how to prepare your startup for venture capital funding
TRANSCRIPT
© Copyright 2017 by K&L Gates LLP. All rights reserved.
Presented by Stan [email protected] Direct: +1 (650) 798-6743November 1, 2017
How to Prepare Your Startup for Venture Capital Funding
Silicon Valley Startup: Idea to IPO
These materials have been prepared solely for educational purposes. The presentation of these materials does not establish any form of attorney-client relationship with the author or K&L Gates. Particular legal issues should be addressed through consultation with your own legal counsel, not by reliance on this presentation or these materials. Attorney Advertising. Prior results do not guarantee a similar outcome. © K&L Gates LLP 2017.
Circular 230 DisclosureTo ensure compliance with requirements imposed by the IRS, please be advised that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed within.
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Introduction§ Stan Lewandowski, Esq., Partner (Emerging
Growth/Corporate/Energy/M&A Lawyer)§ Works primarily in the Silicon Valley (Palo Alto)
office of K&L Gates§ Advises start-ups and emerging growth
companies primarily on optimal legal entity selection and initial structuring issues, angel and venture financings, licensing, strategic relationships, and M&A transactions
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Overview§ What to consider when planning your own
venture and still working for others?§ How to structure the initial allocation of equity
among the founding team?§ What types of restrictions on the founder’s stock
are required by investors?§ Impact of a Stock Option Plan on the company
capitalization
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Overview (cont.)§ How much capital should companies consider
raising?§ What type of securities should a company
consider issuing to investors?§ What are the most important due diligence
issues for the investors?§ How to close a financing round without delays?
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I. Planning Your Own Venture - IP§ Avoid an IP taint from the outset – California
Labor Code Section 2870§ Any provision in an employment agreement which
provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall NOT apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information …
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I. Planning Your Own Venture – IP (cont.)§ EXCEPT for those inventions that either:
§ Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or
§ Result from any work performed by the employee for the employer.
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What Are the Implications?
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II. Allocation of Equity Among Founders§ Types of available shares for founders
§ Voting privileges
§ Approval rights
§ Election of board members by separate vote
§ Common issues considered by founders when allocating first equity§ When to issue founders’ shares
§ What percentage of company equity to issue to a founder
§ Consideration for founder’s shares
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III. Restrictions on Founders’ Stock§ What restrictions on founders’ shares are
expected?§ Stock vesting
§ What is it and why is it imposed?
§ Up front vesting? How much?
§ Duration?
§ Vesting acceleration for unvested shares§ What are the options?
§ Which option is preferred by investors?
§ When to implement?
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IV. Impact of Stock Option Plan on the Cap
Price = $8M/4.5M Shares = $1.78/Share
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Shares (M) %Founders (CS) 4.0 58.2Stock Option Pool (CS) 1.0 14.5Investor 1.875 27.3
Price = $8M/5M Shares = $1.60/Share
Shares (M) %Founders (CS) 4.0 64.6Stock Option Pool (CS) 0.5 8.1Investor 1.685 27.3
V. How Much Capital to Raise?§ Various investment stages
§ Incubation and pre-seed – up to ~$500K
§ Seed – $1M to $3M
§ Series A – $3M to $10M
§ Series B – over $10M
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VI. Types of Securities Issued to Investors§ Convertible Promissory Notes§ SAFEs§ Series Seed Preferred Stock§ Series A Preferred Stock and beyond
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VII. Most Important Diligence Issues§ Ownership of intellectual property§ Capitalization issues§ Grants of stock options§ Securities law compliance
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VIII. Closing of Your Financing on Time§ Preparation from day 1§ Organization and division of tasks§ Dedication and team effort
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THANK YOUFor Further Questions Please Contact:
Stan LewandowskiPartner, K&L Gates LLP
Office: +1 (650) 798-6743E-mail: [email protected]
www.klgates.com/s-lewandowski/www.linkedin.com/in/stanlewandowski
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