What is a Venture Capital Financing? ü Private equity capital ü Early stage, high potential growth company ü Generate a return through exit/realization event ü Cash in exchange for shares 3
Who are the players? • The issuing company • Usually newly formed and wholly-owned by the Founders The Company • Believe they can build a company around a technology or product • Need Investors’ capital to do so The Founders • Savvy, well connected, manage venture funds • Capital comes from university endowments, pension funds, individuals, etc. The Investor 4
The Company / Founders ü Need money and experienced investors to help guide the Company ü Need to understand the trade-offs that come with accepting venture capital investment ü Will have to give up some control of the Company 5
The Investors ü The General Partner of the VC Fund makes money when the appreciated assets are distributed to their investors ü Investors only get paid when there is a liquidity event (IPO, sale) ü Investors bring valuable expertise, connections, credibility ü Will insist on a fair amount of control ü Board seats ü Affirmative and negative covenants ü Restrictions on sale of stock by Founders and key employees 6
The Term Sheet ü Summarizes principle terms of transaction ü Closing date, pre- & post- money valuation, pro forma capitalization, etc. ü Not legally binding, with key exceptions ü Confidentiality ü Exclusivity ü Generally prepared by Investor 8
The Term Sheet – What’s Important ü Pocketbook Issues – Liquidation preference, dividends, redemption ü Founder Specific Issues – Vesting, non-competition covenants ü Control Issues – Board control, protective provisions, right to control future fundraising events 9
Transaction Documents 10 Ancillary Documents • Management Rights Letters • Director Indemnification Agreements • Legal Opinion of Company Counsel Term Sheet Certificate of Incorporation Pre-Closing Operative Documents • Stock Purchase Agreement • Investor Rights Agreement • Voting Agreement • Right of First Refusal/Co-Sale Agreement Signing and Closing Obtain Board and Stockholder Consent Post - Closing Form D (if applicable) / Blue Sky
Stock Purchase Agreement ü Sets forth the basic terms of the purchase and sale of the preferred stock to the investors and identifies the other financing documents ü Covers type and amount of shares, purchase price, reps and warranties, disclosure schedule and conditions to closing 11
Certificate of Incorporation ü Also known as the Charter ü Establishes the rights, preferences, privileges and restrictions of each class and series of the company’s stock ü Establishes protective provisions, anti-dilution provisions, liquidation events, redemption rights, etc. 12
Investor Rights Agreement ü Covers ongoing rights and obligations of investors and ongoing obligations of the company, including registration rights and company covenants ü Registration Rights may include ü Demand Registration ü Piggyback Registration ü Expenses covered by Company 13
Investor Rights Agreement ü Common Diligence Issues for Investors üExcluded inventions in PIIAs üVesting schedules and acceleration provisions of the founders üProvisions in material contracts that would require consent or otherwise restrict the ability to close the financing round üAre there any outstanding loans/debt? 14
Voting Agreement ü Agreement among stockholders, generally investors and founders to vote shares for various matters, including board designees and drag- along rights ü What’s covered? üBoard size and composition ü Preferred Directors, Required vote to remove director or expand board üIncrease common stock to cover conversion of preferred stock üDrag-along ü Holders of specific percentage of stock can require all holders to vote for certain matters 15
Right of First Refusal and Co-Sale Agreement ü Right of First Refusal üCompany has primary right of first refusal üInvestors have secondary right of first refusal if company does not exercise in full ü Right of Co-Sale (“tag along”) üIf company and investors do not exercise their right of first refusal, investors can sell some of their stock ü Allows Investors to have some control over who owns stock ü Allows Investors to liquidate investment alongside Founders 16
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