Documente Academic
Documente Profesional
Documente Cultură
31 Jan 13
Agenda
1. Introduction 2. Initial and Seed funding 3. Series A financing 4. Strategic Investor and Exit 5. Wrap-up
Formation
Seed Financing
Additional Financing
Formative Counseling
Financing
IP Protection
Additional Financing
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Exit Strategies
Why? for the right reasons. When? at the right time. Where? at the place to be. What? the best fit. How? make it happen.
Incorporation
What?
Form of entity:
private limited company (GmbH/UG)
Others:
stock corporation (AG) limited liability partnership (oHG/KG) civil law partnership (GbR)
Agenda
1. Introduction 2. Initial and Seed funding 3. Series A financing 4. Strategic Investor and Exit 5. Wrap-up
Prior to Fundraising
Preparation
The Boy Scout motto
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copyright assignments by authors, both employees and subcontractors litigation: current, pending or threatened infringement actions employment property leases
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Initial Fundraising
Which structure?
Alternative funding
crowdfunding / crowdinvesting mezzanine debt
Courtesy of Venture Hacks
but the path will ultimately depend upon who your investor is.
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Initial Fundraising
Convertible Debt
Convertible Note: Investment in the form of a promissory note that converts into equity on the terms of a qualified financing, typically at a discount to the price of the qualified financing.
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Initial Fundraising
Equity Investment
Valuation, valuation, valuation Typically, full negotiation of preferred shares (even if pref light, Series Seed or other structure):
liquidation preference investor consents & protective provisions anti-dilution drag / tag provisions warranties board seats etc.
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Housekeeping
You have the term sheet, now what?
Intellectual Property
protected through trademark application or otherwise
litigation?
no investor wants to fund a law suit
Housekeeping
You have signed the term sheet, now what?
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Housekeeping
Congratulations, you closed the deal now what?
fiduciary duties:
duty of care: requires directors to act with the amount of care that a reasonable person would use in similar circumstances.
directors are required to act on an informed basis, in good faith and in a manner that they reasonably believe is in the best interests of the company
duty of loyalty: requires directors to put the interest of the company ahead of their own interests.
Board / Supervisory Board / Advisory Board Information rights and communication Try to get as much out of your investors experience as possible.
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Agenda
1. Introduction 2. Initial and Seed funding 3. Series A financing 4. Strategic Investor and Exit 5. Wrap-up
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Term Sheets
Importance European vs. US VCs VCs vs. Strategic Investors Transactions in different jurisdictions Additional (binding) terms:
governing law break fees exclusivity / no shop confidentiality and non-solicitation
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Term Sheets
Top 10 Term Sheet Provisions Liquidation Preference Anti-dilution Protection Redemption Dividends Drag-along Right Right of First Refusal Founders Stock (Vesting) Protective Provisions Board Representation Registration Rights
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Liquidation Preference
What is it?
Basic definition:
Investors get their money back before anyone else
Legal definition:
a right given to holders of a preferred class of shares whereby such holders, in the event of a liquidation event, are entitled to receive their investment back (plus accrued dividends) before the holders of ordinary shares receive anything.
Why is it important?
gives investors downside protection guarantees the investor that they will see the first money out in a liquidation scenario
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Liquidation Preference
Tips & Tricks
Tips:
run the exit model (a VC has already done so) multiple liq. pref. & participation reflect state of economy
Tricks:
horizon / time based inflection point cap / participation removed above $$ value
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Liquidation Preference
Traps
Traps:
high pre-money valuation with multiple / participating liq. pref. liquidation preference on IPO participation = double dip accrued cumulative dividends liq. pref. stack from multiple rounds can be oppressive
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Anti-dilution Protection
What is it?
Basic definition:
Investors get price protection
Legal definition:
a mechanism which insures that an investors equity stake in a company will not be reduced through subsequent investments in the company at reduced valuations.
Why is it important?
gives investors downside protection guarantees the investor that they will benefit from favourable terms of subsequent investment round
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Anti-dilution Protection
Tips & Tricks
Tips:
full ratchet vs. weighted average ensure carve-outs are listed do the math
Tricks:
time-based conversion from full ratchet to weighted average pay to play
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Anti-dilution Protection
Traps
Traps:
high pre-money valuation with full ratchet when weighted average weighted average miscalculating the liquidation preference (money in vs. per share)
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Redemption
What is it?
Basic definition:
Investors get another kind of exit
Legal definition:
an investors right to require the company to repurchase shares that the investor has purchased (often at a price that is greater than what the investor paid).
Why is it important?
another form of downside protection (or even insurance policy), but investor may exercise this right if they realise that the company has no real prospect of an exit (the cash cow scenario)
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Redemption
Tips & Tricks
Tips:
resist, as not all VCs or investors require it should be justified by the VC
Tricks:
stagger the redemption ( / / ) ensure carve-out for legal ability to do so
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Redemption
Traps
Traps:
full redemption at a single date multiple return (pseudo liquidation preference) we have never exercised our right of redemption long term debt on the balance sheet (increasing if dividend as well)
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Dividends
What is it?
Basic definition:
Investors get additional return on their money
Legal definition:
distributions to shareholders from the companys profits, usually on an annual basis at a specified rate.
Why is it important?
Investors sometimes want a guaranteed rate of return on their investment
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Dividends
Tips & Tricks
Tips:
resist, as not all VCs or investors require it if have multiple liquidation preferences, may not be justified
Tricks:
non-cumulative delay commencement of earning / accruing dividends
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Dividends
Traps
Traps:
cumulative (accumulate at a specified rate) multiple rounds + liq. pref. + dividends = mountain effect on redemption accounting treatment
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Drag-along Right
What is it?
Basic definition:
Investors can force other shareholders into a joint sale
Legal definition:
if a certain threshold percentage of a companys shareholders agree to sell their shares, then all other shareholders are obliged to sell their shares in connection with such transaction.
Why is it important?
insure that a sale of the company will not be blocked by other shareholders
Drag-along Right
Tips & Tricks
Tips:
avoid low majority requirements
Tricks:
ensure participation by all shareholder groups in decision list carve-outs (e.g. below market sale, sale to affiliate)
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Drag-along Right
Traps
Traps:
VC investor only? if right can be triggered by only a few shareholders (no checks and balances)
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Basic definition:
Investors get first dibs on transfers of shares
Legal definition:
a right to acquire shares being sold by existing shareholders to third parties.
Why is it important?
allows investors to increase their percentage ownership of the company going forward bargaining tool for the Investor:
complementary (or flip side) to Co-Sale Right
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Tips:
ensure broad range of carve-outs (including tax planning) may not want offer round if numerous small shareholders Company may not always be able to purchase
Tricks:
class by class RoFR
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Traps:
VC investor only timings
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Basic definition:
Founder no longer really owns his/her shares
Legal definition:
the shares held by a founder, typically issued at incorporation, that are subject to reverse vesting granting a call option to the Company to acquire certain number of these shares in case of a leaver event.
Why is it important?
Investor ensures that Founder is incentivised to remain with the company (golden handcuffs) overcomes the free rider problem with Founder who has left
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Tips:
know what youre getting into define good leaver / bad leaver define the compensation for unvested shares
Tricks:
use bad leaver as the benchmark bad leaver = fraud, join competitor or moral turpitude credit for time served acceleration -> single & double trigger
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Traps:
standard good leaver / bad leaver use good leaver as benchmark = out the door feet first
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Protective Provisions
What are they?
Basic definition:
Investors (negatively) control the company
Legal definition:
veto rights that are given to investors, or some combination of shareholders, which require the company to obtain the prior consent of the investors before taking various corporate actions.
Why is it important?
Investors need to have a degree of control over their investments veto rights over important aspects of the business
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Protective Provisions
Tips & Tricks
Tips:
define the laundry list in term sheet split consents / vetoes between shareholder and board (if any)
Tricks:
carve-outs for ordinary course of business & budgeted items
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Protective Provisions
Traps
Traps:
standard protective provisions straightjacket thresholds Articles (public) vs. Shareholders Agreement (private)
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Board Representation
What is it?
Basic definition:
Investor oversees the company
Legal definition:
a requirement that the investor receives a seat on the companys board of directors in consideration for their investment.
Why is it important?
allows the Investor to monitor the status of their investment should be in the companys best interest, as Investor should bring degree of experience and guidance to the table certain veto rights will be allocated to the board or certain board members
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Board Representation
Tips & Tricks
Tips:
define roles for each board seat (including Founder seat) keep board lean part of Information Rights that Investor will seek
Tricks:
ownership threshold for board seat if multiple classes, seats on a class-by-class basis (rather than unique to Investor)
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Board Representation
Traps
Traps:
entrenched seat for irrelevant Investor observers & expenses directors fees for Investors
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Registration Rights
What are they?
Basic definition:
Investors get to sell if company goes public in the US
Legal definition:
contractual rights of investors to require the company to register their shares for sale to the public.
Why is it important?
Investors shares included as part of IPO or secondary if eventual exist is IPO in the US
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Registration Rights
Tips & Tricks
Tips:
resist, as not all European VCs require it not all that relevant anymore
Tricks:
know the difference between:
demand piggy back
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Registration Rights
Traps
Traps:
more than two demand rights low $$ thresholds to trigger rights customary registration rights
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Miscellaneous
Terms Co-Sale Right:
What is it?
rights which entitle an investor to include a percentage of their shares in a purchase by a third party of another shareholders sale.
Why is it important?
investor is able to control the exit of other shareholders, while ensuring that they are able to participate in exits on a pro rata basis
Subscription:
What is it?
... a right to acquire shares being issued by the company in future offerings at the same price to be paid by the new investors.
Why is it important?
allows shareholders to maintain their same percentage ownership of the company going forward
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Miscellaneous
Tips
Tips:
co-terminus: no shop and projected closing date include cap table (pre- and post-closing) cap liabilities under warranties (duration and quantum) thresholds: look at cap table cap on transaction fees and expenses standardised documentation
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Miscellaneous
Trick
Trick:
no confidentiality obligation until signed team up to outbalance any weakness (for Founder it is first time, for VC not)
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Miscellaneous
Traps (Part 1)
Traps:
as are customary in a transaction of this nature. the two page term sheet (AKA youre great & were great, so lets make lots of money together) exploding term sheet payment of fees & expenses even if doesnt close
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Miscellaneous
Traps (Part 2)
Traps:
option pool shuffle price adjustments / ratchets milestones: with or without adjustments forced exit provisions unwritten terms (typically, founder stock & good leaver / bad leaver) .
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Agenda
1. Introduction 2. Initial and Seed funding 3. Series A financing 4. Strategic Investor and Exit 5. Wrap-up
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Strategic Investors
Strategic Investors can come from:
competitor in different region partner along the product chain complementary product old economy / industry
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Exits
Types of Exits for Private Companies If your company has received VC investment, then be prepared for the exit (and the pressure for an exit from your investor). Assuming, you have a VC-backed company, there are only three types of exit normally available:
sale IPO (Initial Public Offering as admission to stock exchange) that which shall not be named (bankruptcy)
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Overview
Two basic types of deal structures for sale
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Share Sale
Structural Principles
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Third party consents and transfer of permits and licenses Contracts must be assigned in order to be transferred
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Agenda
1. Introduction 2. Initial and Seed funding 3. Series A financing 4. Strategic Investor and Exit 5. Wrap-up
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Helpful Resources
The Funded
www.thefunded.com
Venture Hacks
www.venturehacks.com
Katharine Campbell:
Smarter Ventures: A Survivors Guide to Venture Capital through the New Cycle
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About Orrick
Quick Overview
BEIJING
BERLIN
DSSELDORF FRANKFURT HONG KONG
One of the worlds largest and best-regarded law firms More than 1,100 lawyers in 23 locations in 8 countries Named to Law 360s "Global 20 list of the world's leading global law firms
LONDON
LOS ANGELES MILAN MOSCOW
Focus on emerging companies More than 1,000 emerging company clients More than 100 lawyers in the Silicon Valley office, including founding members of Venture Law Group Lawyers on the ground in all global hot spots for emerging technology companies Relationships with more than 100 venture capital funds
SAN FRANCISCO
SEATTLE SHANGHAI
SILICON VALLEY
TAIPEI TOKYO WASHINGTON, D.C.
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About Orrick
Emerging Companies Practice
Recognized by Legal500 as one of the top firms in the U.S. for our venture capital and emerging companies practice Clients include 5 of The Momentum Indexs Top 50 Technology Companies, 8 companies listed in GreenTech Media's Top 50 Greentech Startups, and companies listed among The Wall Street Journal's Top 50 Venture-Backed Companies, BusinessWeek's 50 Best Tech Start-Ups, and VentureWires 50 Most Innovative Technology Startups As one measure of our market presence, we have acted as either company counsel or investor counsel in venture capital financings for 9 of The Momentum Indexs Top 20 Technology Companies
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Thanks
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