The basics of negotiating angel and venture term sheets for early-stage founders

1. © 2016 Morgan, Lewis & Bockius LLP
ANGEL FINANCING:
A PLAY IN THREE ACTS

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3. 3
SPEEDY♒CHARG
E

4. CAST
Founders: Dinesh Melwani and JiWon Park
Dinesh has spent many years in business development at TechCo, a large technology company. He
and JiWon recently launched a new tech start-up, Speedy Charge. Dinesh estimates that
SpeedyCharge needs between $750,000 to $1,000,000 to develop a beta version of the product and
place it with a local electric car club that has signed on to beta test the prototype.
JiWon has also spent many years at TechCo, in engineering. She and Dinesh met about six months
ago and discovered a mutual interest in electric cars. JiWon was working on an idea at night and on
weekends that addressed charging times for electric cars. Having spotted the growing interest in
electric cars, the two started further work to develop a device that sits between the power source
and the car charging port that speeds charge times by 30%-50% (in early lab tests of a crude
prototype).
Seed Investor: Will Perkins
Will, a lawyer by training, now spends his time investing in early-stage growth companies, and
together with his group of old friends, coordinates their angel/seed investments.
4

5. SETTING
Previously...
Originally introduced by email through a mutual connection, Dinesh had a long
teleconference where he talked through Speedy-Charge’s pitch deck and its business model,
which received interest.
Now...
We are at the first in-person meeting to discuss and negotiate terms for the seed investment.
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6. ACT I

7. 7

8. SPEEDY-CHARGE, INC. –
(FOUNDER DRAFT)
Model of Capitalization Table
SERIES SEED
Pre-Money
Type Shares Options Total %
Class and Series of Capital Stock:
Common Stock
Founders 900,000 900,000 100.0%
Total 900,000 0 900,000 100%
8

9. SPEEDY-CHARGE, INC. –
(FOUNDER DRAFT)
Model of Capitalization Table
SERIES SEED
Pre-Money
Type Shares Options Total %
Class and Series of Capital Stock:
Common Stock
Founders 900,000 900,000 90.0%
Option, Warrants and Other Securities:
Equity Incentive Plan
Granted/Committed - - 0.0%
Available for Grant (*) 100,000 100,000 10.0%
Total 900,000 100,000 1,000,000 100%
9

10. SPEEDY-CHARGE, INC. –
(FOUNDER DRAFT)
Model of Capitalization Table
SERIES SEED
Pre-Money Post-Money
Type Shares Options Total % Shares Options Total %
Class and Series of Capital Stock:
Common Stock
Founders 900,000 900,000 90.0% 900,000 900,000 60.0%
Others - - 0.0% 0 0 0.0%
Series Seed Preferred Stock 500,000 500,000 33.3%
Option, Warrants and Other Securities:
Equity Incentive Plan
Granted/Committed 0 - 0.0% 0 - 0.0%
Available for Grant (*) 100,000 100,000 10.0% 100,000 100,000 6.7%
Plan Increase, Seed 0 - 0.0% 0 - 0.0%
Total 900,000 100,000 1,000,000 100% 1,400,000 100,000 1,500,000 100%
10

11. INVESTOR DRAFT –
CAP. TABLE (15%)
Model of Capitalization Table
SERIES SEED
Pre-Money Post-Money
Type Shares Options Total % Shares Options Total %
Class and Series of Capital Stock:
Common Stock
Founders 900,000 900,000 90.0% 900,000 900,000 54.6%
Others - - 0.0% 0 0 0.0%
Series Seed Preferred Stock 500,000 500,000 30.4%
Option, Warrants and Other Securities:
Equity Incentive Plan
Granted/Committed 0 - 0.0% 0 - 0.0%
Available for Grant (*) 100,000 100,000 10.0% 100,000 100,000 6.1%
Plan Increase, Seed 147,059 147,059 8.9%
Total 900,000 100,000 1,000,000 100% 1,400,000 247,059 1,647,059 100%
11

12. INVESTOR DRAFT–
CAP. TABLE (15%)
Model of Capitalization Table
SERIES SEED
Pre-Money Post-Money
Type Shares Options Total % Shares Options Total %
Class and Series of Capital Stock:
Common Stock
Founders 900,000 900,000 77.5% 900,000 900,000 51.7%
Others - - 0.0% 0 0 0.0%
Series Seed Preferred Stock 580,645 580,645 33.3%
Option, Warrants and Other Securities:
Equity Incentive Plan
Granted/Committed 0 - 0.0% 0 - 0.0%
Available for Grant (*) 100,000 100,000 8.6% 100,000 100,000 5.7%
Plan Increase, Seed 161,290 161,290 13.9% 161,290 161,290 9.3%
Total 900,000 261,290 1,161,290 100% 1,480,645 261,290 1,741,935 100%
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13. Act I
• Angel/seed/VC
• Valuation
• Cap table
• Pre-money
• Post-money
• Option plan
• Vesting
13

14. ACT II

15. Act II
• Convertible notes
• Preferred stock
• Priced round
• Conversion cap
• Pre-emptive rights
• Blocking rights / Protective provisions
15

16. ACT III

17. Act III
• Board seat / Observation right
• Information rights
• Timing
• Drafting
• Counsel
• Expenses
17

18. IF THERE WAS AN ACT IV…

19. Act IV
• Dividends
• Participating preferred
• Anti-dilution
• Weighted-average
• Registration rights
• Full ratchet
• ROFR
• Co-sale
• Drag
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20. This material is provided for your convenience and does not constitute legal advice or create an attorney-client relationship. Prior results do not guarantee similar
outcomes. Links provided from outside sources are subject to expiration or change. Attorney Advertising.
© 2016 Morgan, Lewis & Bockius LLP
THANK
YOU
20
William Perkins
Partner
617-951-8574
william.perkins@morganlewis.com
Julio Vega
Partner
617-951-8901
julio.vega@morganlewis.com
Dinesh Melwani
Partner
617-951-8350
dinesh.melwani@morganlewis.com
JiWon Park
Associate
617-341-7520
jiwon.park@morganlewis.com
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