 900,000
shares. $450,000/(5,000,000/10,000,000)
 This example also ignores that the investor will include the shadow
shares in the fully diluted basis, which will change the price per
share the investor pays.
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15. OVERVIEW OF VENTURE FINANCINGS
 Have a credible business plan with milestones
 Run a Systematic Process
 Have more than enough capital from your earlier seed
rounds
 Connect with the right Investors
 Understand your ideal term sheet
 Prepare for through diligence
 Be prepared for cleanup
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16. OVERVIEW OF VENTURE FINANCINGS
(CONT.)
 Understand your ideal term sheet
 How much of the company is being sold
 Dividends
 Liquidation preferences
 Voting Rights
 Protective provisions
 Optional and Mandatory Conversion
 Antidilution protection
 Vesting for founders
 Documentation
 Attorneys Fees
 No Shop and Confidentiality Provisions
 Whether investors will get a board seat
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17. OVERVIEW OF VENTURE FINANCINGS
(CONT.)
 Diligence process
 Documentation Process
 NVCA - https://nvca.org/model-legal-documents/
 Series Seed - https://www.seriesseed.com/
 Proprietary forms
 Closing
 Post-Closing Items
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18. COMMON PITFALLS
 Non-Compliance with Securities Laws
 Other Regulatory Issues
 Not managing cap tables
 Thinking that there are “standard” terms
 Finders
 Side Letters
 Failure to obtain proper corporate authorization
 Not forming an entity or the right entity
 Not getting vesting agreements in place
 Not filing 83(b) elections
 Not paying attention to securities laws
 Risk of employment-law issues
 Undocumented stakes in the company
 IP that resides in other entities
 Tax issues – E.g., federal, state, local
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19. Questions/Comments