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
Come with your questions and get ready to be excited about venture funding!
About the Speaker
Alidad Vakili is an attorney in the San Francisco office of K&L Gates LLP, an international law firm. He regularly represents startup and emerging growth companies at every stage of the company lifecycle—from startup to liquidity. He frequently advises clients on a variety of strategic growth issues including venture capital and private equity financing, private offerings, joint ventures and M&A transactions. His work includes not only advising on major corporate milestones but also significant involvement in day-to-day operations and strategic business issues, such as formation, governance, and commercial agreements.
3. IMPORTANT CAVEATS
Today’s Discussion is General Information – it is Not
Legal Advice
We will be discussing general principals and concepts,
which may not be applicable to your specific situation.
Answers to your questions during this presentation are
not, and should not be taken, as legal advice.
For any particular issues you would like to discuss,
please feel free to reach out to me after this
presentation.
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4. 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
Preparing for Closing (the ABC approach)
Common Pitfalls
Q&A
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5. Background
Corporate attorney with a practice
focus on Emerging Growth and
Venture Capital.
I work out of our San Francisco
office and have worked with
companies throughout the US and
the world.
I enjoy working with and helping
entrepreneurs on startup
adventures from startup to liquidity.
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Alidad Vakili
Counsel
+1.415.882.8039
alidad.vakili@klgates.com
8. FOUNDER AND EARLY EMPLOYEE
DOCUMENTATION
Proper Documentation is Key
IP Assignments
Vesting of Securities
Stock Options
Restricted Stock
Transfer Restrictions
Shareholder Agreements
Restrictions in Bylaws
Stock Purchase Agreements
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9. FINANCING OPTIONS
Convertible Debt*
Also known as bridge notes
Convertible Equity*
SAFEs (Simple Agreement for Future Equity)
Equity / (priced equity or venture rounds)
Common (not as common)
Series Seed, Series A, Series B …
* Also referred to as Convertible Securities
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10. CONVERTIBLE SECURITIES
Convert to future equity securities at a
negotiated discount to a future qualified equity
financing
This avoids valuing the company
Easier to document and less expensive than a
venture 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 (i.e., creditors get paid first)
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11. 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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12. 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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13. 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.
Issued and outstanding basis – all stock issued and
outstanding.
Fully-diluted basis – all 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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14. 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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15. 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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16. OVERVIEW OF VENTURE FINANCINGS
Have a credible business plan with milestones
Perfect your pitch
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 thorough diligence
Have good corporate hygiene
Be prepared for cleanup
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17. 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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18. 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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19. ALWAYS BE CLOSING (ABC)
Do your homework
Get your Company’s house in order BEFORE you talk to investors
Cap table
Proforma
Data room
Do your own diligence on potential investors
Prepare for your closing from Day 1
Create your team (internal and external)
Set a reasonable timeline
Organize and divide tasks appropriately
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20. COMMON PITFALLS
Non-Compliance with Securities Laws
Other Regulatory Issues
Not managing cap tables
Undocumented stakes in the company
Thinking that there are “standard” terms (it’s all boilerplate, right?)
Finders
Side Letters
Failure to obtain proper corporate authorization
Not forming the right entity
Not getting vesting agreements in place
Risk of employment-law issues
Failure to own the technology/IP that is critical to the business
Tax issues – e.g., federal, state, local
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