1.
© Copyright 2021 by K&L Gates LLP. All rights reserved.
Jason Putnam Gordon, K&L Gates LLP
February 9, 2022
How to Raise Seed Funding
for Your Startup: Convertible
Notes and SAFEs
Idea to IPO

2.
IMPORTANT CAVEATS
 Today’s Discussion is General Information – Not Legal
Advice
 We will be discussing rules and exceptions. Those rules,
exceptions, and exceptions to the exceptions may not be
applicable to your situation.
 You need to retain competent legal counsel to review all
facts and circumstances before weighing in with advice.
 Off-the-cuff answers to your questions are not, and
should not be taken, as legal advice.
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3.
OVERVIEW
 My Background
 Structural Considerations
 Considerations When Pitching Investors
 Financing Options
 Key Terms and Considerations for Convertible Securities
 Overview of Valuation and Dilution
 Common Pitfalls
 Q&A
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4.
Background
 Venture Capital and Emerging
Growth Company attorney-
practicing law since 2005.
 My office is in San Francisco,
but I work with companies
throughout the US and the
world.
 I love working with
entrepreneurs on financings, as
outside counsel, and on exits.
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Jason P. Gordon
Partner
+1.415.882.8124
Jason.Gordon@klgates.com

5.
Review of Audience Survey
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6.
Structural Considerations
 Typically a
Delaware C-Corp.
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7.
CONSIDERATIONS WHEN PITCHING
INVESTORS
 Know your audience different investors have
different objectives
 Compliance with securities laws.
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8.
FINANCING OPTIONS
 Convertible Debt/Equity
 Also known as bridge notes
 Convertible debt is the parent of convertible equity,
which can also be known as a SAFE Instruments
 Y Combinator developed the SAFE
 Venture Rounds (different presentation)
 Series Seed and Series A
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9.
CONVERTIBLE SECURITIES
 Convert to future equity securities at a
negotiated discount to a future qualified equity
financing
 This avoids valuing the company
 Far less expensive than a venture round like a Series
Seed or Series A round
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10.
CONVERTIBLE SECURITIES (CONT.)
 Maturity*
 Interest Rate*
 Conversion Terms
 Amendment Terms, e.g., majority in interest
 Remaining Terms
 It’s not that common to negotiate these
 (*For Convertible Notes, not SAFEs)
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11.
MATURITY*
 Generally up to 18-24 months
 Should be trying to time this with some cushion when
you’ll have a venture round.
 Pay attention to California Financing Law, which
applies to persons “engaged in the business of a
finance lender or broker.”
 Make sure the financing fits into an exemption.
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12.
INTEREST RATE*
 Can be as low as AFR.
 Otherwise, imputed interest issues.
 Can be as high as 10% in CA
 Double check the usury laws.
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13.
CONVERSION TERMS
 Mandatory conversion at a discount of price paid
in Next Qualified Financing
 Series Seed/A needs to meet the definition of a
“Qualified Financing”
 Equity financing
 Minimum size, e.g., “$2,000,000”
 Discount has to be reasonable or later investors will
not go for it. 20-25% is typically reasonable.
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14.
CONVERSION TERMS CONT.
 Conversion Price Cap
 Conversion upon a change of control/sale
 Optional Conversion upon maturity or something
less than a qualified financing
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15.
STRUCTURE
 Convertible Notes – Generally one or two
documents (in addition to corporate
authorization and/or side letters)
 Purchase Agreement and a Convertible Security
 SAFEs – Generally one agreement (in addition
to corporate authorization and/or side letters)
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16.
CHOOSING THE PATH FOR YOUR COMPANY
 Convertible Securities
 Upsides:
 Most common; cheaper, simpler;
 No valuation of the company, nearly impossible at this early
stage, and helps maintain a low FMV for stock
options/restricted stock
 Downsides (At least for Convertible Notes)
 This is debt and may be required to be paid at some point
 Extra liquidation preference above all other equity, unless
otherwise handled
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17.
FOUNDATIONAL BASICS – VALUATION
AND DILUTION
 Pre-money valuation – the value of the company
before the next round of investment.
 Post-money valuation – the value of the
company after the round of investment.
 Fully-diluted basis – all common stock issued
and outstanding, plus all securities that can be
converted to common, plus (typically) the shares
reserved for equity compensation.
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18.
FOUNDATIONAL BASICS – VALUATION
AND DILUTION
 Very Simple Example (not factoring in the option pool or
any other equity)
 Pre-money $10,000,000
 10,000,000 shares split among three equal founders
 Founder A = 3,333,333 shares or 33%
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19.
FOUNDATIONAL BASICS – EXAMPLE
CONTINUED
 Basic Example without Convertible Securities
 Investment $3,000,000 at $1.00/share ($10,000,000 pre-
money/10,000,000 outstanding shares) (Post-money is
$13,000,000)
 Founder A = 3,333,333 of ~25% with a paper value of
$3,333,333
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20.
FOUNDATIONAL BASICS – EXAMPLE
CONTINUED
 Basic Examples with Convertible Securities
 If there had been $450,000 convertible security with 25%
discount only, holder would have received 600,000 shadow
shares. $450,000/((1-.25)*$1.00)
 This example ignores the circular math: in determining the price the new
money will pay and on which the discount will be applied, the investor will
include the shadow shares in the fully diluted basis.
 If there had been a $450,000 convertible security with
$5MM cap only, holder would have received 900,000
shares. $450,000/(5,000,000/10,000,000)
 This example also ignores that the investor will include the shadow
shares in the fully diluted basis, which will change the price per
share the investor pays.
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21.
COMMON PITFALLS
 Non-Compliance with Securities Laws
 Finders
 Thinking that there are “standard” terms
 Finders
 Side Letters
 Failure to obtain proper corporate authorization
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22.
Questions/Comments