1. BUSINESS FUNDAMENTALS
BOOTCAMP II
VENTURE CAPITAL ROCKS
William Contente
GESMER UPDEGROVE LLP
March 25, 2011

2. You can’t always get what you
want… but if you try sometimes,
you might find, you get what you
need.
-Mick Jagger

3. We won’t get fooled again.
VALUATION

4. VALUATION is a constant
source of confusion.
SPELL OUT:
Pre-money
Fully Diluted – Elaborate if Necessary
Option Pool Impact
DO NOT BE CREATIVE. AT ALL. EVEN A
LITTLE.

5. And I still haven’t found
what I’m looking for
Identify your investors, indicate
who’s committed and for how
much.
What gaps remain?

6. I love you more today
than yesterday
CUMULATING DIVIDENDS
Annual Rates of 6-8% are most common

7. That’s one for you,
nineteen for me
LIQUIDATION PREFERENCES
Non-Participating
Participating
Participating w/variations (caps,
multiples)

8. NON-PARTICIPATING
PREFERRED/COMMON
CONVERTIBLE PREFERRED/COMMON
$25.00
$20.00
Stock Price
$15.00
$10.00
$5.00
$0.00
2M 4M 6M 8M 10M 12M 14M 16M 18M 20M
Preferred Stock Payment in $/Sh $10.00 $10.00 $10.00 $10.00 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00
Common Stock Payment in $/Sh $0.00 $2.50 $5.00 $7.50 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00
Purchase Price (Millions)

9. PARTICIPATING
PREFERRED/COMMON
PARTICIPATING CONVERTIBLE PREFERRED/COMMON
$30
$25
$20
Stock Price
$15
$10
$5
$0
2M 4M 6M 8M 10M 15M 20M
Preferred Stock Payment in $/Sh $10 $12 $14 $16 $18 $23 $28
Common Stock Payment in $/Sh $0 $2.00 $4.00 $6.00 $8.00 $13.00 $18.00
Purchase Price (Millions)
Preferred Stock Payment in $/Sh Common Stock Payment in $/Sh

10. It’s alright ma,
I’m only bleeding
ANTI-DILUTION PROTECTION
Full Ratchet
Weighted Average

11. ANTI-DILUTION EXAMPLE
ASSUME:
1MM shares outstanding @$5/share
Old Money = 100K shares (10% of the 1MM)
New Money purchases 100 shares @$1/share

12. ANTI-DILUTION EXAMPLE
Weighted Average Anti- Full Ratchet Anti-
dilution: dilution:
 Old Money goes from  Old Money goes from
100,000 shares to 100,000 shares to
100,080 shares 500,000 shares
 10% to 10.006%  10% to 35.712%

13. Because I told you before,
you can’t do that
VOTING, PROTECTIVE PROVISIONS
Consent of Preferred Needed to:
Reduce the Rights of Preferred
Shares
Do another Financing

14. If you want it, here it is, come and get it,
but you’d better hurry
‘cause it’s going fast
REDEMPTION RIGHTS
Present in most VC deals
Almost never exercised
Watch out for renegade investors

15. R-E-S-P-E-C-T
BOARD REPRESENTATION
Balance of Board is always discussed
Founders frequently give up control,
even in a Series A round
Outside Directors encouraged

16. I’m gonna get my share of what’s mine
PRE-EMPTIVE RIGHTS
Maintain percentage ownership
Allocate ALL of next round to investors

17. In-A-Gadda-Da-Vida, Baby
REGISTRATION RIGHTS
“The most heavily negotiated, and least
important, part of any deal.”
Language only a lawyer could love
You’re at the Underwriter’s mercy anyway

18. She’s my best friend’s girl –
she used to be mine
RIGHT OF FIRST REFUSAL/CO-SALE
Rarely contentious

19. You’re the reason I’m movin’ on
TAG/DRAG ALONG RIGHTS
Simplify Exit
Eliminate Appraisal Rights

20. Take another little piece
of my heart now, baby
FOUNDER VESTING; OPTION VESTING

21. I can’t get no satisfaction, and I tried…
CAPS ON TRANSACTION COSTS
Generally OK to cap the investor T/A
costs paid by the Company
Dangerous to cap Company T/A costs

22. And you know something is happening
here, but you don’t know what it is,
do you, Mr. Jones?
INFORMATION RIGHTS

23. If I catch you with another man,
that’s the end, little girl
NO SHOP CLAUSE

24. Stayin’ Alive
PAY-TO-PLAY PROVISIONS
Lose pre-emptive rights
Lose anti-dilution protection
Convert to Common Stock

25. Don’t think twice, it’s all right
SIGNATURE LINE
Usually non-binding except for
No-Shop Clause
Payment of Transaction Expenses
(sometimes)