By Olivia Chu (Berkeley Law 2017) Supervised by Kevin Xu (CA Attorney)

1. GET FUNDED
STARTUP@BERKELEYLAW
OLIVIA CHU, BERKELEYLAW LL.M. 2017
SUPERVISING ATTORNEY: KEVIN XU

2. ANGEL INVESTOR
FUNDING
INITIAL PUBLIC
OFFERING (IPO)
VENTURE CAPITAL
FINANCING
BRIDGE LOANS
(MEZZANINE FINANCING)
SEED CAPITAL
4
1
3
5
2
CONTENT: 5 STAGES OF STARTUP FUNDING

3. STARTUP FUNDING TIMELINE
2013
SEED
ROUND
SERIES
A B C
IPO
Founder/
Co-Founder
Seed Capital
(Family/Friend)
Seeking
Multiple
Sources (ex.
Angel
Investors) Venture Capital:
Big Money Coming In
Convert
to C-Corp
Register as a
company
Mezzanine
Financing &
Bridge Loans
THE BREAK DOWN OF THE 5 STAGES OF FUNDING

4. TAKE A BETTER LOOK!
STARTUP FINANCING CYCLE
Secondary Offerings
Public Market
Time
Revenue

5. SEED CAPITAL

6. FIRST STAGE
SEED CAPITAL
• The most preliminary stage
• Founder’s own saving
• FFF: Fools, Family Friends
(Please appreciate these FFF)
• Crowdfunding
• Accelerators/ Incubator

7. CROWDFUNDING
• Donate-based Crowdfunding
Investors have a social or a personal interest
for investing, without expecting anything in
return. (Ex. Kickstarter)
• Equity Crowdfunding
Investors fund startup companies and small
businesses in return for equity. (Ex. CircleUp)
• Debt Crowdfunding
Peer to peer lending. Investors receive the
principal along with the interest payable.
(Ex. Lending Club)
• Much more easy way to get capital
• Reveal too much of the information
If you have not fully protected your business
idea with IP, someone may steal your
concept from the crowdfunding site
• Does Not Work for Complex Projects
• Most platform release the funds only you
achieve >100% of the funding goal
• You have to pay around 10% of the money
you raised as the fee
Honestly, crowdfunding (equity crowdfunding and debt
crowdfunding) shall be your last resort. It is possibly to
make you not that appealing to VC and angel investors.

8. GREAT PLACE TO GROW
ACCELERATORS/ INCUBATOR
• Invest in both your startup and your potential
to develop and pitch your solution to
potential investors (VC or Angels)
• Provide mentors and other resources
• Some provide co-working space
• Y-Combinator
http://www.ycombinator.com
• 500 Startups
https://500.co
• SkyDeck Berkeley
http://skydeck.berkeley.edu
• The Vault, SF
http://www.thesfvault.com
• CITRIS Foundry
http://citrisfoundry.org
• Impact Hub
http://www.impacthub.net

9. ANGEL INVESTORS

10. SECOND STAGE
ANGEL INVESTORS
• Private individuals who invest in businesses
• “Accredited investor”
Individuals who have a net worth of at least
one million dollars and an annual income of
at least $200,000 a year (or $300,000 a year
jointly with a spouse)
• Yes, you can have up to 35 non-accredited
investors
• However, if you allow even 1 non-accredited
investor in your round you have to comply
with very detailed and comprehensive
disclosure obligations. (SEC Rule 502(b))
• If you are raising money from accredited
investors, there are no specific disclosure
obligations required. (SEC Rule 506)
• If you had accepted any non-accredited
investors in your round, you would not be
able to do general solicitation afterward.
(Rule 506 (c)) (Next Slide)

11. Equity Investment
2 ANGEL STRUCTURES
Convertible Debt Investment• There are two typical types of angel
investment structures: Equity investment and
convertible debt investment
• In an equity investment, the angel and
startup agree in the value of the company
• The angel acquires the percentage of
ownership for the investment
• In a convertible debt investment, the angel
and startup do not have to agree the
present value of the company
• The angel purchase a convertible note that
will convert into equity at the next round of
the company financing
• Can be viewed as “the pre-payment of
equity”of the next round of financing

12. GENERAL SOLICITATION
• SEC Rule 506 (c) permits issuers to use general
solicitation to engage a larger group of
potential investors without engaging in a
registered public offering.
• However, to fall under the protections of Rule
506(c): (i) All purchasers in the offering must
be accredited investors; (ii) The issuer must
take reasonable steps to verify their
accredited investor status; and (iii) Certain
other conditions in Regulation D are satisfied.
• AngelList will support a free verification
process for their investors
• Does a demo day or venture fair necessarily
constitute a general solicitation for purposes
of Rule 502(c)?
No. But be sure to keep your presentation
limited to “information not involving an offer
of securities.”
https://www.sec.gov/divisions/corpfin/
guidance/securitiesactrules-
interps.htm#256.33

13. VENTURE CAPITAL

14. THIRD STAGE
VENTURE CAPITAL
• After the business has shown some of a track
record, you are possibly to receive venture
capital fund
• Venture capital (VC) is a type of private
equity
• VC firms or funds invest in the early-stage
companies in exchange of equity
• Additional to the fund, many VC firms will
provide business expertise, connections, and
other resources
• However, depending on the size of the VC
firm’s stake in your company, you might lost
the control of the company
• Remember, you have to be a C-Corp to
receive VC fund
• The three stages of the VC fund is usually
called: Series A, Series B, Series C

15. THIRD STAGE
VENTURE CAPITAL
• After the business has shown some of a track
record, you are possibly to receive venture
capital fund
• Venture capital (VC) is a type of private
equity
• VC firms or funds invest in the early-stage
companies in exchange of equity
• Additional to the fund, many VC firms will
provide business expertise, connections, and
other resources
• However, depending on the size of the VC
firm’s stake in your company, you might lost
the control of the company
• Remember, you have to be a C-Corp to
receive VC fund
• The three stages of the VC fund is usually
called: Series A, Series B, Series C

16. SERIES C
SERIES A
SERIES B
2 3
SERIES A ROUND
1
• Series A is the first stage of the VC fund
• Generally done by allotting preferred stock
• Typically, Series A raised $ 2 million to 15 million
• The fund is usually provided to optimize the
product and user base
• Valuation of this stage: proof of concept,
progress mage with seed capital, quality of
the executive team, market size, risk involved
• It is important to have a plan to developing a
business model that will generate long-term
profit

17. SERIES C
SERIES B
SERIES A
1 32
SERIES B ROUND
• Series B is the second stage of VC, the
product or the service has already launched
• The fund is provided to help the startups
expanding the market and advancing their
business
• Typically, Series B raised more funding than
Series A because the investment risk is lower
• Valuation of this stage: Performance of
company in comparison to the industry,
revenue forecasts, assets like Intellectual
Property

18. SERIES B
SERIES C
SERIES A
1 2 3
SERIES C ROUND
• Series C is the last stage of the company’s
growth cycle before it goes for IPO
• It occurred when a startup proved its success
in the market
• The fund is for building up greater market
share, acquisitions, or to develop more
products and services
• Series C funding could be used to buy
another company

19. BRIDGE LOANS
(MEZZANINE FINANCING)

20. FOURTH STAGE
BRIDGE LOANS
• Companies may require additional funds for:
An IPO, An Acquisition of a Competitor, A
Management Buyout
• A bridge loan is a short-term loan which
“bridges” the borrower’s plan from point A
to point B. The borrower only needs financing
for a very short time frame so a long-term
fixed rate loan is not the solution.
• Mezzanine financing is often used as a
bridge loan (6 to 12 months before an IPO)
• Mezzanine loans are not secured by
property, it is secured by an ownership
interest in the company that owns the
property. This occurs when the borrower
needs more money than he is able to borrow
against the property, so he puts up an
interest in his company as collateral.
• Mezzanine loans are typically very large
loans. The average size of a mezzanine loan
is probably around $10 million.

21. SENIOR DEBT
ASSET-BASED LENDING
EQUITY
• Mezzanine fills the gap
between senior debt
and asset based lending
and equity
• Mezzanine Financing
includes three parts:
(1) Senior Subordinated
debt
(2) Convertible
Subordinated debt
(3) Redeemable
Preferred Stock
Mezzanine Financing
MEZZANINE FINANCING
HOW IT WORKS
*Asset = Debt + Equity

22. EXAMPLE OF MEZZANINE
• The BIO LAB earns $200,000/year; BIO LAB is
sold at $1Million. You have $400,000, Tax 35%
• Find a senior lender (Rate 8%)
You (Equity Investor): $400,000
Senior Lender (Debt Financing): $600,000
Business Produce: $200,000
Interest Payable (8%): $48,000
Pre-tax Profit = $200,000 - $48,000 = $152,000
After-tax Profit = $98,800
Your return on your $400,000 equity
investment is $98,800 annually (24.7%/year)
• Find a senior lender & mezzanine lender
You (Equity Investor): $200,000
Senior Lender 8% (Debt): $600,000
Mezzanine Lender 15% (Debt): $200,000
Business Produce: $200,000
Interest Payable (S 8%) (M 15%): $78,000
Pre-tax Profit = $200,000 - $78,000 = 122,000
After-tax Profit = $79,300
Your return of your $200,000 equity
investment is $79,300 annually (39.7%/year)

23. IPO

24. FIFTH STAGE
INITIAL PUBLIC OFFERING
• Initial Public Offering (IPO) is the first time that
a company registers its securities with SEC
and is permitted to sell shares of its stock to
the public.
• It is, you sell a part of your business to the
public in the form of shares
• An IPO is another way to raise money from
millions of regular people.
• A successful IPO = A success of the business
• After IPO, you are no longer a startup, you
are one of the public companies!

25. MORE

26. AN IMPORTANT CONCEPT FOR FUND RAISING
EQUITY DILUTION
• Do not be afraid hearing “Equity Dilution”
• Dilution in startups is the decrease in
ownership for existing shareholders that
occurs when a company issues new shares
• You raise more money, the investor give you
capital in exchange of equity;
thus,“diluting” or reducing current
owners’ ownership.
• Your equity “diluted,”but of a higher-
valued asset
• Actually, when you try to acquire funding,
you are on the process of diluting your equity
• What you shall care about is the totally value
of the asset

27. TAX
SECTION 83(B) ELECTION
• Section 83(b) election is a letter you send to
the Internal Revenue Service letting them
know you would like to be taxed on your
equity on the date the equity was granted to
you rather than on the date the equity vests.
• If you purchased/received restricted stock in
a growing startup, you should probably file
an 83(b) Election Form.
• If you have stock options, you do not need to
file an 83(b) Election Form, unless you
exercised the option early.
• If you purchased/received founder’s stock
and there are no restrictions, such as vesting,
you do not need to file an 83(b) Election
Form.
• https://accountalent.com/83b-elections-for-
dummies/

28. THIS IS FOR INVESTORS. BUT ENTREPRENEUR SHALL KNOW
EXIT
• An “exit” occurs when investors decide to
get rid of their stake in a company
• They will either have a profit or a loss
• Traditionally successful exit
(1) Go public (IPO)
(2) Get acquired by another company
• “Acquihires”(Acquisition + Hiring)
The buyer is interested in the product and
also the team. Employees end up
being transferred to a company usually
receive significant hiring bonuses.

29. SOME OTHER ADVICE
• Raising capital is very time-consuming
• Never raise capital when you are in urgent
need. Raise in advance!
• Be confident with your idea, and persuade
the potential investors
• If you are raising raising cross-boarder
capital, especially China, please make sure
the investors have US Dollars in their account

30. THANK YOUSTARTUP@BERKELEYLAW
ATTORNEY: KEVIN XU
KHXU@BERKELEY.EDU