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

1. presents
MICK BAIN
WILMERHALE
Legal Land Mines:
Raising Capital

2. Legal Landmines – Raising Capital
Mick Bain
Janene Ásgeirsson
April 29, 2014

3. 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

4. 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

5. 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).

6. 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

7. 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.

8. 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 ProfitFund
(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

9. 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%

10. 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

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

12. 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

13. WilmerHale
Convertible Debt Terms
- How it works
!
- Benefits
- Postpones valuation discussion (but see “caps”)
- Postpones many terms
- Creditor status
- Fast
- Less expensive

14. 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

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

16. WilmerHale
Preferred Stock Terms
ECONOMIC TERMS
- Pre-money valuation
!
- Option Pool
!
- Liquidation Preference
- 1x
- Multiple
- Participating Preferred
!
- Accruing Dividends

17. WilmerHale
Preferred Stock Terms
ECONOMIC TERMS
!
- Anti-Dilution
- Weighted-average
- Full ratchet
!
- Redemption Rights
!
- Preemptive/ Participation Rights

18. WilmerHale
Preferred Stock Terms
CONTROL TERMS
!
- Voting Rights and Covenants
!
- Board Composition and Representation
!
- Drag Along Rights
!
- Vesting

19. WilmerHale
Preferred Stock Terms
Everything Else
!
- Registration Rights
!
- Information Rights
!
- Right of First Refusal and Co-Sale
!
!

20. Course Title
Course Title
INSTRUCTOR NAME