The Language & Structure of Angel & Venture Deals
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Do you know what a term sheet is? A convertible note? Preferred stock? A private placement memorandum? A 506 offering? A liquidation preference? A participation right? A tag-along right? If you don’t, you’ll be at a disadvantage if and when you pitch your startup to investors. Review this to learn how to talk the talk and walk the walk. This is a presentation by Kieran McCarthy, Colorado Startup Lawyer for the Legal Issues for Startups & Entrepreneurs Meetup on July 28th at Galvanize Golden Triangle. For more about the meetup:http://www.meetup.com/Legal-Issues-for-Startups-and-Entrepreneurs/ For more about Colorado Startup Lawyer: www.coloradostartuplawyer.com
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The Language & Structure of Angel & Venture Deals
- 1. THE LANGUAGE AND STRUCTURE OF ANGEL AND VENTURE DEALS JULY 28TH, 2015 ©MCCARTHY LAW, LLC 2015 LEGAL ISSUES FOR STARTUPS AND ENTREPRENEURS
- 2. FOUR SECTIONS OF THIS PRESENTATION • Types of Deals • Common Structure of Deals • Critical Deal Terms • Other Key Concepts
- 3. SECTION I: TYPES OF DEALS • Common Equity • Preferred Equity • Convertible Notes • Less Common Deals
- 4. COMMON EQUITY • Common Among Less Sophisticated Investors/Startups • Simple • Implies a Valuation • Pre/Post-Dilution Issues
- 5. PREFERRED EQUITY • Most Common Venture Vehicle/Most Sophisticated Investors • Varying Levels of Complexity • Liquidation Preferences • Huge Variation in Fairness/Characteristics of How Startups Treated
- 6. CONVERTIBLE NOTE • An Investment Vehicle that Has Characteristics of Debt and Equity • Initially Debt. Upon Triggering Event, Converts into Equity. • Delays Valuation Question • Originally Used in Bridge Financing, Now Super Common in Early-Stage Startups
- 7. LESS COMMON INVESTMENT VEHICLES • FACE • KISS • Convertible Equity • ROBS • Revenue-Based Financing
- 8. SECTION II: COMMON STRUCTURE OF DEALS • Term Sheet • Disclosure Documents • Investor Due Diligence • Accredited Investor Certs • Final Deal Agreements • Federal Filings
- 9. TERM SHEETS • Broad Strokes • Agreement to Agree • Where You Learn Exactly About Seriousness Level of Your Investors’ Interest • Not a Binding Document
- 10. DISCLOSURE DOCUMENTS • Securities Laws • Material Misstatement or Omission • CYA • Forward-Looking Statements
- 11. INVESTOR DUE DILIGENCE • You’re Responsible for Having the Documents in Place • Investors Do the Legwork Here
- 12. ACCREDITED INVESTOR CERTIFICATION FORMS • For Most Startups, Only Let Accredited Investors Invest • 200k/year Individual, 300k/year Married Couple • $1,000,000 in Assets Excluding Primary Residence
- 13. FINAL DEAL AGREEMENTS • Stock Purchase Agreement • Preferred Stock Purchase Agreement • Convertible Note Agreement • Fully Fleshed Out, All Legal Concepts
- 14. FEDERAL FILINGS • Form D • Associated State Filings • Additional Filings May Be Required – Depends on the Size of the Round
- 15. SECTION III: CRITICAL DEAL TERMS • Liquidation Preference • Anti-Dilution Provisions • Representations and Warranties • Qualified Financing • Conversion Price • Valuation Cap
- 16. LIQUIDATION PREFERENCES • Investor Gets Money Back First • Participating vs. Non- Participating • Usually a Multiple • 1x Considered Standard
- 17. DILUTION, ANTI- DILUTION PROVISIONS • Issued vs. Authorized Stock • Option Pool • Pro Rata Participation Rights • Automatic Grant to Maintain Ownership %= Crazy!
- 18. REPS & WARRANTIES • Company Has to Certify It Has Its Excrement Together • If You Didn’t Set Your Company Up Correctly, Probably In Violation of This • IP, Authority, Compliance with Laws, Full Information
- 19. KEY CONCEPTS, CONVERTIBLE NOTES Coming Slides
- 20. QUALIFIED FINANCING • Typically, Threshold for Automatic Conversion for a Convertible Note • Point at Which Investors Convert to Preferred Equity • $1,000,000 Standard Size
- 21. CONVERSION PRICE • Size of Discount Convertible Note Investors Receive to Later Investors • 20% Discount Standard
- 22. VALUATION CAP • Provides a Reasonable Estimate of What Convertible Note Investors Think Company Should be Worth Next Round • $5 MM Cap, $10 MM Raise
- 23. SECTION IV: OTHER KEY CONCEPTS • Regulation D Offering • Rule 504 vs. 506 Offerings • Tag-Along/Drag-Along/Co-Sale • Right of First Refusal
- 24. ADDITIONAL READING • Venture Deals by Brad Feld and Jason Mendelson • Deal Terms by Alex Wilmerding
- 25. THAT’S IT! • Kieran@ColoradoStartupLawyer.com • @CoStartupLawyer • www.coloradostartuplawyer.com Thanks for Coming!
Editor's Notes
- Thanks for coming to Galvanize and Legal Issues for Startups and Entrepreneurs – This meetup takes us into our 3rd year, if you would believe it.
- ----- Meeting Notes (7/28/15 14:55) ----- 21 Ways to Raise
- Conversation with a VC
- Investor
- The Details Matter