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How to Raise Early Stage Capital
- 1. Perkins Coie LLP Funding the Startup How to Raise Early Stage Capital Idea to IPO October 2015 Buddy Arnheim, Partner/ Chair ECVC
- 2. Perkins Coie LLP | PerkinsCoie.com Fund Sources • Self-funding (savings, credit cards) • Friends, Family and Fools • Crowdfunding • Angels, Super Angels and seed funds • Venture capital • Corporate • Governmental/grants • Private equity, hedge, mutual funds, others
- 3. Perkins Coie LLP | PerkinsCoie.com The Funding Environment Then: • Early ’90’s – cottage industry • Spike in 2000 • Crash and hovering Now: • 2014: • $49.3b invested in 4,400 deals • $29.8b raised by 254 funds • Corporate - $8b in “early stage” • 2015 – through Q2: • $31.0 b in 2200 deals • $18.0b in 144 funds • Angels remain very active: $20b plus
- 4. Perkins Coie LLP | PerkinsCoie.com Venture Capital Invested
- 5. Perkins Coie LLP | PerkinsCoie.com VC Capital Commitments
- 6. Perkins Coie LLP | PerkinsCoie.com Capital Managed
- 7. Perkins Coie LLP | PerkinsCoie.com The Process Prepare • Executive Summary • The “Deck” • Financial model (mostly expense waterfall) Practice Plan out the meetings • List of prospects • Warm intros Prepare for diligence • Clean documentation • References
- 8. Perkins Coie LLP | PerkinsCoie.com The Process (cont.) Define TAM Articulate hypothesis and expected tests • MVP and short-term product roadmap • Pilots/early customers • CAC and LTV • Assumptions and resources to iterate Team • Founders and early employees • Advisors • Service providers Timing Expectations
- 9. Perkins Coie LLP | PerkinsCoie.com Funding Structures Debt v ”SAFE” v Equity Macro terms: • Economic terms • Control terms • Information rights • Resale • Human capital related Custom terms …?
- 10. Perkins Coie LLP | PerkinsCoie.com Equity Funding Economic terms • Valuation: Price and Pool • Proceeds • Liquidation preference • Anti-dilution protection: price and other • Dividend preference • Preemptive rights Control terms • Board • Protective provisions • Negative covenants • Drag along Information rights • Financial • Inspection • Board/observer Liquidity/resale • Redemption • Registration rights • Secondary sales Human capital related • Vesting / acceleration • Severance Cost and timing
- 11. Perkins Coie LLP | PerkinsCoie.com Debt Financing Economic: • Conversion discount v equity kickers • Valuation cap • Interest rate • Premium upon Company sale event • Preemptive rights Information rights - deferred Control - deferred Liquidity - deferred
- 12. Perkins Coie LLP | PerkinsCoie.com TERM SAFE NOTE Inexpensive to paper Y Y Company favorable Y Y Valuation cap & conversion discount Optional Y Due date N Y Premium upon CoC Optional Optional Conversion specifics Y Y Interest rate N Y Seniority over equity N Y MFN Optional Optional Access to Info / control Optional Optional “SAFE” versus DEBT
- 13. TERM SAFE NOTE Inexpensive to paper Y Y Company favorable Y Y Valuation cap & conversion discount Optional Y Due date N Y Premium upon CoC Optional Optional Conversion specifics Y Y Interest rate N Y Seniority over equity N Y MFN Optional Optional Access to Info / control Optional Optional “SAFE” versus DEBT
- 14. Perkins Coie LLP | PerkinsCoie.com NOTE/SAFE Conversion Issues Converting at the valuation cap • If minimal price delta - into same P/S • If significant price delta, either: • into a shadow P/S (with liquidation preference to match the invested proceeds) • Into some C/S and some P/S
- 15. Perkins Coie LLP | PerkinsCoie.com The Investor “Must Haves” • Valuation or valuation cap • Mandatory component of equity investment • Only if requested in a Note/SAFE • Valuation cap must be CLEARLY DEFINED • Avoid any prepayment clause • Ensure clear treatment upon a CoC • Require a firm “due date” for SAFE/DEBT • Optional: Preemptive Rights • Optional: Basic information rights • Optional: Board visibility
- 16. Perkins Coie LLP | PerkinsCoie.com Wrap up Let us know if any of the below would be of interest… • How to pro forma your capitalization • Formation do's and don'ts • Attracting and retaining the "human capital” (advisors, consultants, mentors, employees) • Other…