Contenu connexe Similaire à Funding 101 for Tech Entrepreneurs (20) Funding 101 for Tech Entrepreneurs 1. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Idea to IPO
Funding 101 for Tech Entrepreneurs
#startup #ideatoipo
1
Roger Royse
@rroyse00
2. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
No information contained in this presentation is to be construed as legal advice.
No information contained in this presentation is intended or related to any
particular factual situation. Nothing herein forms an attorney-client relationship. If
legal advice or other expert assistance is required, the services of a competent
professional should be sought.
2
3. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Investors are partners
Stage your financing
Most funding is dilutive
Your valuation might have little to do with what you are worth
Valuation is not your biggest issue
Avoid early mistakes
Take cheap money over expensive money
Common stock is for service providers
Get a data room
Do the cleanup ahead of time
3
4. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Founders – savings, IRAs, credit cards, mortgage equity
Debt Financing
Government Grants
Friends and Family
Angels or Seed Investors
Incubators
Pitch Competitions
Institutional (VC or Private Equity)
Alternative Financing:
o Rewards-Based Crowdfunding
o JOBS Act Crowdfinancing
o ICOs, STOs, IEOs
o Royalty Financing (SEALS)
4
5. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
77% of startups rely on personal savings (and their parents) for their initial
funds
5
Source: Wells Fargo/Gallup Small Business Index
6. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Angels - $25,000
Angel Groups - $250k to $750k
Early stage VC - $1.5 M and up ($3m to $5M)
Later Stage VC - $10M and up
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7. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Smart Money
Chemistry
Commitment
Deep Pockets
Network
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8. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Bank Debt
Security
Personal Guarantees
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9. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Free Money from the Government
https://www.usa.gov/grants
https://www.aprise.org/
https://www.sba.gov/funding-programs
SBIR program
STTR grants
9
10. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
38% of startup founders raised money from their
friends and family
$23,000 was the average amount invested by
friends and family per startup
10
11. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Angels, VCs, crowdfunding, private equity, etc.
How much to raise?
Milestones
Burn rate
Target runway
Equity percentage and valuation
11
13. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Team
Projections
Market
Industry
IP and Patents
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14. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Market Size
Team
Product
Go To Market Strategy
Financial projections
NOT VALUATION
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15. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Mission
Problem to be solved
Solution (aspirin, not vitamins)
Opportunity
Competition (or alternatives)
Product
Business Model
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16. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
VC or Institutional Investor
Preferred Stock
Valuation Methods
Score Card
Venture Capital Method
Berkus Method
Cayenne Calculator
Risk Factor Summation
Negotiation
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17. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
More Valuation Methods
(Patents + People) x $1 Million
Comparables
Discounted Cash Flow
Market Multipliers
Discount to Public Companies
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18. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Kickstarter, Indiegogo
Marketing effect of offering
Tax issues
FTC or state law liability
19. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Crowdfunding (Title III of the JOBS Act)
The company issuer may sell up to $5million of securities in a 12-month
period
Individual investments in all crowdfunding issuers in a 12-month period are
limited by income or net worth tests.
Platforms
WeFunder
Republic
StartEngine
20. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Rule 506 now provides for two different types of private offering:
Rule 506(b) is essentially the same as the old Rule 506, providing an exemption for
non-public offerings but prohibiting general solicitation
Rule 506(c) is a new exemption that allows general solicitation, but with certain
restrictions and filing requirements
Rule 506(c): issuers can offer securities through means of general solicitation
as long as:
All purchasers are accredited investors; and
The issuer takes “reasonable steps” to verify the accredited investor status
Crowdfunding
AngelList
SeedInvest
FundersClub
CircleUp
OurCrowd
21. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
The JOBS Act included legislation to create what is nicknamed “Regulation
A+”, an upgrade to Regulation A
The new Regulation A keeps the allowance of non-accredited investors, and
features two kinds of Regulation A offerings, called “Tiers”:
Tier 1, with a $20 M maximum, does not preempt state law registration, but has low
federal compliance burdens
Tier 2, with a $75 M maximum, preempts state law registration, but has high
federal compliance burdens including ongoing semi-annual, annual, and current
disclosures
22. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
An ICO is a fundraising mechanism in which new projects sell their underlying
crypto tokens in exchange for bitcoin and ether.
Similar to an Initial Public Offering (IPO) in which investors purchase shares
of a company.
Based on tech like ERC20 Token Standard
Investors send funds (usually bitcoin or ether) to a smart contract that stores
the funds and distributes an equivalent value in the new token
Often “pre-sold” to raise money to build the platform
Tokens may have “utility” or security
Traded on exchanges
23. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Alternative to regular loans and equity financing
Company receives a specific amount of money from an investor in exchange
for a percentage of the company's future revenues over a certain period of
time, up to a specific amount.
Investment can be considered an "advance" to the company, and the periodic
percentage payments can be considered "royalties" to the investors.
25. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Angels
Angel Groups
Angel Funds
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26. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
The Good:
Connections to VC funding
Mentorship
Risk capital
The Bad
Hostage takers
Whiners
Demanders
The Ugly
Potential plaintiffs
Disturbers
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27. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Convertible Notes
Debt obligations that convert to preferred stock
SAFE
Convertible equity
Conversion feature
Valuation Cap
Sets a maximum valuation at which note will convert
Discount
Early investors get a discount to the preferred price
Change of Ownership
Investors convert to common or get a multiple on a sale of the
company prior to a priced financing round
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28. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Short term
Secured?
Subordinate?
Interest
Fixed repayment
Discount
Valuation Caps
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29. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Simple agreement for future equity
Pre and Post Money
Pro Rata Rights
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30. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Watered down preferred stock
Justifies low common stock price
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31. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
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Founders 4,000,000 100% 4,000,000 100%
Stock Pool 0 0% n/a
total 4,000,000 100% 4,000,000 100%
Company sells a $1,000,000 SAFE with a $4,000,000 pre money valuation cap
That means that the SAFE will take 20% of the capitalization ($1,000,000/$5.000,000)
Fully Diluted % Issued %
32. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Post Money SAFEs
Valuation caps and excessive dilution
Securities law violations
Cap Tables
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33. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Investor goals
Cooperation and Accessibility
Control
Terms and Valuation
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34. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
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Venture Capital
43. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
“Avoid venture capital unless you absolutely need it.” Randy
Komisar, venture capitalist*
*Straight Talk For Startups
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44. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Must give up Equity
No near term cash flow
Risky
Illiquid
Can the business scale?
Explosive growth
Huge market
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45. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Thematic Investors bet on their thesis of what is next
Domain Investors focus on an industry that they know well
Quant Investors focus on data
People Investors bet on the jockey, not the horse
Tech investors bet on the horse
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46. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
2% management fee on committed capital
20% carried interest
7 to 10 year terms
LPS want 2 1/2 to 3 times investment return
VC fund must earn 3 to 4 times investment to
return that amount
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47. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
50% lose money
20% – 30% are singles or doubles
The rest must be home runs (10X to 100X)
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48. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Large potential market
First Mover or first to market advantage
Long term scale over short term profits
Not able to service debt
Traction!
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49. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Venture capital will participate in management
Board seats
Board Observer
Management rights letter (for VCOC exemption)
Seven to ten year term (and longer)
Precludes small investments
Board meetings
Management
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50. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Team
Domain expertise
Technical co-founders
Technology or product
Solve problems, address pain points
Customer validation
Market size
Must be a huge market
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51. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Reputation
Likelihood of closing
Stage of fund
Size of Fund
How much dry powder?
Is there a fund 2, fund 3 etc.?
Are they litigious?
Deal with decision makers
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52. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Network
Temperament
Advice
See the published email from the CEO of CircleUp to an
investor at for an example of a VC/Founder relationship
that did not work out
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53. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Capital intensive business?
Follow on funding?
Time to exit
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54. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Business Model
Choice of Entity
Cap Table
Vesting
Debt
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55. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Series Seed
Pre-Seed
Series A-1, A-2
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56. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Micro VC – angels with other people’s money
Seed Stage Fund – early, first institutional money
Mid Stage – B and beyond
Late Stage
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57. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Lead or Co Lead and followers
Party rounds
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58. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Lawyers
CPA
Banker/Broker/Finders
Mentors and Advisors
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59. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Can you pivot?
Will it affect customers?
Follow on investors
Change in management
Strategic agreements
Confidentiality
ROFR, right of first look, right of first offer
Strategic objectives
Less operational involvement
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60. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Expensive (fees and warrant coverage)
Secured by IP
Less dilution
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61. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Limited Liability Company (LLC)
S Corporation (S Corp)
C Corporation (C Corp)
Foreign Corporation
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62. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
1. Operating Agreements
2. S Elections
3. Suspended Losses
4. 704(c) Allocations
5. Venture Capital
6. QSB Stock
7. Stock Option Plans
8. LLC Debt
9. Reorganizations
10. Fringe Benefits
11. Audits and Liabilities
12. Contingent Allocations
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63. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
General Requirements
Original issue
Five-year holding period
100% post-Sept. 27, 2010
C Corporation issuer
Up to $10 million or 10 times basis exclusion
1045 Rollover treatment
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64. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
1. QSBS
2. VC’s LPA will not allow investment in a
passthrough
1. Tax exempt investors want to avoid UBTI
2. Foreign investors want to avoid ECI
3. VC wants to be able to manage losses
1. No K-1’s showing losses
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65. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
65
Vesting
Equal Percentages
Subjective
Formula
66. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
66
FAST Model
Valuation
Milestones and
Deliverables
Vesting Stock v.
Options
68. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Who should vest
How long?
Acceleration?
Change of control
Termination without cause
Double and single triggers
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69. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
VC will require unvesting shares so vesting period could be 8 years
Fund life can be 7 to 10 years
Most exits are M&A - Fewer and longer IPOs
Extended Option exercise periods
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70. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Special class of common that has super voting rights
Facebook, Google Snap
May be negotiated away in institutional round
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71. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Right of First Refusal (ROFR)
Lock Ups
Co-Sale Rights
Drag Along
Buy Sell
Rule 144
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72. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Common Stock
Options
Warrants
Convertibles
Preferred Stock
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73. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
73
Founders 5,000,000 38% 5,000,000 45%
Stock Pool 2,000,000 15% n/a
Series A 3,000,000 23% 3,000,000 27%
Series B 3,000,000 23% 3,000,000 27%
total 13,000,000 100% 11,000,000 100%
74. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
IP Rights
Patents
Invention Assignments
Licenses and ownership
Data security
Employment Claims (Homejoy)
Tax Claims
Regulatory
Litigation
Claims by prior employer
Entrenched Management
Material Agreements
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75. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Valuation
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76. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Participating preferred stock returns its investment and
then shares pro rata in proceeds of a sale
Non-participating convertible preferred stock either gets a
return of its investment or its pro rata share of proceeds
Participation may be capped at a multiple of the
investment
Conversion to common – auto-conversion and majority
vote
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77. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Preferred will have a dividend preference.
A cumulative dividend on preferred shares must be paid
before any other dividends on common.
o If the company can't pay out a cumulative dividend in a
year, the amount is carried forward.
o Common in private equity deals, not in venture
Non-cumulative is only paid when as and if declared.
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78. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Who gets paid first and how much?
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79. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
1X Non participating convertible preferred
$1,000,000 invested for 10%
Ex 1: Exit (sale) of company for $5,000,00
Ex 2: Sale for $20,000,000
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80. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Size of board
Founder-friendly boards
Role of the Board
Observers
Indemnification
Insurance
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84. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Financial statements and other information
Thresholds
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85. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Requires a company to list the shares publicly so
that the investor can sell
Demand rights
Piggyback rights
S-3 rights
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86. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Co Sale and Tag-Along Rights – right to participate in a
sale
Right of First Refusal – right of company (first) and
investors (second) to require shares to be offered to each
of them before a third-party sale
Drag Along – right to force shareholders to sell in an exit
Board, common and preferred approvals
Small shareholder carveout
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87. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Term, milestones, commencement
Acceleration
Single and double triggers
Fire the Founder
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88. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Right to maintain, right to participate
Major investors
Limited by amount of money company wants to raise
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89. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Increased pre money
409A valuations
Extended exercise periods for NSOs
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90. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Feature of Preferred Stock
Right to put stock to company, usually after a period of time and
over time
Is effectively a right to force a sale of the company
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91. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Broad-based weighted average
Narrow-based weighted average
Full ratchet
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93. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
30 day no shop
Confidentiality
Is it really nonbinding?
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94. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Overly favorable terms
Valuation planning and down rounds
Reverse splits
Cap table management
Fire the CEO
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95. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Forced conversion to common
Full ratchet
Uncapped participating preferred
Insider rounds
Low valuations
Down rounds
Trigger anti dilution protection unless waived
Pay to play
requires existing investors to invest on a pro rata basis
in subsequent rounds or they lose preferential rights
(anti-dilution, liquidation preferences, voting rights)
95
96. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
IPO
Sale or Acquisition
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97. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Zombie Companies
In re Trados Inc. Shareholder Litigation
Bankruptcy or Insolvency Reorganizations
Fire Sales
Management carveouts
Fiduciary duties: shareholders, optionees, preferred and
creditors?
97
98. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Tax Liability
Personal Liability
Tax
Employment
Fiduciary Claims
Securities Law Claims
Contractual
Pierce the veil and creditor claims
Serial Entrepreneurs and failed companies
98
99. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
Dead on Arrival: How to Avoid the Legal Mistakes that Could Kill Your Startup,
Roger Royse
Straight Talk For Startups, Randy Komisar and Jantoon Reigersman
The Startup Checklist, David S. Rose
Angel, Jason Calcanis
Venture Deals, Feld and Mendelson
The Startup Game, William Draper
Secrets of Sand Hill Road, Scott Kupor
How to be the Startup Hero, Tim Draper
Make Elephants Fly, Steve Hoffman
Getting to Wow, Bill Reichert
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100. AUSTIN
600 Congress Avenue
Suite 1300
Austin, TX 78701
United States of America
T +1 512.867.8400
F +1 512.867.8470
CHARLOTTE
101 S. Tryon Street
Suite 2250
Charlotte, NC 28280
United States of America
T +1 980.771.8200
F +1 980.771.8201
CHICAGO
180 N. LaSalle Street
Suite 2215
Chicago, IL 60601
United States of America
T +1 312.216.1620
F +1 312.216.1621
DALLAS
2323 Victory Avenue
Suite 700
Dallas, TX 75219
United States of America
T +1 214.651.5000
F +1 214.651.5940
DALLAS - NORTH
2505 North Plano Road
Suite 4000
Richardson, TX 75082
United States of America
T +1 972.739.6900
F +1 972.680.7551
DENVER
1050 17th Street
Suite 1800
Denver, CO 80265
United States of America
T +1 303.382.6200
F +1 303.382.6210
FORT WORTH
301 Commerce Street
Suite 2600
Fort Worth, TX 76102
United States of America
T +1 817.347.6600
F +1 817.347.6650
HOUSTON
1221 McKinney Street
Suite 2100
Houston, TX 77010
United States of America
T +1 713.547.2000
F +1 713.547.2600
LONDON
1 New Fetter Lane
London, EC4A 1AN
United Kingdom
T +44 (020) 8734 2800
F +44 (020) 8734 2820
MEXICO CITY
Torre Esmeralda I, Blvd.
Manuel Ávila Camacho #40
Despacho 1601
Col. Lomas de Chapultepec,
DF 11000
Mexico City, Mexico
T +52.55.5249.1800
F +52.55.5249.1801
NEW YORK
30 Rockefeller Plaza
26th Floor
New York, NY 10112
United States of America
T +1 212.659.7300
F +1 212.918.8989
ORANGE COUNTY
600 Anton Boulevard
Suite 700
Costa Mesa, CA 92626
United States of America
T +1 949.202.3000
F +1 949.202.3001
PALO ALTO
525 University Avenue
Suite 400
Palo Alto, CA 94301
United States of America
T +1 650.687.8800
F +1 650.687.8801
SAN ANTONIO
112 East Pecan Street
Suite 1200
San Antonio, TX 78205
United States of America
T +1 210.978.7000
F +1 210.978.7450
SHANGHAI
Shanghai International
Finance Center, Tower 2
Unit 3620, Level 36
8 Century Avenue, Pudong
Shanghai 200120, P.R. China
T +86.21.6062.6179
F +86.21.6062.6347
THE WOODLANDS
10001 Woodloch Forest Drive
Suite 200
The Woodlands, TX 77380
United States of America
T +1 713.547.2100
F +1 713.547.2101
WASHINGTON, D.C.
800 17th Street NW
Suite 500
Washington, D.C. 20006
United States of America
T +1 202.654.4500
F +1 202.654.4501
© 2020 Haynes and Boone, LLP
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