Seed financings enable a startup to put together its initial team, build a working prototype, and begin to test the market. Often these investments are made via convertible debt or SAFEs. In this presentation, Silicon Valley startup and corporate attorney Alidad Vakili discusses the following topics: 1. Required corporate structure 2. Legal considerations when pitching investors for seed financing 3. Differences between using convertible debt and SAFEs 4. Key terms and considerations when raising seed funding 5. Common mistakes and pitfalls that companies make when raising seed funding via convertible debt and SAFEs 6. How to close your seed financing 7. Important post-closing tasks and more! About the Speaker Alidad Vakili is an attorney in the Palo Alto office of Foley and Lardner, an international law firm. He regularly represents startup and emerging growth companies at every stage of the company lifecycle—from startup to liquidity. He frequently advises clients on a variety of strategic growth issues including venture capital and private equity financing, private offerings, joint ventures and M&A transactions. His work includes not only advising on major corporate milestones but also significant involvement in day-to-day operations and strategic business issues, such as formation, governance, and commercial agreements.

1. How to Raise Seed Funding
for your Startup: Convertible
Notes and SAFEs
Alidad Vakili, Foley & Lardner LLP
April 20, 2023
Silicon Valley: Idea to IPO
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DISCLOSURE
These materials have been prepared solely for educational purposes. The information
provided in this presentation does not establish an attorney-client relationship with the
presenter or Foley & Lardner. Specific legal issues should be addressed through
consultation with your own attorney and you should not rely on this presentation or these
materials. Attorney Advertising. Prior results do not guarantee a similar outcome.
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U.S. federal tax advice contained in this communication (including any attachments) is not
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to another party any transaction or matter addressed within.
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AGENDA
 Overview
 Structural Considerations
 Documentation for Founders and Early Personnel
 Financing Options
 Convertible Securities
 Foundational Basics
 Overview Seed Financings
 Closing Your Seed Financing
 Common Pitfalls
 Q&A
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BACKGROUND
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 Corporate attorney with a practice focus on Emerging
Growth and Venture Capital.
 I work out of our San Francisco office and have worked
with companies throughout the US and the world.
 I enjoy working with and helping entrepreneurs on
startup adventures from startup to liquidity.
Alidad Vakili
Of Counsel
+1.415.438.6421
avakili@foley.com

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AUDIENCE SURVEY
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Preparation is key
“By failing to prepare, you are preparing to fail.“
~Benjamin Franklin
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OVERVIEW

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STRUCTURAL CONSIDERATIONS
Key Issues
 Entity type
 Jurisdiction
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DOCUMENTATION FOR FOUNDERS AND
EARLY PERSONNEL
Proper Documentation is Key
 Confidentiality
 Intellectual Property Assignments
 Vesting of Securities
• Stock Options
• Restricted Stock
 Transfer Restrictions
• Shareholder Agreements
• Restrictions in Bylaws
• Stock Purchase Agreements
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FINANCING OPTIONS
 Convertible Debt
• Convertible notes (also sometimes referred to as bridge notes)
 Convertible Equity
• SAFEs (Simple Agreement for Future Equity)
 Equity / (priced equity or venture rounds)
• Common stock
• Series Seed, Series A, Series B ...
Note: There are other financing options that are beyond the scope of this presentation (e.g., grants,
loans, etc.)
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CONVERTIBLE SECURITIES
 Convert to future equity securities upon a qualified equity financing
• Pros:
• Avoids valuing the company
• Easier to document and less expensive
• Easier and quicker process
• Cons:
• Convertible notes are debt and may be required to be paid at some point
• Extra liquidation preference above all other equity, unless otherwise handled (i.e.,
creditors get paid first)
• Conversions can be confusing
• Can result in sweetheart deals (for the investors)
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CONVERTIBLE SECURITIES
 Mandatory conversion at a discount of price paid in Next Qualified
Financing
• Series Seed/Series A needs to meet the definition of a “Qualified Financing”
• Equity financing
• Minimum size, e.g., “$2,000,000”
• Discount should be reasonable. 20-25% is typical.
• Conversion Price Cap (valuation cap)
• Conversion upon a change of control/sale
• Conversion at maturity (for convertible notes)
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CONVERTIBLE NOTES
 Maturity Date
 Interest Rate
 Valuation Cap
 Discount
 Conversion Terms
• Automatic conversion
• Maturity conversion
 Secured vs. Unsecured
 Default
 Representations and warranties
 Amendment Terms, e.g., majority in interest
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SAFES
 Simple Agreement for Future Equity
 Introduced by Y Combinator in 2013 as an alternative to the convertible
note (several types)
• Pre-money valuation cap only (generally more founder-friendly)
• Post-money valuation cap only (generally more investor-friendly)
• Discount rate only
 Viewed as investor-friendly
• Simple form
• Cost effective
• Not treated as “debt” on company balance sheet
• Avoids repayment obligation
• Gives founders more control of capital
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SAFES
 Valuation Cap
• Pre-money
• Post-money
 Discount Rate
 MFN (most favored nations provision)
 Conversion Terms
 Representations and warranties
 Pro rata rights (usually included in a separate (side letter) agreement
 Other rights (major investor, info/inspection, etc.)
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FOUNDATIONAL BASICS
 To Give or Not to Give?
• Striking the right balance when allocating equity
• Capitalization
• Think backwards when planning
• Ownership
• Control
• Dilution (plan for it – it’ll happen)
• Incentivize your team
• Proper documentation
• Vesting
• Repurchase rights
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FOUNDATIONAL BASICS
 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.
 Issued and outstanding basis – all stock issued and outstanding.
 Fully-diluted basis – all 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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FOUNDATIONAL BASICS
 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%
 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
(3,333,333/$13,000,000=25.64%)
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FOUNDATIONAL BASICS
 Basic Examples with Convertible Securities
• If there had been a $450,000 convertible security with 25% discount only,
holder would have received 600,000 shares. $450,000/((1-.25)*$1.00/share)
• 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 valuation
cap/$10,000,000 pre-money*$1.00/share)
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OVERVIEW OF SEED FINANCINGS
 Have a credible business plan with milestones
• Perfect your pitch
 Run a Systematic Process
• Know how much capital you need
• Connect with the right investors
• Understand your ideal term sheet
• Prepare for diligence
• Have good corporate hygiene
• Be prepared for cleanup
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OVERVIEW OF SEED FINANCINGS
Understand the terms:
 Purchase Amount
 Valuation Cap
 Discount
 Equity Financing
 Liquidity Event
 Dissolution Event
 MFN
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 Representations and Warranties
 Pro Rata Agreement (aka Side Letter)

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OVERVIEW OF SEED FINANCINGS
 Term Sheet
 Diligence process
 Documentation Process
• Safes - Y Combinator - https://www.ycombinator.com/
• Convertible Notes - Proprietary forms
 Pre-Closing
 Closing
 Post-Closing Items
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CLOSING YOUR SEED FINANCING
 ABC (Always Be Closing)
 Do your homework
 Get your Company’s house in order
BEFORE you talk to investors
• Cap table
• Proforma
• Data room
 Do your own diligence on potential
investors
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 Prepare for your closing from Day
1
 Create your team (internal and
external)
 Set a reasonable timeline
 Organize and divide tasks
appropriately

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 Not structuring the entity property (type
of entity, jurisdiction)
 Not having proper documentation for
founders, employees, consultants
 Failure to own the technology/IP that is
critical to the business
 Not having proper vesting for equity
grants
 Undocumented stakes in the company
 Non-Compliance with Securities Laws
 Not managing the company’s cap table
COMMON PITFALLS
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 Not understanding the terms of the
Safes or convertible notes
 Thinking that there are “standard” or
“boilerplate” terms
 Side Letters
 Failure to obtain proper corporate
authorization
 Risk of employment-law issues
 Tax issues – e.g., federal, state, local

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PARTING THOUGHTS…
Do your homework
Prepare in advance
Dream backwards
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25. Q&A
Alidad Vakili
avakili@foley.com
April 25, 2023
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About Foley
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maintained its commitment to the highest level of innovative legal services and to the stewardship
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