RAISING ANGEL & VENTURE CAPITAL: GETTING YOUR LEGAL DUCKS IN A ROWMark J. Graffagnini

Managing Partner

Graffagnini+Associates, LLP

New Orleans, LA

BACKGROUND

Graffagnini+Associates, LLP founded in January 2010

Focus on start-up company and venture capital investor representation over last several years

Formerly with Wilson Sonsini Goodrich & Rosati, PC in Palo Alto, CA

Formerly with Lemle & Kelleher, LLP in New Orleans, LA

Entrepreneur www.maximumgen.com www.cleantechlawandbusiness.com www.nanolabweb.com

OVERVIEW

Early Stage Legal Issues

Entity Choice

Founders Issues

Employee Incentives

Seed Capital

Venture & Angel Capital

Keeping Legal Costs Down

SO, NOW YOU’RE AN ENTREPRENEUR:CHOOSING THE RIGHT ENTITY

Factor LLC C-Corp

Taxation Pass-through•Profits/Losses flow through to owners

Double-taxation:•Corp. pays tax on profits•Stockholders pay on dividends

Type of Investor Not generally preferred for VCs:•Exit?•Distribution

Generally preferred for VCs•Limited partners•Certainty

Management/Governance

Flexible•Single manager•Board of Managers•Member-managed

Less Flexible:•Board of Directors•Officers•Stockholders

Employee Incentive Plans

More difficult“working units”/profits interests

Incentive Stock Options

NOW YOU’VE CHOSEN THE RIGHT ENTITY FOR YOU—FOUNDERS ISSUES

Membership Purchase Agreement

A/K/A Subscription Agreement

A/K/A Contribution Agreement

LLC Restricted Stock Purchase Agreement

A/K/ASubscription Agreement

A/K/ABuy-Sell Agreement

C-Corp

FOUNDERS’ ISSUES (CONT’D)

Vesting of Shares or

LLC Interests

Company Re-purchase Option (“ROFR”)

Acceleration Provisions Lock-ups, Reps &

Warranties

Key Features of Founders Agreements

FOUNDERS’ ISSUES (CONT’D)

Clean IP Assignments Applies to ALL employees, contractors, etc. and

in various agreements Full coverage is beyond scope of this presentation

Pay for your stock/interests!! Should be able to document payment and

issuance “Fully paid and non-assessable”

Mistakes: Case of mistaken identity Poor documentation can lead to disputes Not keeping “cap table” clean

WHAT’S A “CAP TABLE”

XYZ CompanyXYZ % Units Type Capital PriceFounder A 15% - Common 25,000$ 0.01$ Founder B 15% - Common 25,000$ 0.01$ Founder C 50% 500,000 WorkingFounder D 12% - Common 250,000$ 0.01$ Reserve 8% - WorkingTotal 1,000,000

Common

Series A

and A-1

(7/10/01

& 7/8/02)

Series B and

B-1

3/31/03

Series C and

C-1

7/27/04

Series D and

D-1

5/24/07

As-Converted

to Common

Shares

% of Total

Out-

standing

% of Total

Fully

Diluted

VC 1A 92,310 886,735 467,704 900,478 2,347,227 #DIV/0! #DIV/0!VC 1B 12,270 117,866 62,168 114,898 307,202 #DIV/0! #DIV/0!VC 1C 236,400 2,270,872 1,197,760 2,361,763 6,066,795 #DIV/0! #DIV/0!VC 1D 2,639,250 25,352,795 13,372,200 26,315,379 67,679,624 #DIV/0! #DIV/0!VC 2A 19,770 189,911 100,168 197,513 507,362 #DIV/0! #DIV/0!VC 2B 138,812 556,873 357,546 669,553 1,722,784 #DIV/0! #DIV/0!

One Portion of a Complex Cap Table

EMPLOYEE INCENTIVE PLANS

Best Practices (LLC or C-Corp)

• Written Plan• Consistent administration

• Board/Manager Consent + Agreement

• Clear Documentation• Update records after each grant• Keep attorney in the loop!!

EMPLOYEE INCENTIVE PLANS (CONT’D)

Worst Practices:• Informal “hand-shake” deals

• Switching equity to and from individuals without paper trails

• Failing to update records and cap table regularly

• Ignoring internal requirements

Risks:• VCs/Angels• Employee confusion• Tax treatment

RAISING SEED CAPITAL:THE “FAMILY & FRIENDS” ROUND

•Issue stock or LLC interests according to your documents

•Comply with securities laws•“Accredite

d investors”

•Private placement memo (“PPM”) (a/k/a “private offering memo”)

•Issue certificates

•Present documents professionally

Do’s

•“Handshake” deals

•General solicitations in media

•Fail to update records and tables

Don’ts

ANGEL & VENTURE CAPITAL—DEAL DOCUMENTS & ISSUES

Term

sheet

•Non-binding

•Outlines basic terms of deal

•Beyond scope

Deal Documents:

•Certificate of incorporation/Operating Agreement

•Stock Purchase/Subscription Agreement

•Investors Rights Agreement

•Right of First Refusal/Co-Sale Agreement

•Voting Agreement

Deal Obstacles:

•Dirty IP Assignments

•Poor Cap Table Maintenance

•General sloppiness—Due Diligence Nightmares!!

SERIOUSLY?! WHAT’S THIS GONNA COST ME?!

Attorney’s fees vary widely

Negotiate with your attorney:

Value Billing/Start-up packages

Hourly rates and lawyers on your file

Investor’s counsel fees & caps

SERIOUSLY?! WHY BOTHER?! MY BUSINESS IS GOOD & I HAVE ENOUGH TO WORRY ABOUT!

Correcting mistakes is far more costly

Happy employees

Happy investors

Roadmaps

Credibility!!!

CONCLUSION

Entrepreneurship is a difficult road, and you have enough to worry about

Good documents and corporate practices give you peace of mind

View them as a roadmap for administration and successful business

Questions?