convertible debt vs. priced equity rounds: evaluating the ......may 11, 2021 · • start-ups and...

Convertible Debt vs. Priced Equity Rounds:

Evaluating the Preferred Deal Structure for

Early Stage FinancingPros and Cons of Different Financing Options for Entrepreneurs and Investors

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TUESDAY, MAY 11, 2021

Presenting a live 90-minute webinar with interactive Q&A

Terrence M. (Terry) Kerwin, Partner, Fox Rothschild LLP, Exton, PA

Elizabeth D. Sigety, Partner & Chair, National Emerging Companies & Venture Capital Practice,

Fox Rothschild LLP, Warrington, PA

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© 2021 Fox Rothschild

Elizabeth D. Sigety, Esq.

Fox Rothschild LLP

[email protected]

(215) 918-3554

May 11, 2021 Startups: ConvertiblesEarly Stage Funding for

The Market

• 2020*– VCs deployed over $164

billion -

– Capital deployed across16,042 US venture deals

Trend increasing every year.

Almost 5000 deals done to date in 2021

*PitchBook

Show me the money!

Total Investment by All Angel Groups Per Year Nationwide?

Approximately $3 billion in 2020 • (Pitchbook)

Early Stage Funding Ecosystem

Credit Cards

Friends & Family, CrowdFunding Incubators,

AcceleratorsAngels VCs

Angel Financing vs. Venture Financing

ANGELS VENTURE FINANCING

Source of $$$$$$ Raise money from others and their job is toInvest own money (volunteers)invest that money.

Stage of company Early-Stage Businesses Later-stage businesses. Emphasis on high growth industries (e.g., tech, life science but others too).

Size of investment/Average investment round

$10,000-$200,000 / $500,000-$2.0 million – give or take

$2 million +, but there are some early-stage VCs who invest less.

Representing a Startup Venture

What is the Attorney’s Role?

• Attorneys should be prepared to advise on:

– Types and stages of startup funding– Strategies to attract venture capital

financing and evaluate investors (know your deal terms!)

– How to prepare for due diligence and avoid common pitfalls

– Entity structure, IP ownership, restrictive covenants, etc.

– Negotiating and preparing term sheets and definitive documents

Investors May Purchase Debt or Equity

(but what are SAFEs and convertible debt really?)

Private EquityPrivate Equity

PublicStock Markets

(IPO, SPAC, DO)

PublicStock Markets

(IPO, SPAC, DO)

Debt / Promissory Notes


Equity FinancingEquity FinancingNon-Equity FinancingNon-Equity Financing

Angel Financing / Venture Capital


In Common






Creates partnerships with people who have “skin in the game”Creates partnerships with people who have “skin in the game”

Sources for practical advice, access to networks and other assistanceSources for practical advice, access to networks and other assistance

Investors may be able to provide additional rounds of fundingInvestors may be able to provide additional rounds of funding

Leverage their experience preparing a company for an exit Leverage their experience preparing a company for an exit

Distinctions

Angel Financing / Venture Capitall

Angel Financing / Venture Capitall




What are you selling?What are you selling?

Debt – a future promise to pay later with either

Equity or Cash

Debt – a future promise to pay later with either

Equity or Cash

Stock – true ownership today Stock – true ownership today

DocumentationDocumentation

Promissory NoteNote Purchase Agreement

Promissory NoteNote Purchase Agreement

Stock Purchase AgreementCharter Amendment

Investors Rights Agreement

Stock Purchase AgreementCharter Amendment

Investors Rights Agreement

DeploymentDeployment

Perception that Faster Perception that Faster Perception that slower Perception that slower

Simple Agreement for Future Equity

SAFE: A hybrid security

SAFE - an agreement that if a company raises money (or is sold or has an IPO), the investor will get an amount of preferred stock valued at the price of the new round of financing (or the sale price of company).

• Introduced by Y Combinator in 2013.

(see https://www.ycombinator.com/documents/ for forms)

• Historically used for early-stage friends and family – pre-angel investing. Small bridge rounds to a priced round of financing

• Recent trends - increased acceptance in the angel community, especially in the West, and early-stage venture capital. Now, many use a “post money” SAFE where the SAFE ownership is measured after all of the SAFE money is converted into the equity round. This is due to SAFE rounds being viewed as independent fundraising rounds.

SAFE: Varieties

There are four flavors of SAFEs:

• Valuation cap, no discount

• Discount, no valuation cap

• Discount & valuation cap

• Most favored nations, no discount, no cap

Other SAFE Terms

All can be coupled with a Pro Rata Agreement, giving participation rights to the SAFE holder in the next preferred stock financing.

No control rights.

Regulated by securities laws.

SAFE vs. Convertible Debt

– Convertible debt-like features:• Valuation of the company is delayed• Investment will convert into securities upon a future

event

– Differences from convertible debt:• It’s not debt – no debt priority.• There’s no maturity date so no repayment obligation.• There’s no interest.• Therefore, if there is no future equity financing, the

SAFE holder has no rights.

SAFE vs. Preferred Stock

– Same: Owner of the safe usually ends up with preferred stock

– Difference: SAFE holder doesn’t have rights of preferred stockholder until a conversion event (votes, board seat, control, etc.)

SAFE: Good and Bad

For Company, SAFE Advantages:• No risk of funds not being available to pay debt at maturity date

• No interest that’s accruing

• Fast and simple – lower legal fees.

For Investors, SAFE Disadvantages:• No guarantee contracts ever convert and no maturity date

• Don’t know what they are buying – valuation issue

Historically, many Angels and VCs would NOT invest in SAFEs though seen more at angel/early VC level recently. Know to whom you are selling!!

SAFE – More information

For more information, download the SAFE User Guide from:

www.ycombinator.com/documents/

Convertible Note

•Generally, a convertible note is a debt instrument that is convertible into equity of the issuer or another entity at a future point in time.

•Like a promissory note, it has terms governing principal, interest and a maturity date.

Convertible Note – Bridge to Equity

• Start-ups and investors typically view convertible notes as asecurity that will convert into the same preferred equity securitythe start-up issues to its first institutional venture capitalinvestor in the company’s fixed price round (Series Seed orSeries A).

• With the general goal of having a higher valuation in a followinground of financing, convertible notes serve as a “bridge”between the need for immediate capital to the point in time thatthe company is ready for a proper valuation.

When are Convertible Notes Used?

• Pre-Valuation Start-ups– Used in seed-stage financing.

• Developed Start-ups– Used to bridge need in capital to later-stage or subsequent fixed price

round financing.

–BUT increased use for multiple independent rounds – put off need forvaluation and giving up control. Think before over-using this security.

Convertible Note – A Security

• Convertible notes are securities–Section 5 of the Securities Act mandates that every

time a security is sold, it must either be registeredwith the SEC or exempt from registration.

• Common exemptions:–Regulation D (“Safe Harbor”)–Section 4(5) (Accredited Investors)–Rule 147 (Intra-State Offering Exemption)

Why Convertible Notes?

• Defer company valuation– Generally, valuation determines what percent of the company is being

offered. This valuation, however, can be difficult to determine for many early-stage start-ups.

– Deferring valuation provides the start-up an opportunity to establish proof-of-concept, data points, and other key metrics.

• Simple/Efficient/Fast – Perception that will reduce legal and accounting fees.

– Less features to negotiate than a fixed price round.

• Maintain control of company

Terms of Convertible Notes

• Interest Rate

• No Prepayment without Noteholder Consent

• Conversion Discount

• Valuation Cap

• Qualified Financing Defined – Mandatory Conversion

• Optional Conversion upon non-qualified financing

• Conversion upon Change of Control/Maturity

• Most Favored Nation

• Occasional other rights – Participation Rights

Interest Rate

•Subject to negotiation – presently 4%-8% typical

• Interest not paid periodically – accrues on the principal and is added to purchase price for the shares received upon conversion.

•Beware of simple annual interest vs. compounding interest.

Prepayment

•The investors purchase convertible notes for the upside in the Company, not to get their principal and interest.

•Therefore, no prepayment at the Company’s option. Noteholders must consent – either a majority of the convertible note round or each holder – if Company wants to prepay.

Conversion Discount

•Grants noteholder the right to purchase stock upon the closing of the next equity financing at a discount. So, if the discount is 20% and the price of a share of stock in the equity financing is $1.00, the noteholder gets the share for $0.80.

•Rewards the noteholder for the risk they took in investing early.

•Discounts usually range from 10% to 30%.

Conversion Calculation

• Example:–Conversion discount of 20%–Convertible note valued at $100,000 (not including

interest)–Subsequent fixed price financing round sets price of

share at $1.00–Note holder would convert the note at an effective

price of $0.80 per share resulting in 125,000 shares ($100,000 divided by $0.80 per share)

Valuation Cap

•A provision that creates a cap on the valuation of the Company for the purpose of calculating the conversion price at the time the note converts (the next equity financing).

•Protects noteholder against a sharp increase in valuation – rewards them for risk of early investment.

Valuation Cap Calculation

• Example:– Note purchased for $100,000 and includes $5,000,000 valuation cap

provision

– Fixed price round at $10,000,000

– Price per share set at $1.00

– Note holder would convert at an effective price of $0.50 per share($5,000,000 divided by $10,000,000)

– Note holder would get 200,000 shares (This is a 2x return, notincluding any accrued interest)

– The previous discount example only gave the note holder 125,000shares after the 20% conversion discount.

Qualified Financing – Mandatory Conversion

• Qualified Financing–A mechanism that automatically converts the

convertible note debt into equity upon the equity financing of over a certain funding amount. So, for example, if the Company raises $2,000,000 in a preferred stock financing, the note would automatically convert at a discount or at the valuation cap price.

–Adds protection to the note holder from having note converted to equity prematurely during a small fixed pricing round and the Company gets the debt off its balance sheet.

Optional Provisions

• Optional Conversion upon non-qualified financing – consider size of convertible note raise.

• Conversion upon Change of Control – different options to calculate conversion rate. Fixed valuation, multiple of return, or as if note converted immediately prior to sale of company.

• Maturity – Offer to allow conversion to “Plain Vanilla” preferred rather than pay principal/interest.

Other provisions

• Most favored nations – allows holder to obtain more favorable terms offered to subsequent investor.

• Participation Rights – the right to purchase additional securities of future offerings on a pro rata basis.

• Warrants – a “sweetener” – can be offered to a lead investor, investors over a certain amount or if valuation cap deemed to high, etc.

Moral of the Story

•Moral of the story – not all convertible notes are alike. Do not treat them like a form – close legal review and financial modeling are critical

Risks of Convertible Notes vs. Equity

• Straight Equity financing has gotten faster and cheaper.

• Many angel and nearly all venture capital investors prefer fixed price equity rounds.

• If no fixed price round occurs, company stuck with debt on balance sheet at an early stage.

• The interest of the founders and the investors can be “misaligned” with Convertible Notes.

–Founders’ interest is to maximize company valuation vs. noteholders’ interest is to minimize company valuation. (Noteholder will get more % of company with lower valuation.)

Risks of Convertible NotesCompany Side

Danger of a low subsequent fixed price round

– Companies usually assume their company valuation will be higher at the time of a delayed fixed price round.

– Companies do not consider the effects of a discounted convertible note if the company valuation is lower than expected or goes down.

– Result – Noteholder gets significantly more equity than anticipated .

Investor Considerations

Is delaying valuation in the interest of the convertible noteholder?

– Investor goal is the upside achieved through equity ownership not interest on debt

– If the subsequent fixed price round is at a valuation higher than expected, the noteholder is not rewarded for the risk of their early stage investment. (the reason why most sophisticated investors require a valuation cap)

– (Result is less equity than expected.

Investor Considerations

Valuation Cap (the monster in the room…)

– Conversion discount may not adequately rewardthe note holder for their early-stage risk.

– A valuation cap provides added value to protectinvestors from an inflated company valuation.

– Most Angel Groups will not take a convertiblenote without a valuation cap.

– But for Companies, this begs the issue ofavoiding valuation negotiations.

Perils of Convertible Debt

Multiple Liquidation Preference

• Convertible Note investor puts in $100k with $5M cap• Series A investor puts in $2.0 million at $10 million pre-

money valuation (price of $1/share)• Seed investor gets $200,000 worth of shares, which

would typically then have 1x liquidation preference as preferred stock

• Result = convertible note investor has twice the value put in and an effective 2x liquidation preference

Perils of Convertible Debt

Liquidation Cap Issues

• No cap - Risky for investors– If note investment made when company is worth

$1,000,000 and company valued at $10,000,000 upon later equity raise, investor who took early-stage risk to get a 20% discount off the $10M raise is not fairly compensated vs. investor buying in after the company’s value increased ten-fold.

• With cap – Risky for founders– Since convertible notes never have a minimum price,

with a cap the founders have all the pricing risk (multiple liquidation preference).

Summary: Perils of Convertible Debt

PROS CONS

Simple, efficient, fast (but forms like series seed and SAFE may lessen this advantage)

If you don’t have qualified financing by the maturity date of the note, you have to repay debt

Traditionally low cost Convertible notes may be disfavored by potential investors in subsequent fixed price round

Postpones company valuation (but the cap begs the issue)

May have “misaligned” incentive between start-up and investors

Maintain control over company Some provisions difficult to negotiate (conversion discount, valuation cap, most favored nation) Most angels and VCs will not invest without a valuation cap

A word on taxes…

• Qualified Small Business Stock (QSBS – Section 1202 of IRC) – investors in emerging businesses formed as corporations can get capital gains forgiveness on the sale of stock if hold the stock for 5 years. Investment in a convertible note or SAFE will not toll that holding period.

• Many state tax credits also do not apply to convertible notes and SAFEs.

Recent Trends

• The Angel Capital Association’s 2019 Angel Funders Report indicated a growing acceptance by Angel Investment Groups of the Convertible Note (44% of early stage fundings in 2018 up from 36% in 2019). SAFEs under 2%.

• BUT AngelList reports a large increase in SAFEs (80% in the first half of 2019 – especially on the West coast BUT AngelList caters more to individual investors.

• So – know your customers (F&F, angels or VCs. East coast vs. West coast)!!

Venture Capital and Onwards

For some, equity is the only road …

Thank you and Good Luck!

Elizabeth D. Sigety, Esq.

Co-Chair, National Emerging Companies & Venture Finance Group

Fox Rothschild LLP

[email protected]

(215)918-3554

© 2019 Fox Rothschild

Early Stage Funding for Startups: Priced Equity Rounds

May 11, 2021

Terrence M. Kerwin, Esq.

Fox Rothschild LLP

[email protected]

(610) 458-6186

mailto:[email protected]

What is a Priced Equity Round?

• Investment round in which a company sells equity interests toinvestors.

• Typically preferred stock.

• Requires the company to be valued.

• Typically involves at least one sophisticated lead investorcapable of negotiating a meaningful valuation and otherinvestment terms.

• In 2020 VCs deployed over $164 billion in capital in over16,000 transactions, trend increasing year over year.

Key Features of Priced Equity Rounds

A. Offering Terms

B. Governance Rights

C.Economic Rights

D.Other Rights (transfer of shares, anti-dilution, registration, etc.)

Offering Terms –Angel Financing vs. Venture Financing

ANGELS VENTURE FINANCING

Source of $$$$$$ Invest own money Raise money from others and their job is to invest that money.

Stage of company Startup and Early Stage Businesses

Later-stage businesses. Emphasis on high growth industries (e.g., tech, life science).

Size of investment/Average investment round

$500,000-$1.5 million $2 million +

Type of securities Series Seed or Series A Series A or later

Series Seed vs. Series A Terms

Industry Accepted Model Documents

• www.seriesseed.com

• https://nvca.org

• Industry spends estimated $200 million/year in legal fees onprivate financing rounds

• Model documents include footnoted commentary; intended toreflect current practices and customs (West and East Coast)

http://www.seriesseed.com/

Offering Terms

• Amount to Raise (including/excluding convertible debt)

• Pre-Money Valuation / Price Per Share

• Size of Equity Incentive Pool

Share price is calculated on a pre-money basis. Ownership stakes are calculated on a post-money basis.

Offering Terms - Valuation

Methodologies:

• Venture Capital Method (5 year terminal value to get 10X)

• Discounted Cash Flow or Net Present Value

• More art than science


• Existing shareholders care about the pre-money valuation.

• VCs care about the post-money valuation.

Founders

Employee Pool

Series A Investors

Series B Investors

Series C Investors


Suppose (a) the existing shareholders ask for $15 million in new money on a $25 million valuation and (b) the VCs require a 5X valuation pop, then:

Pre $

$25

million+

New $

$15

million=

Post $

$40

millionX 5 =

FV

$200

million

What if the $15 million produced a $125 million company?

FV

$125

Millio

n

÷ 5 =Post $

$25

million-

New $

$15

million=

Pre $

$10

million

Offering Terms –Size of Equity Incentive Pool

• VC: “$10 mil of new money on a $20mil pre-money valuation.”

• Company: “Great, we have a deal.”

• VC: “We’ll need to refresh the stockoption pool for employees,consultants and key partners. 20%should be sufficient.”

Governance Rights –Series Seed vs. Series A

SERIES SEED SERIES A

Board Seat Y Y

Investor Director Veto N Y (but not always)

Shareholder Veto (Protective Provision)

Y (fundamental decisions, decisions adversely affecting Series Seed)

Y (same as Series Seed plus additional protections)

Governance Rights - Board Seats

• Approval of Investor Director(s):

– Lending

– Guarantees

– Cap on debt

– Conflict of interest transactions

– Executive compensation/hiring/firing

– Major corporate/business decisions.

Governance Rights – Shareholder Veto

• Protective Provisions:

– Fundamental transactions

– Amending governance documents

– New equity securities (senior or pari passu)

– Purchasing, redeeming, paying dividends on existing securities prior to preferred

– Cap on debt

– Change Board size

Economic Rights –Series Seed vs. Series A


Dividends Y (typically pari passu with common)

Y (cumulative or non-cumulative)

Liquidation Preference Y (typically 1x, typically non-participating)

Y (typically 1x, participating or non-participating)

• Current trends are toward a non-participating preferred and dividends

paid only as, if and when declared by the Board.

Economic Rights - Dividends

• Pari passu with Common• Non-cumulative (if and when

declared)

• Cumulative: accrue until exit(liquidation or redemption)

• Non-compounding (typical)

The impact of dividends matters most if the company is eventually sold for a modest amount, or if the investment is held for many years.

Economic Rights –Liquidating Preference

Guarantees VCs recoup investment prior to common equity investors

Straight Preference Return of entire investment (plus any accrued dividends) prior to the distribution of any proceeds to common or VC can convert to common equity, participating pro-rata in the common equity proceeds.

Participating Preference Return of entire investment (plus any accrued dividends) prior to the distribution of any proceeds to common holders. Then, treated like common and share pro-rata in remaining proceeds.

Multiple Participating VC entitled to a multiple (typically 2-3x) of original investment (plus any accrued dividends) prior to distribution of proceeds to common. Then, treated like common and share pro-rata in remaining proceeds.

Capped ParticipatingPreference

VC gets same right as participating preferred but aggregate return is capped.

Other Rights –Series Seed vs. Series A


Conversion to Common Y Y

Economic Anti-Dilution Protections

N Y

Drag-Along Y (may require approval of preferred and common holders and board)

Y (may only require approval of preferredholders)

ROFR and Co-Sale N (may require company to maintain ROFR and assign if not exercised)

Y

Anti-Dilution Protections

• Weighted Average (accounts for magnitude of down-round)

• Full-Ratchet (conversion price reduced to price of new shares)

Q: What kind of “issuance” can trigger anti-dilution protection?

A: Selling preferred stock at a lower price; issuing stock or stock options beyond the pool that has been set aside; issuing warrants or convertible notes that can be exercised into stock

Q: How do anti-dilution provisions work?

A: Adjust the conversion price downward.

Protects existing investors from the adverse impact experienced when a company issues new securities at a lower price than that paid by existing investors.

Drag-Along Rights

• The new investor can require existing stockholders to vote in favor of a merger or sale of assets, or otherwise to sell their stock to a third party.

• Rationale: (1) added security that a negotiated M&A event can be closed; (2) avoid/minimize dissenters rights, which interferes with tax-free transactions.

ROFR and Co-Sale Rights

Right of First Refusal and Co-Sale Rights limit the incentive and ability of the founders to dispose of a significant portion of their holdings.

Right of First Refusal A repurchase right, exercisable by the company or preferred holder

Co-Sale Right The right to tag along with a founder or junior preferred stockholder who is selling

Other Rights –Series Seed vs. Series A


Redemption N Maybe (more common in PE investment than VC)

Participation Y Y

Registration N (but Series Seed may negotiate to receive same rights as next round)

Y

Key Person and Employee Matters

Y (vesting; double trigger acceleration, etc.)

Y (vesting; restrictive covenant agreements, etc.)

Redemption

• Uncommon

• Redemption allows VCs to requirethe company to repurchase theinvestors’ shares after a set periodof time, typically 5 years. It’s a putright.

• The redemption price is typicallythe higher of the original purchaseprice [+ accrued dividends] and fairmarket value.

Other Rights and Terms

Participation Rights Gives investors the right to purchase equity in future rounds pro rata based on their ownership percentage. Allows investors to maintain pro rata share of company. Often limited to “Major Investors”.

Registration Rights Demand Registration: Permit investors to require the company to register the offer and sale of securities under the Securities Act, under certain circumstances. Piggyback Registration: Permits investors to include their securities if the company is effecting a registration.

Key Person / Employee Matters

Employment Agreements / Restrictive Covenant Agreements (Sign early, sign often: don’t let employees leverage against closing)Founder stock and stock option vesting.

Insurance D&O; Key Person

Regulation Crowdfunding

Regulation Crowdfunding (Reg CF) enables eligible

companies to offer and sell securities through

crowdfunding to accredited and non-accredited

investors. The rules:

• require all transactions under Reg CF to take place

online through an SEC-registered intermediary

(either a broker-dealer or a funding portal);

• permit a company to raise a maximum aggregate

amount of $5 million through crowdfunding

offerings in a 12-month period;

• limit the amount individual non-accredited investors

can invest;

• require disclosure of information in filings with the

SEC and to investors and the intermediary

facilitating the offering; and

• securities purchased in a crowdfunding transaction

generally cannot be resold for one year.

Federal Securities Law Compliance

Type of Offering Offering Limit

within 12-month Period

General Solicitation Investor Requirements SEC Fil ing or Disclosure

Requirements Restrictions on

Resale

Preemption of State Registration and Qualification

Rule 506(b) of Regulation D

None No Unlimited accredited investors

Up to 35 sophisticated but

non-accredited investors in a 90 day

period

Form D

Financial statement

requirements for non-accredited

investors consistent with

Regulation A

Yes. Restricted securities

Yes

Rule 506(c) of Regulation D

None Yes Unlimited accredited investors

Issuer must take reasonable steps to

verify that all purchasers are

accredited investors

Form D Yes. Restricted securities

Yes

Federal Securities Law Compliance

Type of Offering Offering Limit

within 12-month Period

General Solicitation Investor Requirements SEC Fil ing or Disclosure

Requirements Restrictions on

Resale

Preemption of State Registration and Qualification

Rule 504 of Regulation D

$10 million Permitted in l imited circumstances

None Form D Yes. Restricted securities except in l imited

circumstances

No

Regulation Crowdfunding; Section 4(a)(6)

$5 million Testing the waters permitted before

Form C is fi led

Permitted with limits on advertising after

Form C is fi led

Offering must be conducted on an internet platform

through a registered intermediary

No investment limits for accredited

investors

Non-accredited investors are subject to investment limits

based on the greater of annual income and net

worth

Form C, including two years of

financial statements that

are certified, reviewed or audited, as required.

Progress and

annual reports

12-month resale

l imitations

Yes

Accredited Investors

• Whether investors are considered“accredited investors” is an importantfact in connection with registrationexemptions.

• Definition that has changed over time.

• One reason offerings may be limitedto accredited investors is to ensurethat all participating investors arefinancially sophisticated and able tofend for themselves or sustain the riskof loss, thus rendering unnecessarythe protections that come from aregistered offering.

Accredited Investors

• An accredited investor, in the context of a natural person, includes anyone who:

– earned income that exceeded $200,000 (or $300,000 together with a spouse or spousalequivalent) in each of the prior two years, and reasonably expects the same for the current year,OR

– has a net worth over $1 million, either alone or together with a spouse or spousal equivalent(excluding the value of the person’s primary residence), OR

– holds in good standing a Series 7, 65 or 82 license; OR

– is a “family client” of a “family office” (as defined in the Investment Advisors Act of 1940) who hasassets under management in excess of $5 million.

• There are other categories of accredited investors, including the following, whichare often relevant:

– any trust, with total assets in excess of $5 million, not formed specifically to purchase the subjectsecurities, whose purchase is directed by a sophisticated person, OR

– certain entity with total investments in excess of $5 million, not formed to specifically purchasethe subject securities, OR

– any entity in which all of the equity owners are accredited investors.

Conclusions

• Priced equity rounds require the company to be valued, whichattracts and requires more sophisticated investors.

• Amount of $$ invested drives terms.

• The most frequently negotiated terms involve:– valuation (including size of equity incentive pool);

– control and economic rights and economic anti-dilution provisions;

– transfer of shares, redemption and key person/employee matters.

• Always be cognizant of federal and state securities laws andapplicable filing requirements.