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Convertible Debt December 12, 2013

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Today’s(Experts(•  Ben(Li3auer((

–  Advisory(Board,(The(Capital(Network(–  Member,(Walnut(Ventures(–  Member,(Boston(Harbor(Angels(–  Director,(Several(Startups(–  Former(Entrepreneur(–  Geek((selfLdescribed!)(

•  Robert(Bishop(–  Partner(Goodwin(Procter(LLP(–  Over(17(years(experience(represenTng(venture(capital(firms(and(high(growth(

companies(–  Founding(team(member(of(the(Founders(Workbench(

(

ConverTble(Debt(

(Ben(Li3auer(

li3auer@blkk.com(vizibility.com/li3auer(

@li3web((

Robert(Bishop(rbishop@goodwinprocter.com(

((

Structure(of(an(Equity(Deal(

•  Company(and(Investors(agree(on(a(“preLmoney(valuaTon”((PM)(which(leads(to(a(price(per(share(

•  Investors(put(in($X(•  Investors(then(own:(X(/((X(+(PM)(of(the(company(

Example:(PM(=($1M(X(=($0.5M(Investors(own(0.5/1.5(=(33%((Remember:(New(issuance(NOT(transfer(

What(about(ConverTble(Debt?(

•  Many(seedLstage(companies(use(an(instrument(called(ConverTble(Debt.(Huh?(

•  ConverTble(debt(is(not(tradiTonal(bank(debt(•  Converts(exist(for(several(reasons(–  Investors(and(Entrepreneurs(find(it(hard(to(agree(on(a(PM(valuaTon(

– SomeTmes(quicker(and(cheaper(to(document(than(equity(deals((

– May(allow(for(“rolling(close”(accreTon(of(investment((

ConverTble(Debt(provides(OpTonality(

•  Conver'ble*Debt*=((usually)(unsecured(debt(obligaTon(of(the(Company(that(may(be(converted(into(equity(of(the(Company.((

(•  Conversion*Trigger*=(Qualified(Financing(usually(at(some(

minimum(amount(of(funds((ex.($500,000)(

•  If*Notes*stays*as*Debt*=(Get(back(principal(and(interest(ahead(of(other(equity((behind(other(creditors(typically)(

•  If*Notes*Convert**=(Convert(amount(of(debt(and(interest(into(equity(at(the(valuaTon(in(the(next(round(

•  ( aier(applicaTon(of(a(Discount((oien(15(–(25%)(•  ( subject(to(a(maximum(valuaTon(amount((the(“Cap”)(

*

Basic(Structure(of(ConverTble(Debt(

•  Investor(loans($(to(Company(an#cipa#ng(another(round(of(funding(•  Investment(accrues(small(interest((6L8%(typical)(•  When(the(funding(occurs,(investment(+(interest(convert(to(equity,(

usually(at(a(discount((15L25%(typical)((

Example:(•  Investors(loan($200K(to(Company((•  20%(discount(•  As(of(conversion,(interest(of($10k(has(accrued(•  Next(Round(PM(=($2m;(1M(shares(before(financing(•  New(Shares(offered(at($2/each((At(Conversion,(Noteholders(receive(210K(/(1.60(shares(=(131,250(shares(

Converts–(ComplicaTons!(

•  What(if(only(a(li3le(money(comes(in?(•  When(does(the(debt(convert?(•  What(happens(if(PM(of(next(round(is(huge?(•  Does(the(investor(have(any(say(in(things?(•  What(if(there(is(an(equity(investment(that(doesn’t(trigger(conversion?(

•  What(happens(if(it(never(converts?(•  What(happens(if(Company(gets(bought?(

Converts–(SoluTons?(

•  Caps(and(Floors(•  Default(conversion(price(and(security(at(maturity(•  Open(round,(minimum(close(•  Quick(sale(preferences((ex.(2x)(•  Governance(provisions(•  Careful(a3enTon(to(conversion(condiTons(

Converts:(Worse(Than(Equity?(

•  MulTple(liquidaTon(preference((circa(2008)(–  Ex.($500k(of(Notes(with(cap(at($2m(PM(– Next(Round(at($6m(PM(–  Issue(Noteholders(3x(number(of(shares(–  3x(shares(equals(3x(liquidaTon(preference!!(

•  Without(a(floor,(effecTvely(Full(Ratchet(AnTLdiluTon(•  Preference(Overhang(–  In(prior(example(Noteholders(bought($262,500(of(preference(for($200,000.(((

– All(other(Series(A(Holders(bought(1:1(preference(•  Not(Just(a(Price(Adjustment(

Converts:(When(Do(They(Work?(

•  “Bridge”(financing(in(anTcipaTon(of(an(“event”(– Another(financing(– A(big(sale(– Company(sale(

•  Seed(stage(investment(– ValuaTon(not(understood(– Rolling(closes((oien(with(ratcheTng(caps)(– Proof(points(as(an(“event”(– When(the(investor(loves(the(company((cf.(exuberant(equity(valuaTons)(

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Convertible Debt December 12, 2013