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Cap Table Managementand

Other Issues Surrounding Equity Financing

Cap Table Managementand

Other Issues Surrounding Equity Financing

Jim FranklinCEO, SendGrid

Mark W. WeakleyPartner, Bryan Cave LLP

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What We Will CoverWhat We Will Cover

• Cap Table Management• Market trends in venture-style financing.• What’s happening in the Rocky Mountain

tech and VC community.

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Cap Table ManagementCap Table Management

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Entrepreneurial FinanceEntrepreneurial Finance

Cap Table Management Issues

• Number of Founders• How to split Equity among Founders• Plan for changing contribution levels• Keep it Simple

– Few Angels, Advisors– Pay them off the cap table

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Entrepreneurial FinanceEntrepreneurial Finance

Cap Table Management Issues• Compensation

– Options, Warrants, RSU’s– Title Inflation– “Punished by Rewards” Alfie Kohn

• Can you attract a fundable team?– Ideally ‘been there, done that’ with investor ties

• Role of Advisors– Attorney, Accountant– IB (at the end, not the beginning)

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Market Trends inVenture-Style Financing

Market Trends inVenture-Style Financing

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Angel FinancingAngel Financing

• Typical angel financing structures– Convertible debt– Equity investments

• Common Stock• Series A Preferred “Light”

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Angel FinancingAngel Financing

• Convertible Debt– converts into preferred equity upon future VC

financing– conversion price discounted to future equity share

price (e.g., 20% to 50%) and often with a cap on the maximum effective valuation represented by the conversion price

– optional conversion into common stock prior to exit event

– enables company and investor to avoid protracted and difficult negotiations on pre-financing valuation

– great for F&F round

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Angel FinancingAngel Financing

• Equity Financing– Preferred Stock– liquidation preference over common

stock– other potential rights– permits lower pricing for employee stock

options– enables angels to participate in full

appreciation of company

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Angel Financing: Practice PointsAngel Financing: Practice Points

• Don’t raise angel money unless you have to – it’s expensive.

• Be prepared for valuation expectations of angels.

• Keep it simple and build from there.

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Key Terms in Venture DealsKey Terms in Venture Deals

• Investor Return Drivers• Investor Protections• Governance Rights

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Pre-Investment ValuationsPre-Investment Valuations

• Determines the price per share– 1,000,000 shares outstanding and a

$1,000,000 valuation = $1.00/share purchase price

– $2,000,000 valuation = $0.50/share purchase price

– A $1,000,000 investment on a $1,000,000 valuation = ?% of the company to the investor?

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Valuation: Take-AwaysValuation: Take-Aways

• Keep long-term perspective in view.• Understand trade-offs between valuation,

dividends, liquidity preferences and option pool size.

• Start with a rational valuation at the F&F / angel stages - valuations too high early cause problems later.

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DividendsDividends

• An 8% dividend on a $1,000,000 equity investment = $80,000 annually

• Typical dividend terms:– mandatory or discretionary– cumulative or non-cumulative– participating (“double dipping” or non-

participating– Payable in cash or shares of stock

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Dividends: Take-AwaysDividends: Take-Aways

• Mandatory dividends that cumulate from date of investment can be extremely dilutive to the founders.

• Dividends paid in shares of stock are also very dilutive.

• Limit stock dividends to common stock and clarify how the stock is valued and by whom.

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Liquidation PreferencesLiquidation Preferences

• When a company is acquired, “liquidation preferences” determine how the sale proceeds are shared among the stockholders.

• Example:– $1,000,000 of preferred stock sold to

investors– Company sells for $5,000,000

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Liquidation PreferencesLiquidation Preferences

• Two Components– Preference

• Multiple return on investment - (1 -3 times investment amount)

– Post-preference participation rights• Rights of preferred stockholders to

participate with common stockholders after paying the preference)

• full participation, capped participation or no participation

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Liquidation Preferences:Take-Aways

Liquidation Preferences:Take-Aways

• We are seeing 1x to 2x participating preferences, sometimes with caps (usually set at 3x the investment amount).

• Use valuation and option pool sizing as “stalking horses” for negotiating preferences.

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Investor ProtectionsInvestor Protections

• Pre-emptive Rights• Registration Rights• Information Rights• Class veto rights• Co-Sale / Tag-Along Rights• Drag-Along Rights

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Governance RightsGovernance Rights

• Board seats• Board veto / approval rights

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Preparing for Investor DiligencePreparing for Investor Diligence

• Complete all organizational and other documentation – Charter, Bylaws, minutes, approvals– Stock ledger and cap table– IP documentation– Key agreements– Compliance records

• Put them in a due diligence notebook

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Things That Can Trip You UpThings That Can Trip You Up

• Third-party finders were used to sell securities– Unregistered finders can create

rescission rights• Uncertainty around IP ownership

– Problems of joint ownership– NDAs, invention assignments,

development logs– Public disclosure before patents are filed

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Things That Can Trip You UpThings That Can Trip You Up

• Equity ownership – Documentation of who owns what– Poor cap table management– Expectations of equity stake– Stock issuances and consideration documented

(cash, technology, etc.)– Stock restrictions in place: vesting and transfer

restrictions (repurchase rights, first refusal rights and acceleration)

• Unclear / unrealistic roles– Someone has to be in charge

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What’s Happening in the Rocky Mountain Tech

and VC World

What’s Happening in the Rocky Mountain Tech

and VC World

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TechStars ProgramTechStars Program

• Mentorship-driven seed stage investment program

• Began in Boulder, Colorado in 2007• Now located in Boston, NYC and Seattle• 10 companies selected out of hundreds for each

summer-long program• Companies receive $18,000 in seed funding, 3

months of intensive high-quality mentorship and opportunity to pitch to angels and VCs at end of the program

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Boulder Open Angel ForumBoulder Open Angel Forum

• 5 companies present quarterly• Seasoned angels only• 10 to 15 angels attend• True angel stage and dollar amounts• openangelforum.com

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Founder InstituteFounder Institute

• Pre-seed incubator• Applicants evaluated via social science

testing• Weekly company-building sessions with

seasoned CEO mentors• Access to free/discounted services• US, Europe, Asia and South America• founderinstitute.com

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Accessing Venture Capital in DenverAccessing Venture Capital in Denver

• Active Colorado-based Funds– Access Venture Partners (Denver)– Altira Group (Denver)– Boulder Ventures (Boulder)– Colorado Fund (Boulder) – Foundry Group (Boulder)– Liberty Global (Denver)– Meritage Funds (Denver)

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Accessing Venture Capital in DenverAccessing Venture Capital in Denver

• Other VCs Active in Colorado (2+ deals):– DJF Mercury (Houston, Texas)– Epic Ventures (SLC, Utah)– Flywheel Ventures (Albuquerque, NM)– Grotech Ventures (Virginia – D.C. area)– Metamorphic (NYC)– New World Ventures (Chicago, Illinois)– Pelion Venture Partners (SLC, Utah)

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Sectors Attracting FinancingSectors Attracting Financing

• Social networking / web 2.0 • Internet technology and eCommerce• Data storage / networking systems /cloud

computing• Business analytics / intelligence• Medical devices• Drug discovery• CleanTech (energy, capital efficient

technologies)• Telecom

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Q&AQ&A

Presented by: Mark Weakley

Phone Number: 303-417-8549

Email Address: mark.weakley@bryancave.com

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