This webinar is critical for entrepreneurs who will be raising a preferred round in the near future. This webinar is designed to teach you what to expect when your company sells preferred stock in a venture round.
During this webinar, veteran Silicon Valley venture capital attorney Jason Putnam Gordon will cover the following topics:
· What venture capitalists are looking for when they invest in a company
· What makes a company a potential investment for a venture capital fund
· Pre-round issues
· What makes a good investor and how to find them
· How to negotiate a term sheet
· The deal documentation
· The diligence process
· Closing issues
· Post-closing issues
· Common pitfalls when raising venture capital
· And much, much more
2. IMPORTANT CAVEATS
Today’s Discussion is General Information – Not Legal
Advice
We will be discussing rules and exceptions thereto.
Those rules, exceptions, and exceptions to the
exceptions may not be applicable to your situation.
You need to retain competent legal counsel to review all
facts and circumstances before weighing in with advice.
Off-the-cuff answers to your questions are not, and
should not be taken as, legal advice.
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3. OVERVIEW
My Background
Venture Model
Ideal VC Investors
Preliminary Considerations
Term Sheet Negotiation
Deal Documentation
Diligence
Side Letters
Closing and Post-Closing Issues
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4. Background
Venture Capital and Emerging
Growth Company attorney-
practicing law since 2005.
My office is in San Francisco,
but I work with companies
throughout the US and the
world.
I love working with
entrepreneurs on financings
and as outside corporate
counsel.
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Jason P. Gordon
Partner
+1.415.882.8124
Jason.Gordon@klgates.com
6. Venture Model (continued)
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Investors
(Capital)
Idea(s)
(Intangible Assets)
Technicians who have
skills like: sales,
marketing, business
acumen
(Services)
Company Increases in Value
7. Venture Capital Model (continued)
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Figures are for illustrative purposes and should not be interpreted to be applicable to
your situation.
8. WHO MAKES A GOOD INVESTOR (AND
HOW TO FIND THEM)
Investor Objectives
Traditional VC Funds
Build a portfolio where a few companies will be home runs
Fund’s life is usually around 10 years
Angel investors have different considerations
Strategic investors have different considerations
Company’s Objectives
Investors that will add value beyond dollars
contributed
Investors that will be supportive of the company
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9. PRELIMINARY CONSIDERATIONS
Correct structure
Modeling round
Style of Deal
NVCA – https://nvca.org/model-legal-documents/
NVCA-light
Series Seed – https://www.seriesseed.com
Other
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10. PRELIMINARY CONSIDERATIONS:
DEFINITIONS
Pre-money valuation – the value of the company before
the next round investment
Post-money valuation – the value of the company after
the round of investment
Fully-diluted basis – all common stock and anything that
can be converted to (or may become) common stock,
e.g., preferred stock, warrants, options, or option pool
When dealing with convertible securities, assumptions must be
made and should be scrutinized.
Names for Priced Rounds
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11. Preliminary Considerations:
Definitions Applied
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Pre-money Valuation
New Investment
Post-money Valuation
$40,000,000
$10,000,000
$50,000,000
$40,000,000 pre-money valuation /
37,000,000 pre-money shares =
$1.0811 price/share
$10,000,000 new investment / $1.0811
price/share =
9,250,000 new shares
issued
Format and figures are for illustrative purposes and should not be interpreted to be applicable to your situation
12. Term Sheet Negotiation: Typical Term Sheet
Terms
How much of the company is
being sold based on a
valuation
Dividends
Liquidation Preferences
Voting Rights
Protective Provisions
Optional and Mandatory
Conversion
Legal Opinion
ROFR & Co-Sale
Drag Along
Registration Rights
Anti-dilution Protection
Vesting for Founders
Documentation
Attorneys Fees
No Shop and Confidentiality
Provisions
Whether investors will get a
board seat and/or observer
seat
Pro Rata Rights
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13. DEAL DOCUMENTATION
Main Financing Documents
Stock Purchase Agreement
Amended and Restated Certificate of Incorporation
Investors Rights Agreement
Voting Agreement
Right of First Refusal and Co-Sale Agreement
Other documents
Board and stockholder consents
Waivers
Side letters (discussed in a moment)
Pro Forma Cap Table
Potentially a legal opinion
Cleanup
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14. DEAL DOCUMENTATION: SIDE LETTERS
Letter agreements outside of the main financing
documents
Common rights include
Information rights
Observer seat
Pro Rata Rights
Commercial agreements
Other risk-mitigating related covenants
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15. DILIGENCE PROCESS
Steps
Investor request for information
Open up a data room
Topics
Corporate records
Business plan and financials
Security Issuances
Material Agreements
Disputes and Litigation
Intellectual Property
Subsidiaries
Miscellaneous
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16. INTERFACE BETWEEN DEAL
DOCUMENTATION AND DILIGENCE
Diligence –
The process during which investors obtain information about the
company to identify and assess risk investment is made.
Deal Documentation –
The representations in the stock purchase agreement provide
statements of fact regarding categories of risk, which when read
connection with the disclosure schedule accurately conveys the
information by which the investors can assess risk.
Covenants, commonly in the Investors’ Rights Agreement are
contractual obligations that the company must undertake post
closing.
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17. CLOSING AND POST-CLOSING ISSUES
Typical Order of Operation of Closing
Board consent
Stockholder consent
Filing charter
Then closing can happen usually with escrowed signature pages
Typical post-closing action items
Securities filings
228 Notices
Issuing stock certificates
Closing binder
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18. COMMON PITFALLS AND TRAPS FOR THE
UNWARY
Negotiating before you have run a proper pro
forma
Securities laws issues
Finders
Poor record keeping
Napkin promises
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