legal land mines: raising capital

20
presents MICK BAIN WILMERHALE Legal Land Mines: Raising Capital

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Starting a new company is hard, but putting in place the right legal framework for your business doesn’t have to be... Dive deep into the most important issues relating to raising capital for your company with insight from Mick Bain and Janene Asgeirsson, two experts on start-up law from WilmerHale. Having worked with hundreds of entrepreneurs and start-ups, Janene and Mick will answer the questions that you haven't even thought to ask. What You'll Learn: Financing structures and terms How to comply with security regulations Types of investors to work with and why

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Page 1: Legal Land Mines: Raising Capital

presents

MICK BAIN WILMERHALE

Legal Land Mines: Raising Capital

Page 2: Legal Land Mines: Raising Capital

Legal Landmines – Raising Capital

Mick Bain Janene Ásgeirsson

April 29, 2014

Page 3: Legal Land Mines: Raising Capital

WilmerHale

Setting the Stage – the Company- Stage of the Company - Funding needs of the Company: both today and

over time - Key business objectives and milestones to be

achieved - Future inflection points

Page 4: Legal Land Mines: Raising Capital

WilmerHale

Setting the Stage – the Investors- Friends and Family - Crowdfunding - Social/ product funding (e.g., Kickstarter) - Government grants - Angel investors - Venture Capital investors - Strategic investors

Page 5: Legal Land Mines: Raising Capital

WilmerHale

Setting the Stage – What do Investors Care About?

Angels and VCs rank their priorities in a deal very differently !Business Attributes Angel VC !Investor’s possible involvement 1 3 Investor’s strengths filling gaps in business 2 5 Geographically close 3 6 Potential exit routes (liquidity) 4 1 Investor’s understanding of business 4 2 Presence of (potential) co-investors 6 4 !Source: Angel Investing: Matching Startup Funds with Startup Companies – A Guide for Entrepreneurs, Individual Investors and Venture Capitalists (Jossey-Bass).

Page 6: Legal Land Mines: Raising Capital

WilmerHale

Setting the Stage – What do Investors Care About?

- Great Team - Sound Business Proposition - Solid Business Plan - Technical/IP Advantage - Customer and Market Due Diligence - Execution

Page 7: Legal Land Mines: Raising Capital

WilmerHale

Setting the Stage – How do VCs Work and What do they Want?

- Funds are partnerships (sometimes limited liability companies)

- Where do they get their money? ▪Capital Contributions: GPs – 1%. LPs – 99% ▪Funds last 10 years. Therefore they need to raise money

about every 3- 5 years.

Page 8: Legal Land Mines: Raising Capital

WilmerHale

Setting the Stage – How do VCs Work and What do they Want?

General Partner LLC Limited Partners (individuals and

institutions)

1% of capital / 20% of Profit

portfolio

company

portfolio

company

portfolio

company

99% of capital / 80% of Profit Fund

(2-2.5% total commitments)

General Partner LLC Limited Partners (individuals and

institutions)

portfolio

company

portfolio

company

portfolio

company

99% of capital / Fund

Management Fee

Page 9: Legal Land Mines: Raising Capital

WilmerHale

Setting the Stage – How do VCs Work and What do they Want?

- How do VCs decide what to invest in? - What are their expectations? ▪VC Funds want a 30% return to compensate for risk and liability ▪ This translates to a 3x return of capital over the life of the fund ▪ The home run (10x) pay-offs provide most of the return

% of Deals

$ million of Capital

Return Multiple Return

% of Return

Home Runs 10% $ 22 10 $ 220 72% Other Wins 30% $ 28 3 $ 84 28% Losers 60% $ 40 0 $ - 0%

Expenses $ 10

Total 100% $ 100 3 $ 304 100%

Page 10: Legal Land Mines: Raising Capital

WilmerHale

Setting the Stage – What do Companies Care About?

- Money - Help - Limited dilution/High valuations - Terms they can live with – today and tomorrow - Speed, efficiency and limited expenses

Page 11: Legal Land Mines: Raising Capital

WilmerHale

Types of Financing Structures- Cash Loan - Common Stock - Preferred Stock - Convertible Debt

Page 12: Legal Land Mines: Raising Capital

WilmerHale

Compare Structures with Goals

Money? Help? Limited Dilution?

Company Friendly Terms?

Good Precedent for Future Rounds?

Speed/Low Cost?

Cash Loan Y N Y N N ?

Common Stock

Y N N N N ?

Convertible Debt

Y Y ? ? Y Y

Preferred Stock

Y Y ? ? Y N

Page 13: Legal Land Mines: Raising Capital

WilmerHale

Convertible Debt Terms- How it works !- Benefits

- Postpones valuation discussion (but see “caps”) - Postpones many terms - Creditor status - Fast - Less expensive

Page 14: Legal Land Mines: Raising Capital

WilmerHale

Convertible Debt Terms- Typical terms

- Interest rate - Maturity date - Automatic conversion in a “Qualified Financing” - Optional conversion at maturity (common or preferred?)

- Conversion discount - Conversion cap

- Optional conversion if no financing (common or preferred?) - Sale terms - Warrant coverage

Page 15: Legal Land Mines: Raising Capital

WilmerHale

Preferred Stock Terms!3 categories of terms: !- Economic !- Control !- Everything Else (TSTDM)

Page 16: Legal Land Mines: Raising Capital

WilmerHale

Preferred Stock TermsECONOMIC TERMS - Pre-money valuation !- Option Pool !- Liquidation Preference

- 1x - Multiple - Participating Preferred !

- Accruing Dividends

Page 17: Legal Land Mines: Raising Capital

WilmerHale

Preferred Stock TermsECONOMIC TERMS !- Anti-Dilution

- Weighted-average - Full ratchet !

- Redemption Rights !- Preemptive/ Participation Rights

Page 18: Legal Land Mines: Raising Capital

WilmerHale

Preferred Stock TermsCONTROL TERMS !- Voting Rights and Covenants !- Board Composition and Representation !- Drag Along Rights !- Vesting

Page 19: Legal Land Mines: Raising Capital

WilmerHale

Preferred Stock TermsEverything Else !- Registration Rights !- Information Rights !- Right of First Refusal and Co-Sale !!

Page 20: Legal Land Mines: Raising Capital

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