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© Copyright 2015 by K&L Gates LLP. All rights reserved.
Presented by Stan [email protected] 31, 2016
Silicon Valley Startup: Idea to IPO
Pre-Series A Funding Vehicles
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OVERVIEW OF COMMONLY USED VEHICLES Friends, Family and … (FFF)
Convertible Promissory Notes (Notes)
Simple Agreements For Equity (SAFEs)
Keep It Simple Agreements (KISSes)
Other Options (crowdfunding, grants, etc.)
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CONVERTIBLE PROMISSORY NOTES Debt instruments with a conversion into equity feature
Features
Maturity date
Interest
Mostly, automatic conversion into equity in a qualified financing
Conversion discount (~20%) or a valuation cap (max. pre-money valuation), or…
Premium on acquisition (1X+)
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CONVERTIBLE PROMISSORY NOTES Conversion Options – Automatic Conversion
Upon Qualified Financing
What is a Qualified Financing?
Discount
Valuation Cap
Fully Diluted Capitalization
What if the valuation cap in the note is lower than that agreed by the company and the investors?
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CONVERTIBLE PROMISSORY NOTES
Conversion Options – Automatic Conversion
If No Qualified Financing or Acquisition Before Maturity Date
Conversion into Common Stock at a Pre-Agreed Valuation Cap on a Fully Diluted Basis
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SAFE (CONVERTIBLE EQUITY)
Convertible equity instrument
No debt features
Interest
Maturity
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SAFE (CONVERTIBLE EQUITY)
Four available versions
Price cap, no discount (no minimum amount for conversion)
Discount, no price cap (no minimum amount for conversion)
Price cap and discount
Most favored nation (MFN) provision (no price cap or discount but MFN treatment, minimum amount for conversion)
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SAFE (CONVERTIBLE EQUITY)
Price Cap, no Discount (no minimum for conversion)
Price cap = valuation cap
Conversion into Standard Preferred Stock or Safe Preferred Stock
Same or different price per share
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SAFE (CONVERTIBLE EQUITY)
Discount, no Price Cap (no minimum for conversion)
Discount rate = [100 - the discount]%
Conversion into shares of Standard Preferred Stock based on principal amount divided by price of Standard Preferred Stock sold in Equity Financing
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SAFE (CONVERTIBLE EQUITY)
Price Cap and Discount
Conversion into number of shares of Preferred Stock equal to:
The principal amount divided either by:
Safe Price (valuation cap/capitalization of company), or
Discount Price (standard price of stock sold in Equity Financing x discount rate), whichever results in a greater number of shares
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SAFE (CONVERTIBLE EQUITY)
Most Favored Nation (MFN) provision (no price cap or discount but MFN treatment, minimum
amount for conversion)
What’s the benefit?
Amendment of existing documents to reflect better terms offered to investors purchasing issuer’s convertible securities in the future
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SAFE (CONVERTIBLE EQUITY)
Now, what if:
Company is acquired by another person before conversion of your principal amount into preferred stock?
You can elect to:
Receive your money back, or
Automatically receive shares of common stock equal to the principal amount divided by FMV of company’s common stock, if you fail to elect receipt of cash
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SAFE (CONVERTIBLE EQUITY)
Now, what if:
Company terminates its operations, liquidates, dissolves or winds up before conversion of your principal amount into preferred stock?
You will:
It depends
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SAFE (CONVERTIBLE EQUITY)
Now, what if:
Your investor asks for participation rights as part of its investment?
Few options are available
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KISS DOCUMENTS
Two versions
Debt
Equity (more favorable to the issuer)
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KISS DOCUMENTS
Comparison of Debt and Equity Versions (substantially similar, except for interest and maturity)
Treatment in financing
Conversion into preferred stock in a qualified financing round (~$1M, for instance) at a price that’s lesser of cap or discount
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KISS DOCUMENTS
Comparison of Debt and Equity Versions (substantially similar, except for interest and maturity)
Treatment in acquisition
You elect to either convert principal into shares of common stock at a valuation cap or multiple of investment plus interest (2X)
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KISS DOCUMENTS
Comparison of Debt and Equity Versions (substantially similar, except for interest and maturity)
Treatment at maturity
If not converted in equity financing or part of an acquisition, then, on or after maturity, the majority in interest will elect to either convert into Series Seed Preferred Stock at a cap OR demand repayment from issuer
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KISS DOCUMENTS
Comparison of Debt and Equity Versions (substantially similar, except for interest and maturity)
Most favored nation treatment
Right to exchange the existing instrument for one issued subsequently to other investors on terms more favorable than the terms of the instruments issued to existing investors if such subsequent issuance occurs before conversion or repayment of the existing instrument
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KISS DOCUMENTS
Comparison of Debt and Equity Versions (substantially similar, except for interest and maturity)
Information and participation rights
Rights for “Major” Investors? Who is Major Investor?
What are the rights?
Information Participation (pro rata, 1X+ investment amount)
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OTHER OPTIONS TO SECURE CAPITAL
Crowdfunding (www.kickstarter.com)
Factoring (selling AR)
Customer financing
Grants
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THANK YOU VERY MUCH!
For Further Questions Please Contact:
Stan LewandowskiK&L Gates LLP
630 Hansen Way, Palo Alto, CA 94304T: +1 (650) 798-6743
E-mail: [email protected]
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