BRIDGE FINANCING

Corporate Training LunchJune 18, 2010

Ben Straughan

What is a Bridge Financing?What is a Bridge Financing?

Debt Feature - Loan from one or more investors to the Company

Equity Feature – Expected to convert to equity if anticipated financing occurs

Bridge v. pier

Why Bridge?Why Bridge?

Fast

Avoid valuation issue

Investor commitment

Gain control over smaller investors

ValuationValuation

Preferred Stock Valuation - Negotiating Leverage Valuation Ceilings Discount off preferred valuation Warrant coverage

Time

Common Stock Valuation Tax/409A

Why Invest in a Bridge?Why Invest in a Bridge?

Ensure access to hot deal

Keep Company moving forward

Better return in exchange for higher risk

When Bridge?When Bridge?

Pre-seed or pre-first round

Expected financing

"Down" round

Expected sale

DocumentationDocumentation

Term Sheet

Note Purchase Agreement

Convertible Promissory Note

Warrant

Term SheetTerm Sheet

Keeps deal on track

Offering tool

Usually non-binding

Economic Terms/sweetener

Purchase AgreementPurchase Agreement

Representations and warranties Company representations Investor reps for securities compliance

Minimum amount for initial closing

Affirmative / Negative Covenants

Managing multiple purchasers

Convertible Promissory NoteConvertible Promissory Note

Term / Maturity Date

Interest

Conversion

Automatic vs. Optional Triggering Events

Qualified Financing Passage of Time Corporate Transaction

SweetenersSweeteners

Discount on Conversion

Warrant "Warrant Coverage" Term Cashless exercise

Convertible Note (cont'd)Convertible Note (cont'd)

Miscellaneous Clauses

Prepayment Participation Milestones Security / Subordination Default / Acceleration Amendment by majority in interest

Bridge Tax IssuesBridge Tax Issues

Imputed interest for low rates

Original Issue Discount ("OID") issues Warrant Penny warrants

Common Stock Valuation

Securities ComplianceSecurities Compliance

Analyze exemption

Consider Form D for bridge and subsequent conversion

OtherOther

Review Charter, financing agreements

Interest calculation on conversion

Noteholder waiver if no "qualified financing"

Interim LLC Funding

Practical TipsPractical Tips

Expense of financing

Speed

Check consent requirements, financing documents

Carries debt remedies