Post on 18-Oct-2014
description
presents
MICK BAIN WILMERHALE
Legal Land Mines: Raising Capital
Legal Landmines – Raising Capital
Mick Bain Janene Ásgeirsson
April 29, 2014
WilmerHale
Setting the Stage – the Company- Stage of the Company - Funding needs of the Company: both today and
over time - Key business objectives and milestones to be
achieved - Future inflection points
WilmerHale
Setting the Stage – the Investors- Friends and Family - Crowdfunding - Social/ product funding (e.g., Kickstarter) - Government grants - Angel investors - Venture Capital investors - Strategic investors
WilmerHale
Setting the Stage – What do Investors Care About?
Angels and VCs rank their priorities in a deal very differently !Business Attributes Angel VC !Investor’s possible involvement 1 3 Investor’s strengths filling gaps in business 2 5 Geographically close 3 6 Potential exit routes (liquidity) 4 1 Investor’s understanding of business 4 2 Presence of (potential) co-investors 6 4 !Source: Angel Investing: Matching Startup Funds with Startup Companies – A Guide for Entrepreneurs, Individual Investors and Venture Capitalists (Jossey-Bass).
WilmerHale
Setting the Stage – What do Investors Care About?
- Great Team - Sound Business Proposition - Solid Business Plan - Technical/IP Advantage - Customer and Market Due Diligence - Execution
WilmerHale
Setting the Stage – How do VCs Work and What do they Want?
- Funds are partnerships (sometimes limited liability companies)
- Where do they get their money? ▪Capital Contributions: GPs – 1%. LPs – 99% ▪Funds last 10 years. Therefore they need to raise money
about every 3- 5 years.
WilmerHale
Setting the Stage – How do VCs Work and What do they Want?
General Partner LLC Limited Partners (individuals and
institutions)
1% of capital / 20% of Profit
portfolio
company
portfolio
company
portfolio
company
99% of capital / 80% of Profit Fund
(2-2.5% total commitments)
General Partner LLC Limited Partners (individuals and
institutions)
portfolio
company
portfolio
company
portfolio
company
99% of capital / Fund
Management Fee
WilmerHale
Setting the Stage – How do VCs Work and What do they Want?
- How do VCs decide what to invest in? - What are their expectations? ▪VC Funds want a 30% return to compensate for risk and liability ▪ This translates to a 3x return of capital over the life of the fund ▪ The home run (10x) pay-offs provide most of the return
% of Deals
$ million of Capital
Return Multiple Return
% of Return
Home Runs 10% $ 22 10 $ 220 72% Other Wins 30% $ 28 3 $ 84 28% Losers 60% $ 40 0 $ - 0%
Expenses $ 10
Total 100% $ 100 3 $ 304 100%
WilmerHale
Setting the Stage – What do Companies Care About?
- Money - Help - Limited dilution/High valuations - Terms they can live with – today and tomorrow - Speed, efficiency and limited expenses
WilmerHale
Types of Financing Structures- Cash Loan - Common Stock - Preferred Stock - Convertible Debt
WilmerHale
Compare Structures with Goals
Money? Help? Limited Dilution?
Company Friendly Terms?
Good Precedent for Future Rounds?
Speed/Low Cost?
Cash Loan Y N Y N N ?
Common Stock
Y N N N N ?
Convertible Debt
Y Y ? ? Y Y
Preferred Stock
Y Y ? ? Y N
WilmerHale
Convertible Debt Terms- How it works !- Benefits
- Postpones valuation discussion (but see “caps”) - Postpones many terms - Creditor status - Fast - Less expensive
WilmerHale
Convertible Debt Terms- Typical terms
- Interest rate - Maturity date - Automatic conversion in a “Qualified Financing” - Optional conversion at maturity (common or preferred?)
- Conversion discount - Conversion cap
- Optional conversion if no financing (common or preferred?) - Sale terms - Warrant coverage
WilmerHale
Preferred Stock Terms!3 categories of terms: !- Economic !- Control !- Everything Else (TSTDM)
WilmerHale
Preferred Stock TermsECONOMIC TERMS - Pre-money valuation !- Option Pool !- Liquidation Preference
- 1x - Multiple - Participating Preferred !
- Accruing Dividends
WilmerHale
Preferred Stock TermsECONOMIC TERMS !- Anti-Dilution
- Weighted-average - Full ratchet !
- Redemption Rights !- Preemptive/ Participation Rights
WilmerHale
Preferred Stock TermsCONTROL TERMS !- Voting Rights and Covenants !- Board Composition and Representation !- Drag Along Rights !- Vesting
WilmerHale
Preferred Stock TermsEverything Else !- Registration Rights !- Information Rights !- Right of First Refusal and Co-Sale !!