Raising Capital Guide

PREPARING
FOR

THE
PROCESS
OF
RAISING
CAPITAL

Anthony Millin
Partner, Pedley & Millin, PLLC
June 2015
Tel: (240) 235-1101
almillin@pedleymillin.com
www.pedleymillin.com

© 2015 Pedley & Millin PLLC
Anthony
Millin
-‐
Bio

Anthony
currently
serves
as
a
Partner
in
Pedley
&
Millin,
a
law
firm
with
offices
in
Washington
DC
Metro,
Denver
and
Los

Angeles;
a
Venture
Partner
in
Urban.US
,
a
seed
and
early
stage
venture
capital
firm
invesHng
in
companies
that
make
ciHes

beJer;
a
Partner
in
Poalim
Asia
Direct,
a
China-‐based
investment
bank
bringing
direct
foreign
investment
from
Chinese
VC
and

PE
firms
and
strategic
investors
to
US
companies;
a
Co-‐Founder
and
ExecuHve
Chairman
of
BioDatomics,
LLC,
the
first
Hadoop-‐
based
big-‐data
analyHcs
company
in
the
life
sciences
verHcal;
a
current
Board
Member
and
former
Board
Chair
of
Bethesda

Green,
a
green
technology
incubator
located
in
Bethesda,
MD;
a
Member
of
the
Board
of
Directors
of
the
Montgomery
County

Chamber
Community
FoundaHon.

Anthony
co-‐founded
CorHva
InsHtute
(Acquired
by
Steiner
Leisure),
a
for-‐profit
Title
IV
funded
educaHon
company
which
grew

from
a
concept
to
10
schools,
and
13
campuses
in
7
states.
Anthony
oversaw
the
integraHon
of
the
campuses
into
a
single

system,
and
as
President
and
General
Counsel
ran
day-‐to-‐day
operaHons.
Anthony
also
co-‐founded
China
Horizon,
an

investment
and
business
development
company
focused
on
the
retail/distribuHon,
and
clean
energy
sectors
in
China.
Anthony

built
and
ran
the
clean
energy/cleantech
side
of
the
Company
and
served
as
General
Counsel
for
China
Horizon.

2
Anthony
Millin
has
a
corporate
and
securiHes
law
pracHce,
focusing
on
start-‐up
and
emerging
growth

companies.
Anthony
is
also
a
successful
serial
entrepreneur
who
has
co-‐founded
several
insHtuHonally-‐

funded
companies.
His
experience
in
raising
capital,
and
building
and
running
companies,
provides
Anthony

with
valuable
insights
into
the
legal
and
business
needs
of
his
clients.
It
enables
Anthony
to
understand
a

business,
its
goals
and
its
challenges
from
the
perspecHve
of
the
entrepreneur.
Anthony’s
legal
pracHce

includes
formaHons,
general
corporate
counseling,
employment
maJers,
preparaHon
of
investor
packages

including
teasers,
PowerPoint
presentaHons
and
financial
models,
equity
and
debt
financings,
security
filings,

joint
ventures,
corporate
governance
and
mergers
and
acquisiHons.

Agenda

•  The
Investor
and
Stages
of
Company

•  Investor
Packages
&
PresentaHons

•  Term
Sheet

•  Due
Diligence

•  Form
of
SecuriHes

•  DeﬁniHve
DocumentaHon

•  Regulatory
Compliance

3

Due
Diligence
on
Investor

•  Early
investors
become
an
important
partner
in
the

success
of
a
start-‐up
and
emerging
growth
company

•  Most
start-‐up
companies,
even
ones
that
go
on
to

become
very
successful
go
through
periods
of
growing

pain
where
money
runs
out,
or
a
pivot
is
required,
and

during
these
periods
early
investor
support
is
criHcal

•  Company
should
conduct
due
diligence
on
each
investor

–  Understand
investor’s
experHse,
track
record
and
value
beyond

money
being
provided

–  Speak
to
other
CEOs
funded
by
investor
to
learn
how
the

investor
was
to
work
with
(in
good
Hmes
and
even
more

importantly
in
bad
Hmes)

4

Stage
/
Market
Segment

•  What
stage
of
investment
and
market
segment/
verHcal
does
the
investor
focus
on

•  Investment
strategies
are
o`en
oriented
around
the

stage
of
a
company
and
parHcular
market
verHcals

–  You
may
hear
that
“we”
invest
in
companies
from
pre-‐revenue

all
the
way
through
later
stage
rounds
–
but
usually
there
is
a

“SWEET
SPOT”
regarding
the
stage

–  Investors
o`en
have
a
focus
on
parHcular
industry
segments

where
they
have
domain
knowledge
and
track
records
of

success

•  If
you
are
not
matched
to
the
“sweet
spot”
of
an
investor

the
investor
meeHng
will
be
much
more
challenging

5

Stages
of
Company

•  Seed
Stage

•  Early
Stage

•  Growth
/
Expansion
Stage

6

Stages
of
Company
-‐
Seed

STAGE

SEED

Investor

•  Self

•  Friends
&
Family

•  Angels
/
InsHtuHonal
Angels

ObjecHves
Include

•  FormaHon
and
planning
acHviHes

•  R&D
related
to
building
or
tesHng
product
/
service
oﬀering

•  ValidaHon
-‐
assessment
of
early
customer
interest

•  Develop
a
markeHng
and
sales
plan

Structure
•  Common
Stock
/
Membership
Units

•  ConverHble
Note

•  Series
AA
Preferred
Stock
/
Membership
Units

7

Stages
of
Company
-‐
Early

STAGE

EARLY

Investor

•  Angels

•  InsHtuHonal
Angels

•  Venture
Capital

•  Strategic
Investor

ObjecHves
Include

•  Launch
product
and/or
services

•  ConHnued
product
development

•  First
Commercial
Sales
/
Revenue

•  Build
Management
Team;
Board,
Advisors

Structure
•  Series
A
Preferred
Stock
/
Membership
Units

•  ConverHble
Note

8

Stages
of
Company
-‐
Growth

STAGE

GROWTH
/
EXPANSION
STAGE

Investor
•  Venture
Capital

•  Other
InsHtuHonal
Investors

ObjecHves

•  Scale
MarkeHng,
Sales
and
DistribuHon

•  Scale
OperaHons

•  Expand
Product
Lines

•  Expand
Geographically

Structure
•  Series
B
Preferred
Stock

•  Series
C
Preferred
Stock

•  Series
D
Preferred
Stock

9


Investor
Packages
and
PresentaHons

10

Investor
Package

•  “Teaser”

•  Non-‐Disclosure
Agreement
(NDA)

•  Financial
Model

•  ExecuHve
Summary

•  Investor
PresentaHon
(PowerPoint)

•  Business
Plan
(Internal
Document)/
ImplementaHon
Plan

Investor
Packages

12
INFORMATION
TO
CONVEY

•  Vision
/
Why
Statement
-‐
Why
did
you
start
the
Company.

•  Business
Summary
–
Short
Summary
of
what
the
Company
does.

•  Target
Market
/
Target
Customer

–
Who
pays,
beneﬁts,
uses
product

or
service,
what
is
size,
growth
rate
of
market.

•  Problem
/
Challenge
-‐
What
is
the
main
problem(s)
that
you
are

solving
/
addressing.

•  Your
SoluIon
–
How
do
your
Products
and/or
Services
address

problem
and
create
value.

•  CompeIIon
–
Who
is
the
CompeHHon
and
what
is
your
compeHHve

advantage.

Investor
Packages

13
INFORMATION
TO
CONVEY

•  Go
To
Market
Strategy
–
How
will
you
take
your
products
and/or

services
to
market
–
Plan
for
MarkeHng/Sales
/DistribuHon

•  Business
Model
–
How
will
you
generate
revenue

•  TracIon
-‐
Current
milestones
achieved
–
pilots,
customers

•  Demo
–
Demo
of
product
if
requested
or
relevant

•  Management
Team
–
Also
include
notable
advisors
and
investors

•  Financial
Summary
–
Summary
chart
from
full
ﬁnancial
model

•  The
Ask
-‐

Amount
of
funds
you
are
seeking
and
the
uses
of
the
funds

Investor
Packages

•  InformaHon
for
Investor
Packages
are
threaded

through
the
diﬀerent
investor
package

documents:

•  “Teaser”

•  ExecuIve
Summary

•  Investor
PresentaIon
(PowerPoint)

14

Teaser

•  1-‐2
pages

•  Goal
of
a
“teaser”
is
to
get
to
a
meeHng
or
call

•  Tool
for
you
and
your
advisors
to
easily
share

with
prospects

•  Quick
to
read,
compelling

•  Prior
to
an
NDA
-‐
Share
only
informaHon

comfortable
sharing
more
broadly

15


Non-‐Disclosure
Agreement

•  Most
VCs
and
many
angel
groups
will
not
sign

an
NDA

•  Individual
angels
might

•  How
should
you
proceed
?

– Judgment
call
speciﬁc
to
each
potenHal
investor

– Risk
Level
and
Risk
Aversion

– Should
label
all
your
documents
“ConﬁdenHal”

16

ExecuHve
Summary

•  5-‐10
Pages

•  Expands
on
the
“teaser”

•  Distribute
to
potenHal
investors
a`er

iniHal
meeHng
or
call

17

Financial
Model

•  It
is
important
to
build
a
ﬁnancial
model

•  Forces
you
to
understand
your
underlying
business

model

•  Actual
numbers
will
usually
vary
from
your
projecHons

•  The
key
is
your
understanding
of
the
assumpHons
that

drive
the
Revenue,
COGS
and
SG&A
in
your
business

•  Summary
Income
Statement
and
Cash
Flow
projecHons

for
3-‐5
years

•  Very
detailed
Cash
Flow
projecHons
for
next
12
months

18

Financial
Model

•  Perform
SensiHvity
Analysis

– What
if
your
assumpHons
are
oﬀ
by
10%,
25%,

50%

– What
if

ﬁrst
sale
takes
6
months
longer

– What
if
price
needs
to
be
cut
by
30%

•  Understand
the
impact
on
Cash
Flow

– Helps
you
model
out
how
much
capital
you
need

to
raise
under
the
more
conservaHve
assumpHons

19

Financial
Model

•  What
items
from
the
ﬁnancial
model
should
you

include
in
the
investor
package

–  Teaser

•  Revenue
and
EBITDA
line
for
3-‐5
years

–  ExecuHve
Summary
and
Investor
PresentaHon

•  Summary
chart
of
Income
Statement
and
Cash
Flow

Statement
for
3-‐5
years

–  The
more
detailed
ﬁnancial
model
will
be
shared
with

potenHal
inventors
with
whom
you
are
engaged
in

serious
discussion
and
/or
due
diligence

20

PowerPoint
PresentaHon

21
1.  Vision
/
Why
Statement

2.  Business
Summary
–
What
You
Do

3.  Target
Market
/
Target
Customer

4.  Problem
/
Challenge

5.  Your
SoluHon
-‐
(Demo)
–
If
Time

6.  CompeHHon

7.  Go-‐To-‐Market
Strategy

8.  Business
Model

9.  TracHon

10.  Management
Team

11.  Financial
Summary

12.  The
Ask

PowerPoint
PresentaHon

22
•  Use
bullet
points,
and
discuss
and
elaborate
-‐

Do
not
stand
up
and
read
verbaHm.

•  Include
Graphics

•  Include
brief
demo
if
Hme,
or
screen
shots
of

product/service

•  PracIce,
PracIce,
PracIce
!!!

PowerPoint
PresentaHon

23
•  ITERATE,
ITERATE,
ITERATE
–
aèr
every

presentaHon
evaluate
what
did
not
work
based
on

feedback,
quesHons,
and
rejecHons,
and
iterate
the

presentaHon
and
pitch.

•  Oèn
aèr
5
or
6
presentaHons,
the
investor
pitch
/

PowerPoint
presentaHon
is
substanHally
different

from
the
first
one
in
terms
of
story,
posiHoning,
and

what
is
highlighted.

PreparaHon
of
Team

•  Make
sure
all
key
members
of
the
team
who

will
interact
with
Investors
are
prepared
for

the
process

•  If
Investors
plan
to
contact
a
few
key

customers
and/or
partners

– Let
the
customers
and/or
partners
know
that
they

may
be
contacted
by
investors

– If
there
have
been
issues
with
a
customer,
explain

the
situaHon
to
the
investor
ahead
of
Hme

24

PowerPoint
PresentaHon

•  Ask
investor
to
start
oﬀ
telling
you
about
their
investment

ﬁrm,
strategy,
“sweet
spot”
for
investments

•  May
need
to
modify
or
adapt
planned
presentaHon
in

response
to
what
you
hear
-‐

to
make
sure
you
address
what
is

most
important
to
them

•  Passion
!!!

If
you
do
not
have
it,
the
audience
will
not
either.

•  Know
that
amount
of
Hme
you
have,
and
adjust
presentaHon

Hme
ad
detail
accordingly
assuring
Hme
for
Q&A

25

PowerPoint
PresentaHon

•  Know
the
amount
of
Hme
you
have,
and
adjust
presentaHon

Hme
and
detail
accordingly
assuring
Hme
for
Q&A

•  It
is
OK
not
to
know
everything.

SomeHmes
you
will
need
to

say
“That
is
a
great
quesHon,
I
appreciate
its
importance,
but
I

do
not
have
answer
yet,”
or
“I
will
get
back
to
you
on
that

quesHon”

•  Invite
QuesHons
and
make
the
presentaHon
interacHve

•  The
more
the
potenHal
investors
are
engaged,
asking

quesHons,
sharing
their
own
anecdotes
or
experiences,
the

beJer

26

PowerPoint
PresentaHon

•  O`en
investor
will
request
addiHonal
informaHon
or

documents
from
you

•  Promptly
send
both
a
thank-‐you
note
and
any
documents
that

were
requested.

The
more
Hmely
the
beJer

•  Follow
up
if
you
do
not
hear
back
to
stay
on
their
radar

•  If
you
get
rejected
ask
for
any
feedback
that
may

27


TERM
SHEET

28

Term
Sheet

•  Term
sheets
can
take
several
different
forms,
depending
on
the
preferences

of
the
parIes
involved

–  A
brief
list
of
terms

–  A
leJer
agreement

–  A
short
agreement

•  Reasons
for
Using
Term
Sheets

–  Highlights
key
terms
of
the
transacHon

–  Enables
earlier
discovery
of
deal
breakers

–  Facilitates
the
draìng
and
negoHaHon
of
the
definiHve
transacHon

documents

–  While
it
requires
addiHonal
Hme
and
cost
upfront,
ulHmately
reduces
the

amount
of
Hme
and
expense
incurred

–  Makes
it
harder
for
parHes
to
change
their
posiHons
later

•  Term
sheets
are
generally
non-‐binding,
but
may
include
a
few

binding
provisions

29

Three
Key
NegoHaHon
Areas

•  VALUE
OF
THE
COMPANY

–  Drives
the
percent
of
the
Company
you
are
selling
in
the
ﬁnancing

•  INVESTOR
RIGHTS
&
PREFERENCES

–  Drives
the
investors’
preferences
with
respect
to
distribuHons
of
proﬁt
or

distribuHons
upon
a
liquidity
event

–  Drives
the
investors’
rights
to
parHcipate
in
new
issuances
of
securiHes
and

transfers
of
issued
securiHes

•  INVESTOR
PROTECTIONS
(CONTROL)

–  Drives
the
level
of
control
the
investor,
usually
holding
only
a
minority

interest,
exerts
on
major
acHons
of
the
Company

30

Value
of
The
Company

•  Key
ValuaHon
Concepts

– Pre-‐Money
vs.
Post-‐Money
ValuaHon

– Fully-‐Diluted
Basis

31

Pre-‐Money/Post-‐Money

•  The
Pre-‐Money
ValuaHon
is
the
valuaHon
of

the
Company
not
including
the
new
cash
to
be

raised

•  The
Post-‐Money
ValuaHon
is
the
valuaHon
of

the
Company
including
the
new
cash
to
be

raised

32

Pre-‐Money/Post-‐Money

Example
-‐
Entrepreneur
is
raising
$500,000
and
the
investor

and
entrepreneur
agree
on
a
valuaIon

of
$2
million

•  Is
the
$2
million
pre-‐money
or
post-‐money?

–  If
it
is
pre-‐money,
the
business
is
worth
$2.5
million
upon

closing
and
the
investor
will
receive
20%
($500,000/$2.5

million)
of
the
company
upon
closing

–  If
it
is
post-‐money,
the
business
is
worth
$2.0
million
upon

closing
($1.5
million
before
closing)
and
the
investor
will
receive

25%
($500,000/$2.0
million)
of
the
company
upon
closing

33

Fully-‐Diluted
Basis

•  To
calculate
the
share
price
or
membership
unit
price

–  Divide
the
value
of
the
company
by
the
number
of
shares/units
issued
and

outstanding

•  How
do
you
account
for
stock
opHons,
warrants,
or
converHble
notes
that

could
become
issued
and
outstanding
units
upon
exercise
or
conversion
?

–  Investors
almost
always
want
to
avoid
having
their
shares
diluted
in
the
future

when
these
instruments
are
exercised
or
converted,
o`en
at
a
price
lower

than
the
price
paid
by
the
investor

•  The
investor
will
want
the
share
price
calculated
on
a

“FULLY
DILUTED

BASIS”

–  Includes
the
number
of
shares/units
subject
to
opHons,
warrants,
and
converHble
notes

in
the
denominator

Fully-‐Diluted
Basis
-‐
Example

•  Shares
issued
and
outstanding:
$2
million

•  Stock
OpHon
Plan:

200,000
(Includes
opHons
not
yet
granted,
and
granted
but
not

yet
vested
or
exercised)

•  Investment
Amount:
$
500,000
at
a
pre-‐money
valuaHon
of
$
2
million

Based
on
Shares
Currently
Outstanding

Divide
the
pre-‐money
valuaHon
by
the
sum

of
the
shares
issued
and
outstanding

$2,000,000/
2,000,000
=

$1

per
share

Number
of
shares
issued
in
ﬁnancing

=

$500,000/
$1.00
=
500,000

Fully-‐Diluted
Basis

Divide
the
pre-‐money
valuaHon
by
the
sum

of
the
shares
issued
and
outstanding
plus

the
opHons
in
the
stock
opHon
plan

$2,000,000/
2,200,000
=

$0.91

per
share

Number
of
shares
issued
in
ﬁnancing
=

$500,000/
$0.91
=
550,000

35

Rights
and
Preferences

•  LiquidaHon
Preference

•  ParHcipaHng
vs.
Non-‐ParHcipaHng

•  Dividend
Rights
/
Preferred
Return

•  AnH-‐DiluHon

•  PreempHve
Rights

•  Right
of
First
Refusal
&
Co-‐Sale
Rights

•  Drag
Along
Rights

•  RedempHon
Rights

•  RegistraHon
Rights

•  InformaHon
Rights

36

The
LiquidaHon
Preference

•  A
mechanism
by
which
the
investor
seeks
to
recoup
its
original
investment

or
a
mulHple
thereof,
plus
any
declared
and
unpaid
dividends,
before

there
are
any
distribuHons
to
the
common
stockholders/unit
holders

•  Usually
is
deﬁned
to
occur
upon
a
liquidaHon,
dissoluHon
or
winding
up
of

the
company,
a
merger,
or
a
sale
of
the
company
or
its
assets

•  Example
-‐
$1
million
dollar
investment:

1X
LiquidaIon
Preference
=

$1
million
to
investor
before

common
shareholders
get
1st

dollar

2X
LiquidaIon
Preference
=

$2.0
million
to
investor
before

common
shareholders
get
1st

dollar

37

ParHcipaHng
vs.
Non-‐ParHcipaHng

Non-‐Par(cipa(ng
Preferred

Limits
the
investor
to
either

LiquidaHon
Preference
or

conversion
to
common
stock/
units
prior
to
exercising

LiquidaHon
Preference

Par(cipa(ng
Preferred
–

With
No
Cap

Investor
receives
LiquidaHon

Preference
and
then
shares
in

remainder
of
distribuHons
on
a

pro
rata
basis
with
the
common

stockholders/unit
holders

Par(cipa(ng
Preferred
–

With
A
Cap

Investor
receives
LiquidaHon

Preference
and
then
shares
in

further
distribuHons
on
a
pro

rata
basis
with
the
common

stockholders/unit
holders
up
to

a
Cap

38

CumulaHve
vs.
Non-‐CumulaHve

39
No
Preferred
Return
8%
Non-‐CumulaIve

Preferred
Return

8%
CumulaIve
Preferred

Return

The
preferred
stockholders/

unit
holders
and
common

stockholders/unit
holders

parHcipate
in
dividend

distribuHons

on
a
pro
rata
basis

1st
–

Company
must
pay
8%

dividend
to
the
preferred

stockholders/unit
holders
for

the
current
year
before
making

a
distribuHon
on
any
junior

securiHes

2nd
–
Preferred
stockholders/

unit
holders
and
common

stockholders/unit
holders
then

share
in
dividend
distribuHons

on
a
pro
rata
basis

1st
–

Company
must
pay
8%

dividend
to
the
preferred

stockholders/unit
holders
for

the
current
year,
and
for
all

prior
years
for
which
Preferred

Return
was
accrued
but
not

paid

2nd
–
Preferred
stockholders/
unit
holders
and
common

stockholders/unit
holders
then

share
in
dividend
distribuHons

on

a
pro
rata
basis

39

AnH-‐DiluHon
ProtecHon

•  ProtecHon
to
investor
in
the
event
the

Company
issues
new
shares/units
at
a
price

lower
than
the
price
paid
by
the
investor

•  Adjusts
the
investor’s
conversion
raHo
for
the

conversion
of
Preferred
Stock
to
Common

Stock
(from
a
1:1
raHo)
to
increase
the

number
of
shares
of
Common
Stock
the

investor
receives
on
conversion

40

AnH-‐DiluHon
ProtecHon

•  Three
Forms
of
AnH-‐DiluHon
ProtecHon

–  Full
Ratchet

•  Least
favorable
to
Entrepreneur

•  Only
accounts
for
the
share/unit
price
of
the
new
issuance.

A
single

new
share
at
a
lower
price
could
result
in
a
major
adjustment

–  Narrow
Based
Weighted
Average

•  Less
Favorable
to
Entrepreneur

•  Also
accounts
for
the
size
of
the
new
issuance
relaHve
to
the

number
of
units
issued
and
outstanding

–  Broad
Based
Weighted
Average

•  Most
Favorable
to
Entrepreneur

•  Also
accounts
for
the
size
of
the
new
issuance
relaHve
to
the

number
of
units
outstanding
on
a
fully
diluted
basis

41

PreempHve
Rights

•  The
investor’s
pro
rata
right,
based
on

percentage
equity
ownership,
to
parHcipate
in

subsequent
issuances
(usually
only
financings)

•  If
the
investor
owns
20%
of
Company
before

the
subsequent
financing,
it
has
the
right
to

take
20%
of
the
subsequent
financing

•  Need
to
understand
impact
on
future
rounds

if
new
investor
wants
to
take
it
all
or
most
of

round

42

Right
Of
First
Refusal

•  In
the
event
a
shareholder/unit
holder
has
a

bona
ﬁde
oﬀer
to
buy
its
stock/units,
the

Company
and/or
the
remaining
shareholders/
unit
holders
have
a
pro
rata
right
to
acquire

those
shares/units
on
the
same
terms

43

Co-‐Sale
Rights

•  In
the
event
one
or
more
shareholders/unit

holders
desire
to
sell
any
shares/units,
the

remaining
shareholders/unit
holders
have
a

right
sell
their
shares/units,
pro
rate
on
an
as-‐
converted
basis,
as
part
of
such
sale
of
such

shares/units

44

Drag
Along
Rights

•  The
right
of
a
pre-‐requisite
number
(e.g.
a

majority)
of
the
selling
shareholders/unit

holders
who
all
agree
to
sell,
to
drag
along
the

remaining
shareholders
in
the
sale
of
the

Company

•  Avoids
situaHon
similar
to
last
homeowners

refusing
to
sell
house
to
developer
who
needs

all
houses
to
sell
or
will
not
purchase
any
of

the
homes
he
has
agreed
to
purchase

45

RedempHon
Rights

•  The
Company’s
right
or
obligaHon
based
on

agreed
upon
terms
and
condiHons
to
redeem

(purchase)
the
shares/units
of
a
shareholder/

unit
holder,
or
the
Investors
right
to
force
a

redempHon
by
the
Company

•  Terms
will
include
triggering
event,
share/unit

price
and

payment
terms

46

RegistraHon
Rights

•  Grants
the
investor
the
right
to
either:

– 
force
the
Company,
aèr
a
period
of
Hme,
to

register
the
investor’s
shares

and
offer
them

publicly,
or

– register
and
sell
the
investor’s
shares
as
part
of
a

registraHon
and
public
offering,
including
a

registered
offering
iniHated
by
the
Company
or

another
stockholder

47

InformaHon
Rights

•  Right
to
financial
informaHon
such
as
income

statements,
balance
sheets,
and
cash
flow
statements

•  Right
to
other
informaHon
such
as
budgets,
key

financial
metrics,
and
Board
observaHon
rights

•  Could
be
on
an
annual,
quarterly
or
monthly
basis.

Need
to
weigh
benefits
to
investor
vs.
burden
on

management
to
produce

•  Could
be
unaudited
or
audited
financials

•  May
want
to
limit
to
investors
who
have
invested
a

material
amount

48

ProtecHve
Provisions

•  Board
RepresentaHon
/
VoHng
Agreements

•  Provides
investors,
who
are
minority
shareholders

(i.e.
control
less
than
50%),
signiﬁcant
control
over

designated
acHons
of
the
Company

•  Requires
the
approval
of
a
majority,
or

supermajority,
of
preferred
shareholders/unit

holders
voHng
as
a
separate
class

•  May
also
require
the
approval
of
a
majority
of
the

Directors
designated
by
the
preferred
shareholders
/
unit
holders

49

ProtecHve
Provisions

•  Investors
and
entrepreneurs
will
negoHate
over
which

protecHve
provisions
to
include.
Examples
are:

–  Amending
the
CerHﬁcate
of
IncorporaHon
and
Bylaws
/
OperaHng

Agreement

–  A
repurchase
or
redempHon
of
equity

–  A
material
change
in
the
nature
of
the
Company’s

business

–  A
change
in
the
size
of
the
Board

–  The
issuance
of
new
equity
or
securiHes
converHble
into
equity
(pari-‐
pasu,
Superior
or
Junior)

–  Incurring
debt
above
a
designated
amount

–  The
sale
of
all
or
substanHally
all
of
the
assets
of
the
Company
or

merger
into
another
company
resulHng
in
a
change
of
control

–  The
liquidaHon,
dissoluHon,
and
winding
up
of
the
Company

50


Due
Diligence

51

Due
Diligence

•  A
comprehensive
review
of
a
company's
business

•  Components
of
Due
Diligence

–  Legal
Due
Diligence

–  Business
Due
Diligence

–  Financial
Due
Diligence

•  Time
to
complete
due
diligence

–  Can
range
from
a
couple
of
weeks
to
a
few
months,

depending
on
the
size
of
the
investment,
the
group

making
the
investment,
the
stage
of
the
company,

and
the
level
of
preparaHon
by
the
Company

52

PreparaHon
Of
Documents

•  Includes:

–  OrganizaHonal
Documents
-‐
COI/Bylaws/OperaHng

Agreement/Stockholder
Agreement/Foreign
QualificaHons/
Stock
or
Unit
CerHficates)

–  CapitalizaHon
Table
(Ownership)

–  Names
of
Directors
and
Officers
and
Minutes
from
Board
and

Shareholder/Unit
Holder
meeHngs

–  Finance
and
AccounHng
(up
to
3
years
if
available)
-‐
Tax

Returns;
Financial
Statements
(Income
Statement/Cash
Flow

Statement/Balance
Sheet

–  Customers/Suppliers/Strategic
Partnerships
-‐
Names;

Copies
of
agreements;
Contact
informaHon
for

reference
checks

53

PreparaHon
Of
Documents
(cont.)

•  List
of
all
Intellectual
Property
(Patents/Trademarks/

Copyrights)

•  Insurance
policies

•  OrganizaHon
chart
and
bios
of
key
managers

•  Copies
of
all
prior
ﬁnancing
agreements

•  Copies
of
all
other
material
agreements

•  MarkeHng
collateral
and
markeHng
and
sales

strategies

•  Detailed
product
or
service
descripHons
and

informaHon

•  Business
plans

54


Form
of
SecuriHes

55

Form
of
SecuriHes

•  CorporaHon

– Common
Stock
(VoHng
/
Non-‐VoHng)

– Preferred
Stock-‐
Series
Seed,
Series
A,
B,
C

•  Limited
Liability
Company

– Common
Units
(VoHng
/
Non-‐VoHng)

– Preferred
Units

•  CorporaHon
and
Limited
Liability
Company

– ConverHble
Notes

56

Form
of
SecuriHes

•  Common
Stock/Units

– Founders,
Friends
and
Family

•  ConverHble
Note

– 

Friends
and
Family,
Angel,
InsHtuHonal

Angel,
Venture
Capital

•  Preferred
Stock/Units

– Usually
Angel,
InsHtuHonal
Angel,
Venture

Capital

57

Common
Stock

•  A
security
that
represents
an
equity
ownership
interest

•  First
form
of
stock
issued
upon
creaHng
a
new

corporaHon

•  Conveys
some
basic
rights
–
vote,
right
to
dividends,
and

proceeds
of
sale

•  Usually
comes
with
restricHons
–
e.g.,
restricHons
on

transfer

•  Right
to
the
assets
of
the
company
upon
liquidaHon,

a`er
distribuHons
to
the
holders
of
debt
and
preferred

equity

58

ConverIble
Note

•  Debt
instrument,
with
interest
that
usually
accrues

•  Bypasses
the
need
for
upfront
agreement
on
valuaHon,
price
during
Series
A/AA

•  Can
be
secured
or
unsecured;
subordinated

•  ConverHble
into
a
Company’s
stock/units

•  Terms
of
the
conversion
are
negoHated
by
the
ParHes

–  AutomaHcally,
at
the
Hme
the
Company
closes
on
its
next
qualiﬁed
round
of

equity
ﬁnancing

–  If
no
such
round
occurs,
at
pre-‐agreed
upon
terms

–  Any
Hme
prior
to
maturity,
upon
a
vote
of
a
majority
of
the
converHble
note

holders

•  If
no
conversion
prior
to
maturity:

–  Repayable
along
with
accrued
interest,
upon
its
maturity
OR

–  OpHonal
or
forced
conversion
that
provides
investor
with
a
discount
to
the
next
round/warrants

Lower
transacHon
cost
than
Preferred
Round

•  Priority
status
over
common
and
preferred
shareholders/unit
holders

59

ConverIble
Note
With
A
“CAP”

•  A
ConverHble
Note
is
oèn
the
first
non-‐Friends
and
Family

investment

•  Comes
into
the
Company
during
a
period
of
very
high
risk

(market
risk,
execuHon
risk,
technology/product
risk
and

financing
risk)

•  To
compensate
for
all
of
the
risk,
many
investors
now

negoHate
a
“CAP”
on
the
conversion
price
(NegoHaHng

maximum
value
upfront)

•  Protects
investor
in
event
of
rapid
value
growth
prior
to

conversion

•  Investor
will
usually
have
the
opHon
to
convert
at
the
lower

of:

-‐  A
negoHated
discount
(e.g.,
20%)
to
the
next
equity
round

-‐ 
The
agreed-‐upon
valuaHon
cap

•  Company,
with
leverage,
would
require
forced
conversion
at

maturity
but
at
a
further
discount

60

“CAP”
-‐
EXAMPLE

•  A
Company
with
1
million
shares
of
common
stock/units

outstanding

•  Issued
a
$500,000
converHble
note,
with
a
conversion

discount
of
20%
and
a
conversion
cap
of
$5
million

•  The
start-‐up
is
able
to
raise
$5
million
at
a
pre-‐money

valuaHon
of
$10
million
in
its
next
round
of
ﬁnancing

*
$
5
million

Cap

20%

Discount

No
Cap
or

Discount

ValuaHon
$5
million
$8
million
$10
million

Per
Share
Price
$5.00
$8.00
$10.00

Shares
Upon
Conversion
100,000
62,500
50,000

* For illustration purposes, this analysis does not take into account interest on the convertible note or calculate share price on a fully diluted basis that includes
shares from the conversion of the note.
61

Preferred
Stock

•  Security
that
represents
an
equity
ownership

interest

•  Rights
and
preferences
(prioriHes)

– Over
the
common
stock
related
to
the
assets

and
proﬁts
of
a
company

– Rights
in
the
event
of
issuance
of
new
equity

or
shareholders
sale
of
equity

•  ProtecHve
provisions
that
limit
acHons
that

can
be
taken
by
the
Company
without

preferred
stockholder
approval

62


DeﬁniHve
DocumentaHon

63

Common
Stock
/
Units

•  Common
Stock

– Stock
Purchase
Agreement
or
SubscripHon

Agreement

– Stockholders
Agreement

•  Common
Membership
Units

– Membership
Unit
Purchase
Agreement
or

SubscripHon
Agreement

– Amended
and
Restated
OperaHng
Agreement

64

Preferred
Stock
/
Units

•  Series
AA
(Limited
Rights
and
ProtecHons)

–  Stock
Purchase
Agreement

–  Amended
and
Restated
Stockholder
Agreement

–  Amended
and
Restated
CerHﬁcate
of
IncorporaHon

•  Preferred
Membership
Units

–  Membership
Unit
Purchase
Agreement
or
SubscripHon
Agreement

–  Amended
and
Restated
OperaHng
Agreement

•  Series
A
Preferred,
Series
B
Preferred,
Series
C
Preferred

–  Stock
Purchase
Agreement

–  Investor
Rights
Agreement

–  Right
of
First
Refusal
and
Co-‐Sale
Agreement

–  VoHng
Agreement

–  Amended
and
Restated
CerHﬁcate
of
IncorporaHon

–  Management
Rights
LeJer

–  Legal
Opinion

6565

ConverHble
Note

•  ConverHble
Promissory
Note
Purchase

Agreement

•  ConverHble
Promissory
Note(s)

•  Warrant
Agreement
(If
deal
includes
warrant

coverage)

•  Pledge
&
Security
Agreement
(If
Secured)

66


Regulatory
Compliance

67

Regulatory
Compliance

•  Ability
to
raise
money
from
individual
investors

regulated
by
the
SecuriHes
Act
of
1933
(the
“SecuriHes

Act”)
and
certain
state
securiHes
laws
(“Blue
Sky

Laws”)

•  Security
Filings
will
be
required
with
the
SecuriHes
and

Exchange
Commission,
unless
4(2)
exempHon
exists

•  Security
Filings
will
be
required
with
States
in
which

investors
reside,
unless
the
ﬁnancing
falls
under
a
self-‐
execuHng
state
exempHon,
with
state
security

agencies

68
68

Contact
InformaHon

69

Anthony
Millin

Pedley
&
Millin,
PLLC

4520
East
West
Highway,
Suite
700

Bethesda,
Maryland
20814

Tel:

(240)
235-‐1101

Cell:

(301)
908-‐0005

Fax:

(240)
235-‐1097

Email:

almillin@pedleymillin.com

Web:

www.pedleymillin.com

Raising Capital Guide

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Raising Capital Guide

Similar to Raising Capital Guide (20)

Recently uploaded

Recently uploaded (20)

Raising Capital Guide