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Make yourself financing ready - may 19 2020
This document discusses different types of financing for early-stage startups, including equity, debt, and other options like SAFEs. It outlines the benefits and drawbacks of common seed financing structures like preferred stock, convertible notes, and SAFEs. Key details like valuation, liquidation preferences, and investor rights for each option are also summarized. The presentation aims to help startups understand their financing-readiness for an initial fundraising round.
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Make yourself financing ready - may 19 2020
- 1. Make Yourself Financing-Ready Presented by:Will Perkins and Dinesh Melwani May 19, 2020
- 2. © 2020 MINTZ,LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. // Confidential Property Types of First Round Fundraising 2 Equity • Common Stock • Series Seed Preferred Stock Debt • Convertible Promissory Notes Other • "SAFEs" (Simple Agreement for Future Equity)
- 3. © 2020 MINTZ,LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. // Confidential Property • “Permanent capital” • No debt on balance sheet • Light terms (vs. later rounds with VC funds) • Avoids later discussion regarding maturity of notes Some drawbacks: • Need to set a valuation (bid and ask spread, can affect option pricing) • More expensive and time consuming than SAFEs and Notes • Could just be a Series A with a different name Benefits of Series Seed Preferred (and some drawbacks) 3
- 4. © 2020 MINTZ,LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. // Confidential Property • Valuation/calculating price per share • Liquidation preference • Anti-dilution price protection • Protective provisions • Option pool increase or establishment • Board composition • Founder vesting/revesting • Investor rights: – Information rights – Preemptive (anti-dilution) rights – Registration rights (not typical for true Seed round) – Certain company covenants (D&O insurance, employee vesting) Nuts and Bolts of Series Seed Preferred 4
- 5. © 2020 MINTZ,LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. // Confidential Property Company • Relatively low cost (as compared to an equity financing) • No need to value the Company (avoids valuation negotiation) • Caveat: valuation caps are common, might require some negotiation Investors • Low cost • Seniority to founders/existing shareholders • Interest and discount in exchange for risk of capital • Creditor of the Company (in event of liquidation) • Maturity Date (date certain for repayment or renegotiation) Benefits of Convertible Notes 5
- 6. © 2020 MINTZ,LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. // Confidential Property Company • Even lower cost (as compared to an equity financing and note financing) • No need to value the Company (avoids valuation negotiation) (same valuation cap caveat as convertible notes) • No interest paid • No maturity date Investors • Low cost • Seniority to founders/existing shareholders (contractual) • Discount in exchange for risk of capital • Downsides to investors: no interest, no maturity, potential risk of trapped capital Benefits of SAFEs 6
- 7. © 2020 MINTZ,LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. // Confidential Property • Interest (Notes only) • Discount • Maturity Date (Notes only) • Cap • Types of Conversion (qualified financing, change of control, optional, maturity) • Warrants • Secured/Unsecured • Amendments Nuts and Bolts of SAFEs and Notes 7
- 8. © 2020 MINTZ,LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. // Confidential Property Thank You! – Contact Information 8 Will Perkins, Co-Chair, Technology Practice Mintz Boston, MA 617.348.4449 WSPerkins@mintz.com LinkedIn: https://www.linkedin.com/in/williamperkins Bio: http://mintzedge.com/will-perkins Dinesh Melwani, Member Mintz Boston, MA 617.348.4450 DKMelwani@mintz.com LinkedIn: https://www.linkedin.com/in/dineshmelwani Twitter: @dineshmelwani Bio: http://mintzedge.com/dinesh-melwani