Bootup Startup Legal 101: Startup Financing May 11, 2011

Brock Smith & Mark Longo Clark Wilson LLP

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agenda

Legal Aspects of Raising Financing

1. Plant the seeds for a financing

2. financing structures

3. due diligence process

4. financing terms 5. financing deal docs

6. case studies

7. information sources

8. q & a

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Plant the corporate and legal seeds to facilitate successive rounds of financing. Raise each round of financing with your ultimate exit transaction in mind.

plant the seeds for a financing

Corporate Structure

Customer Agreements

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Share Structure Shareholders

Directors Officers

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the new financing reality

New rule of thumb: raise only as much equity as you need, bootstrap yourself, get to revenue and cash flow positive position. Exhaust all available funding sources.

Old rule of thumb: raise as much capital as you can.

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financing structures

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financing structures

!   Common Share offering (private placement)

!   New class of Common Shares (e.g., Class B)

!   Exchangeable Common Shares

!   Preferred Share offering (Series A, Series B, etc.)

!   Convertible debt

!   Venture debt

!   Bank debt

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cross border financing structures 2010 Federal budget eliminated Section 116 Income Tax Act reporting / filing burden on non-resident investors. This change enables U.S. VC funds to directly invest in Canadian companies, eliminating need to employ workarounds, such as re-organizing business into U.S. entity or investing indirectly via offshore company. Direct investment structure will often be the recommended deal structure from corporate, tax and cost perspectives.

CanCo,  Inc.

USInvestors

Cdn  Investors

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securities law considerations !   Comply with applicable securities laws:

ü  Canada: NI 45-106: exempt distributions from Prospectus / registration

ü  Need comparable US federal / state exemptions for US investors

!   Private placement Prospectus Exemptions:

ü  Private issuer exemption

ü  Friends & family

ü  Accredited investor (Canada and US)

ü  Employees, officers, directors, consultants

!   Resale restrictions apply to exempt share purchases

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equity financing timeline

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due diligence process

!   Due dili can make or break a deal

!   Proactively create virtual data room

!   Deals have a finite time to close

!   Don’t give investor reason to walk

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due diligence !   Minute Book

!   Shareholders agreements

!   Founder vesting agreements

!   Employment agreements

!   IP ownership agreements

!   Financial statements

!   Technology docs. / Product roadmaps

!   Material contracts

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the business deal

!   Deal size

!   Type of security

!   Investment Syndicate

!   Use of proceeds

!   Price: pre/post money cap table (basic / fully diluted)

!   Tranches (Call or option)

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general Ts & Cs

!   Closing date

!   Expenses of transaction

!   Representations and warranties

!   Conditions to closing

!   “No shop” clause

!   Break-up fee

!   Confidentiality

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common share financing

!   Common voting shares

!   Dividends discretionary

!   Share pro rata on sale of company

!   No redemption right on shares

!   No conversion rights

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convertible note financing

!   Discount on conversion

!   Valuation cap

!   Interest rate

!   Maturity date

!   Automatic conversion events

!   Optional conversion

!   Secured or unsecured

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preferred share financing

!   Dividends

!   Liquidation preferences

!   Conversion rights

!   Anti-dilution provisions

!   Voting rights

!   Redemption right

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financing deal docs.

!   Subscription / Investment Agreement

!   Shareholders Agreement

!   Capitalization table

!   Share provisions

!   Investor Rights Agreement

!   Stock Option Plan

!   Opinion of counsel

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shareholders agreement

!   Unanimous or not

!   Board of directors

!   Share transfer restrictions

!   Right of first refusal

!   Pre-emptive right

!   Drag along

!   Tag along

!   Information rights

!   Approval rights

case studies

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financing info. sources ü  Canadian Venture Capital Association: www.cvca.ca

ü  National Venture Capital Association: www.nvca.org

ü  BCSC: http://www.bcsc.bc.ca/privateplacements.asp

ü  Basil Peters’ blog: www.angelblog.net

ü  www.startupcompanylawyer.com

ü  www.seriesseed.com

ü  Fenwick & West Angel/Seed Financing Survey

Q & A Please direct inquiries to:

Mark Longo, Partner

mjl@cwilson.com | 604.643.3138 Twitter: markjlongo

LinkedIn Profile

Brock Smith, Partner bhs@cwilson.com | 604.643.3186

Twitter: brocksmith2

www.cwilson.com