Early Stage Financing: Deal Terms

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Investment Legalesefor Singapore startups

This is an informational document only and not an offer for shares.It is not legal advice. If in doubt, rent a lawyer.

2015-03-26

@mengwong

Early Stage Financing: Deal Terms

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Welcome to the Middle of the Trilogy

Early Stage Financing: Deal Terms

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Part One: The Startup ItselfVenture-fundable startup … or just an SME? What do investors look for?Lean Startup, Customer Discovery, Traction, Pirate Metrics, Revenue Model, AIDA, Business Model, disruptive innovation, user acquisition strategy, activation, retention, referral, revenue, promotion, SEO/SEM, A/B testing, analytics,you should take Steve Blank’s EP245 and watch How to Start a Startup by Sam Altman

Early Stage Financing: Deal Terms

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Part One: The Startup Itself

Early Stage Financing: Deal Terms

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Part Three: Deal Execution

The workflows, rituals, and etiquette of actually issuing securities so you can get money in the bank.

Early Stage Financing: Deal Terms

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Part Three: Deal Execution

legalese.io

Early Stage Financing: Deal Terms

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Part Two: Deal Terms

Early Stage Financing: Deal Terms

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Part Two: Deal TermsSeries A?

Preferred Shares?Ordinary Shares?Convertible Note?

Warrant?Options?SAFE?KISS?

Early Stage Financing: Deal Terms

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Part Two: Deal TermsSeries A?

Preferred Shares?Ordinary Shares?Convertible Note?

Warrant?Options?SAFE?KISS?

Venture Capital?Bridge?Seed?ESOP?

Accelerator?Angel / Govt Grant?Friends and Family?

Founder Shares?

Early Stage Financing: Deal Terms

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Part Two: Deal Terms

http://www.feld.com/archives/2005/08/term-sheet-series-wrap-up.html

Early Stage Financing: Deal Terms

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Part Two: Deal Terms

TL;DR?

Just sign whatever the investor gives youor

Try to get in to an accelerator andget advice from mentors and

alumni who have raised

Early Stage Financing: Deal Terms

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Part Two: Deal Terms

ButI am the investor!

thenyou will just have to

learn this stuffthink of it as being paid $1,000 an hour to read blogs

Early Stage Financing: Deal Terms

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Part Two: Deal Terms

Early Stage Financing: Deal Terms

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Part Two: Deal Terms

Debt Equity

Early Stage Financing: Deal Terms

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Part Two: Deal Terms

Debt Equity

Early Stage Financing: Deal Terms

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Part Two: Deal Terms

Debt Equity

some useful toolsto track your cap table

captable.ioreportally.comtermsheet.iolegalese.io

Early Stage Financing: Deal Terms

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Part Two: Deal Terms

Debt Equity

some useful toolsto track your cap table

captable.ioreportally.comtermsheet.iolegalese.io

Wait, what is a cap table?

Early Stage Financing: Deal Terms

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Capitalization Tableor, Show Me The Money

Early Stage Financing: Deal Terms

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founders friends and family round angel and fund round TOTAL

money shares percentage money shares percentage money shares percentage money shares percentage

pre-money 0 0 $1,500,000 100,000 $3,500,000 123,333

price per share 1 $3.00 $15.00

shares, post 100,000 123,333 150,667 150,667

post-money $1,570,000 $3,910,000

amount raised $20,000 $70,000 23,333 18.92% $410,000 27,333 18.14% $500,000 50,667 33.63%

Smoochy $20,000 33,196 33% 26.92% 22.03% $20,000 33,196 22.03%

Legs 26,938 27% 21.84% 17.88% $0 26,938 17.88%

Jumper 24,866 25% 20.16% 16.50% $0 24,866 16.50%

ESOP 15,000 15% 12.16% 9.96% $0 15,000 9.96%

Smoochy's Mom $15,000 5,000 4.05% $15,000 5,000 3.32%

Clark Kent Family Trust $30,000 10,000 8.11% $30,000 10,000 6.64%

Parker Family Trust $25,000 8,333 6.76% $25,000 1,667 1.11% $50,000 10,000 6.64%

Bruce Wayne $25,000 1,667 1.11% $25,000 1,667 1.11%

Tony Stark $30,000 2,000 1.33% $30,000 2,000 1.33%

Black Widow Holdings $30,000 2,000 1.33% $30,000 2,000 1.33%

Stark Industries Ventures $50,000 3,333 2.21% $50,000 3,333 2.21%

Wayne Enterprises Ventures $250,000 16,667 11.06% $250,000 16,667 11.06%

Early Stage Financing: Deal Terms

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Mommy, where do IPOs come from?

Early Stage Financing: Deal Terms

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Mommy, where do IPOs come from?When two founders love each other very much…

Early Stage Financing: Deal Terms

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Mommy, where do IPOs come from?

Early Stage Financing: Deal Terms

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Mommy, where do IPOs come from?

Early Stage Financing: Deal Terms

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Mommy, where do IPOs come from?

Early Stage Financing: Deal Terms

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Mommy, where do IPOs come from?

Early Stage Financing: Deal Terms

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Term Sheets and Fundraising

Early Stage Financing: Deal Terms

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Term Sheets and Fundraising

Early Stage Financing: Deal Terms

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Term Sheets and FundraisingThe startup could just issue ordinary shares.Exactly the same shares as the founders own.

Early Stage Financing: Deal Terms

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Term Sheets and FundraisingThe startup could just issue ordinary shares.Exactly the same shares as the founders own.

Investor puts in $20,000.Investor owns 20% of the company.

Early Stage Financing: Deal Terms

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Term Sheets and FundraisingThe startup could just issue ordinary shares.Exactly the same shares as the founders own.

Investor puts in $20,000.Investor owns 20% of the company.

Pop quiz: What is the pre- and post-money valuation?

Early Stage Financing: Deal Terms

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Term Sheets and FundraisingThe startup could just issue ordinary shares.Exactly the same shares as the founders own.Investor puts in $20,000.Investor owns 20% of the company.

But what if the startup gets acqui-hired for $70,000 two months later?

Early Stage Financing: Deal Terms

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Term Sheets and FundraisingThe startup could just issue ordinary shares.Exactly the same shares as the founders own.Investor puts in $20,000.Investor owns 20% of the company.

But what if the startup gets acqui-hired for $70,000 two months later?

Early Stage Financing: Deal Terms

CONFIDENTIAL

Term Sheets and FundraisingThe startup could just issue ordinary shares.Exactly the same shares as the founders own.Investor puts in $20,000.Investor owns 20% of the company.

But what if the startup gets acqui-hired for $70,000 two months later?Is that fair to the investor?

Early Stage Financing: Deal Terms

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Term Sheets and FundraisingThe startup could issue preference shares:shares with more rights than ordinary shares.

Early Stage Financing: Deal Terms

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Term Sheets and FundraisingThe startup could issue preference shares:shares with more rights than ordinary shares.

“If the startup is acquired prior to the next round of financing, each holder of preference shares will receive 1.5× the amount they paid for their shares.”

Now they get $30,000 back.

Early Stage Financing: Deal Terms

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Term Sheets and FundraisingPreference shares and ordinary shares = equity.

What’s the other way to do it?

Debt.

That is, convertible debt. (note, bond, debenture)

Early Stage Financing: Deal Terms

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Convertible Notes are Very Popular

Early Stage Financing: Deal Terms

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Get BothSid.es of the Story

Early Stage Financing: Deal Terms

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Standard DocumentsThe nice thing about standards is that you have so many to choose from. Andrew S. Tanenbaum

Early Stage Financing: Deal Terms

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Standard DocumentsThe nice thing about standards is that you have so many to choose from. Andrew S. Tanenbaum

Early Stage Financing: Deal Terms

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OK, boring, let’s go to the docsNow we look at the SAFE and the KISS

Early Stage Financing: Deal Terms

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You now know enough to be dangerous

This is sufficient for an angel roundup to but not including the NRF TIS or a Series A

The big boys will have their own paper.

Early Stage Financing: Deal Terms

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Part Three: Deal Execution

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legalese.io

Early Stage Financing: Deal Terms

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Further Reading“Salary” once meant salt. Now it’s paid in cash. Why not shares?

http://www.amazon.com/The-Founders-Dilemmas-Anticipating-Entrepreneurship/dp/0691158304

Software is eating law:

http://techcrunch.com/2015/01/10/documents-just-want-to-be-free/

Frog vesting:

https://dl.dropboxusercontent.com/u/9544489/class%20f%20frog%20vesting.pdf

Cap Table:

https://docs.google.com/spreadsheets/d/13pvLbteofyuLRjbOi0hAgOsb8FI6dTpcME4AZ2QjKys/edit?usp=sharing