Post on 12-Jan-2015
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Seed Funding Your StartupFrom Bootstrapping to Convertible Debt
and Series Seed Financing#seedfunding
Kristine M. Di BaccoAssociateFenwick & West, LLP
Sirk RohCOOEGFS
Who We Are
2Seed Funding Your Startup
Presentation Overview
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Bootstrapping The leap from bootstrapping to
investment Preparing for investment capital Different ways to structure your
first investment round:•Convertible debt•Series seed preferred stock
Current deal flow Sample term sheets
Seed Funding Your Startup
Bootstrapping
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Better focus on execution No dilution Independence Caveats: Keep personal
finances separate from business!
Seed Funding Your Startup
Moving On Up…
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How do you go from that bootstrap stage to the next level?
First step…
Seed Funding Your Startup
First step… How do you go from that bootstrap stage to the next level?
Friends and Family
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Smaller investment Formalize process Be transparent about
risks What happens when
you start bringing in professional investor?
Seed Funding Your Startup
Preparing for Professional Investors
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Angels vs VCs Tailor money raising issues, going from bootstrap to next level What does it mean to talk to professional investors How to build a financial model that appeals to investors Top-down vs bottom up projections Finances need to tell a story
Seed Funding Your Startup
Two Ways to Do Seed Financings
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Convertible Debt Series Seed
Convertible Notes or Series Seed Preferred?
9Seed Funding Your Startup
Convertible Notes Series Seed
Pros • Doesn't require company valuation (but may need to negotiate a "valuation cap")
• Quick/cheap• More prevalent for
smaller $ rounds
• Clearer definition around investor rights
• Starts long-term capital gains clock (important if early exit)
• Relatively quick (cheaper than Series A)
Cons • Valuation uncertainty for investors (unless there is a cap)
• Requires negotiations around valuation
• Higher legal fees• More expensive than
convertible note
Convertible Promissory Notes
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Simple Terms•Amount of money raise, interest, maturity/default
More Negotiated TermsWhat is a qualified financing?Optional conversion on non-qualified financing?Kicker payment on change of control (sale of company)
Seed Funding Your Startup
Sample Convertible Note Term Sheet: Official Terms
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Convertibility on Qualified Financing
Convertibility on Non-Qualified Financing
Sale of the Company Term: Prepayment Closing(s) Subordination Note Purchase Agreement
Seed Funding Your Startup
vs. Series Seed Preferred Stock: Valuation and Purchase terms
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• Pre-money valuation is negotiated:• How market factors in• If you’re pre-revenue, need
milestones• Deal flow• Examples of pre-money valuation
for different types of companies• Size of option pool • Reps and warranties from Company
slimmed down from Series A• Minimal closing conditions
Seed Funding Your Startup
Series Seed Preferred Stock: Conversion and Distribution Rights
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• No price-based anti-dilution protections
• Non-participating liquidation preference
• No preferential dividend rights• No redemption rights• Series Seed board seat• Limited protective provisions
and voting rights
Seed Funding Your Startup
Series Seed Preferred Stock: Contractual Stockholder Rights
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• Better rights given to future investors guaranteed to Series Seed investors
• Right of first offer on future financings (optional)• Limited information rights• Drag-along for smaller investors and common stock (optional)• No registration rights• No Company covenants• No co-sale rights
Seed Funding Your Startup
Sample Term Sheet and Investment Documents
15Seed Funding Your Startup
Go to www.seriesseed.com
Also, check out the Fenwick & West VC Survey (done quarterly):
http://www.fenwick.com/publications/Pages/silicon-valley-venture-survey-first-quarter-2014.aspx
Questions?
16Seed Funding Your Startup
Kristine M. Di Bacco650.988.8500
www.fenwick.com@fenwickwest
Check out Kristine’s bio!
We look forward to hearing from you!
Sirk Roh415.234.3437
www.earlygrowthfinancialservices.com@EarlyGrowthFS