Financing Options for Startups by Nicole Moss

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Law & Order: Financing Options for Startups February 12, 2013 Nicole Moss (617) 816-8220 [email protected]

Transcript of Financing Options for Startups by Nicole Moss

Law & Order: Financing Options for Startups

February 12, 2013

Nicole Moss(617) [email protected]

Disclaimer

The information presented herein and the surrounding discussion are provided for educational or informational purposes only. The information presented herein is not necessarily applicable to any particular situation herein or discussed in the course of this presentation. By providing this information and engaging in discussion, no legal advice is provided hereby and no attorney client relationship or privilege is being established. Every business and every issue is unique and legal questions or issues should be directed to your attorney.

Sources of Funds for Startups

Sources of Funds for Startups

• Founding Team• Friends & Family•Angels• Super Angels•Accelerators, etc.• Seed Funds•VC Funds

•Banks•Mezzanine Funds •Private Lenders•Crowdfunding•Grants

Categories of Fund Sources

• Equity•Debt•Hybrids

Debt Structures

•Credit Cards•Promissory Notes• (Convertible Notes are hybrids)• Loans

Credit Cards

•Higher Rates than other Debt•Compounding Interest

Promissory Notes

•Principal• Interest•Repayment Structure•Prepayment•Default•Personal Guarantee (maybe)

Shareholders

Company

Assets

Super-Simple Org Chart

Shareholders

Company

Assets

Personal Guarantee

Debt document secured by guarantee or collateral or both

Collateral

Super-Simple Org Chart

Loans

• Same as P-Notes PLUS•Covenants•Reps & Warranties•Bringdowns•Diligence• Secured with Assets/Collateral,

Guarantees•UCC Filings

SBA Loans

• Same as Regular Loans PLUS•More Paper• Longer Payment Schedule•No/Lite Prepayment Penalties• Lighter Covenants•Non-recourse (maybe)

Equity Structures

•Common Stock (or membership units in an LLC)•Preferred Stock •Warrants & Options

Shareholders

Company

Assets

Super-Simple Org Chart

Shareholder #1 – 50%

Company

Assets

Simple Org Chart

Shareholder #2 – 30%Shareholder #3 – 20%

Shareholder #1 – 50%

Company

Assets

Org Chart

Shareholder #2 – 30%Shareholder #3 – 20%

Liquidity Event: $1000

Distribution: $1000

Waterfall: - outstanding debt - shareholders pro rata

Common Stock

• For cash, in-kind, in lieu of compensation• = a Security• Governed by:• Federal & State Securities Laws• State Corporate Laws• Certificate of Formation (public)• Bylaws• Other Agreements – Shareholders’,

Investors’ Rights…

Preferred Stock

• Like Common PLUS• Liquidation Preference•Convertible• Superior Voting Rights/Protection•Anti-dilution – ROFR, Participation

Shareholder #1 – 25%

Company

Assets

Org Chart

Shareholder #2 – 15%Shareholder #3 – 10%

Liquidity Event: $1000

Distribution: $1000

Waterfall: - outstanding debt - Preferred shareholders pro rata - Common shareholders pro rata

Preferred #1 – 50%

Warrants & Options

•Not an Equity, but still a Security• Exercise Threshold• Strike Price•Warrants -> Transactions•Options -> Compensation

Hybrid Structures

• Loans with PIKs, Warrants•Convertible Notes

Q & A