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: Why a Delaware C-Corp is the most-common structure How to document the relationship of the founders and early employees The typical funding stages of a successful startup An overview of convertible debt and SAFEs Why it’s critical to run pro forma cap tables before financings What happens in a venture financing Why compliance with securities laws is important Common legal mistakes in raising capital And much, much more

1. © Copyright 2022 by K&L Gates LLP. All rights reserved.
Alidad Vakili, K&L Gates LLP
May 12, 2022
How to Position Your Startup
for Venture Capital Funding
Idea to IPO

2. These materials have been prepared solely for educational purposes.
The presentation of these materials does not establish any form of
attorney-client relationship with the author or K&L Gates. Particular
legal issues should be addressed through consultation with your own
legal counsel, not by reliance on this presentation or these materials.
Attorney Advertising. Prior results do not guarantee a similar outcome.
© K&L Gates LLP 2022.
Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, please
be advised that any U.S. federal tax advice contained in this
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be used, and cannot be used, for the purpose of (i) avoiding penalties
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recommending to another party any transaction or matter addressed
within.
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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

6. Review of Audience Survey
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7. Structural Considerations
 Key Issues:
 Entity type
 Jurisdiction
 Typically a Delaware C-Corp.
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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 …
 VCs will typically invest in a priced equity round
* Also referred to as Convertible Securities
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10. CONVERTIBLE SECURITIES
 Convert to future equity securities at a
negotiated discount in 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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21. Questions/Comments
Alidad Vakili
K&L Gates LLP
alidad.vakili@klgates.com
+1.415.882.8039