1.0 Law & Legal CLE Credit – A/V Approval #1114214 Recording Date - March 20, 2019
Meeting Location Date Time Topic
King County Bar Association 1200 Fifth Avenue - Suite 700
Seattle, WA
Wednesday, March 20, 2019
12:00 PM to 1:15 PM
Current Trends in Startup and Small Business Financing
AGENDA 12:00 PM Introduction 12:10 PM Presentation: ‘Current Trends in Startup and Small Business Financing’, by Joe Skocilich,
Foundry Law Group The presentation will look at some of the common financing instruments and standard terms used by startups and small business when raising capital, as well as the available securities law exemptions and practices.
1:15 PM Adjourn
SPEAKER BIOGRAPHY Joe Skocilich, Foundry Law Group - Joe Skocilich is a corporate and securities lawyer at Foundry Law Group, where he focuses on the representation of emerging companies in connection with company formation, capital raising, business transactions, and mergers and acquisitions. Joe is a member of the WSBA Securities Law Committee and the occasional commentator on developments in federal and state securities laws. He is admitted to practice in New York and Washington.
HOW DO I EARN CREDIT FOR SELF-STUDY
OR AUDIO/VISUAL (A/V) COURSES?
For pre-recorded A/V (self-study) programs, although the sponsor should apply for
accreditation, lawyers need to report the credits earned for taking the course.
To add an approved course to your roster, follow the procedures below:
Go to the "mywsba" website at www.mywsba.org/.
Log in.
Click on the "Access MCLE" link in the "MCLE Info" box on your home profile
page.
Click on "Add Activity." Search to find the approved course in our system. (See
search suggestions on the screen.)
Adding a Recorded Course Select Recorded Course from the Add New Activity screen.
This will prompt you to search for the activity in case the activity has already been
accredited in the MCLE system.
You can search by Activity ID or by specific Activity Details. For the Activity Details
search, you can use keywords for the title, sponsor name and date.
After entering your search criteria and selecting Search at the bottom of the screen, a list
of possible activities will be provided.
You can select the correct one by clicking the Activity ID. This will take you to the
specific activity. Entered the date(s) on which you began and ending viewing this
recorded activity.
Then claim the correct credits for which you attended this activity in the Credits Claimed
fields and click the Submit button at the bottom of the page.
You will receive a confirmation message at the top of your screen stating, “The activity
has been added to your roster.
Current Trends in Startup
Capital Formation
Questions from Clients
How do I raise money?
How do I comply with securities laws?
What is the best type of investment structure?
What terms are people getting?
What do investors want to see?
Lingo: “traction” “PMF”, “MRR,” “beta,” “MVP,” “burn”
How do I limit dilution and make sure I don’t lose control of my company?
Securities Law Offering Exemption Primer
Reg D, Rule 506(b)
● Primary exemption used by startups. Key features are manner of conducting the offering and limitation to
accredited investors
● Filing Form D w/ SEC and notice filings with the applicable states.
Reg D, Rule 506(c)
● Still not too common, used in accredited investor crowdfunding and crypto/blockchain ICO/STO.
Section 4(a)(2) Private Offerings (NO STATE PREEMPTION)
Crowdfunding (REG CF)
Capital Raising Trajectory
Bootstrapping (founders’ stock or debt)
Friends & Family (simple debt, convertibles)
Seed Rounds (convertibles, Series Seed)
● Growth of seed rounds and “pre-seed,” follow-on seed rounds.
● Series Seed Preferred Stock.
● Preserving the Series A for later in the fundraising cycle.
Series Preferred Rounds (Series A, B, C, . . . . )
Convertibles
Two primary types of convertible investment instruments:
Convertible Notes
● Standard debt with principal, interest, and maturity date.
● Conversion terms: when, with what discount and/or capped conversion price.
SAFE (Simple Agreement for Future Equity)
● Essentially a pre-purchase agreement for shares with the price and terms TBD
Convertibles: Key Terms
Discount: 20% is common, but can be 15% to 25%+
Valuation Cap (most important term)
● Pre-Money or Post-Money Cap?
Automatic Conversion: Size of next round that forces conversion.
Discount Shares: Issued in common stock or shadow preferred (e.g. Series A-2).
Maturity: 12-36 months, but more important what happens at maturity if no conversion.
Warrant Coverage: Getting more and more uncommon.
Preferred Stock
Series Seed
Published at: https://www.seriesseed.com/ and Github--https://github.com/seriesseed/equity.
Created by Ted Wang, a Fenwick & West lawyer in 2010.
Idea is to offer a simple, pre-negotiated, early-stage priced equity round that can be led by the company.
Series A
A fully negotiated investment round that should be led by a VC or other fund/lead investor.
NVCA (National Venture Capital Association) Model Series A Docs (updated in 2018).
Preferred Stock: Series Seed
Main Document: Series Seed Preferred Stock Investment Agreement. Structured as a fill-in-the blank.
Key Terms:
● Designed as a “light,” company-friendly agreement--1x, non-participating, no anti-dilution rights, and fairly
limited special “protective provision” investor voting rights.
● Series Seed gets same rights given to investors in the next equity issued (e.g. Series A, but with same carried-
over liquidation preference--i.e. class of shadow preferred stock)
Additions to Series Seed: Trend is to build on the Series Seed terms to incorporate standard Series A
provisions and even agreements. At its worst, the Series Seed is in name only and you have a Series A deal (maybe
a light version) called Series Seed. Some add-ons can be worthwhile though.
Preferred Stock: Series A
What makes a Series A?
Main documents: Stock Purchase Agreement, Investors’ Rights Agreement, Voting
Agreement, Right of First Refusal and Co-Sale Agreement.
Key Economic Terms:
● Liquidation preference: 1x, non-participating, has become the standard.
● Dividends: % rate, pro rata with common, cumulative, or non-cumulative.
● Anti-dilution: broad-based/“typical” weighted average. ○ CP2 = CP1* (A + B) ÷ (A + C)
○ A = fully diluted cap, B = hypothetical # of shares sold at old price, C = actual # of shares sold
○ Exceptions are key, including right of majority of investors to waive.
Preferred Stock: Series A (Cont’d)
Key Legal Terms:
● Board Composition, typically, a 3 or 5 person board (common, investor, and joint seats).
● Protective Provisions, requires a majority of Series A approval to issue senior class of shares (or any), change
board size, sell debt, pay dividends, redeem shares, non-wholly owned subsidiaries, change of control, issue
and blockchain-based “tokens.”
● Drag-Along Rights, forced sale terms and waiver of appraisal rights.
● Participation Rights, limited to “Major Investors.”
● Registration Rights, often not worth negotiating.
● Long list of technical provisions, add-ons, etc.
The State of Crowdfunding
Investment Grade Crowdfunding
● Created by Title III of the JOBS Act of 2012, REG CF went live on May 16, 2016.
● Works as a sort of micro-IPO, with disclosure and reporting obligations. Must be conducted through CF
Portal or broker.
● Biggest CF Portals: Wefunder, SeedInvest, Republic.
● Portals have adopted suggested forms of the SAFEs, convertibles notes, other promissory notes, or other
investment instruments.
● Criticism that SAFEs can be inappropriate when a next round is not expected or realistic. (SEC Bulletin, May
9, 2017).
● Platforms have opened up to allowing token/crypto sales as securities through the platforms.
Initial Coin Offerings
A sale (or pre-sale) of “tokens” to fund a blockchain-based project.
“Utility Tokens” were marketed and sold as not a security. Questionable Howey Test analysis in many
cases.
Now accepted that tokens are securities and sold under standard exemptions, Rule 506(b) or 506(c),
Reg CF, and Reg A+.
Pre-Sale Investment in Tokens:
● SAFT (Simple Agreement for Future Tokens).
● DPA (Debt Payable by Assets) Agreement. Similar to a convertible note, with the price of tokens TBD.
Initial Coin Offerings
A form of crowdfuding for “tokenized” blockchain-based projects.
Token marketed as a “utility token” and believed to be not a security.
Position is not clear that token are securities (mostly).