Download - Startup Seed Funding: From Bootstrapping to Equity Financing

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Page 1: Startup Seed Funding: From Bootstrapping to Equity Financing

Startup Seed Funding

Kristine M. Di BaccoAssociateFenwick & West, LLP

Sirk RohCOOEGFS

From Bootstrapping to Convertible Debt

and Series Seed Financing

#seedfunding

Page 2: Startup Seed Funding: From Bootstrapping to Equity Financing

Who We Are

2Seed Funding Your Startup

Page 3: Startup Seed Funding: From Bootstrapping to Equity Financing

Presentation Overview

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Bootstrapping The leap from bootstrapping to

investment Preparing for investment capital Different ways to structure your

first investment round:•Convertible debt•Series seed preferred stock

Current deal flow Sample term sheets

Seed Funding Your Startup

Page 4: Startup Seed Funding: From Bootstrapping to Equity Financing

Bootstrapping

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Better focus on execution No dilution Independence Caveats: Keep personal

finances separate from business!

Seed Funding Your Startup

Page 5: Startup Seed Funding: From Bootstrapping to Equity Financing

Moving On Up…

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How do you go from that bootstrap stage to the next level?

First step…

Seed Funding Your Startup

First step… How do you go from that bootstrap stage to the next level?

Page 6: Startup Seed Funding: From Bootstrapping to Equity Financing

Friends and Family

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Smaller investment Formalize process Be transparent about

risks What happens when

you start bringing in professional investor?

Seed Funding Your Startup

Page 7: Startup Seed Funding: From Bootstrapping to Equity Financing

Preparing for Professional Investors

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Angels vs VCs Tailor money raising issues, going from bootstrap to next level What does it mean to talk to professional investors How to build a financial model that appeals to investors Top-down vs bottom up projections Finances need to tell a story

Seed Funding Your Startup

Page 8: Startup Seed Funding: From Bootstrapping to Equity Financing

Two Ways to Do Seed Financings

8Seed Funding Your Startup

Convertible Debt(generally when raising < $2M)

Series Seed Preferred Stock(generally when

raising >$2M)

Page 9: Startup Seed Funding: From Bootstrapping to Equity Financing

Convertible Promissory Notes

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Simple Terms•Amount of money raise, interest, maturity/default

More Negotiated TermsWhat is a qualified financing?Optional conversion on non-qualified financing?Kicker payment on change of control (sale of company)

Seed Funding Your Startup

Page 10: Startup Seed Funding: From Bootstrapping to Equity Financing

Sample Convertible Note Term Sheet: Official Terms

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Convertibility on Qualified Financing

Convertibility on Non-Qualified Financing

Sale of the Company Term: Prepayment Closing(s) Subordination Note Purchase Agreement

Seed Funding Your Startup

Page 11: Startup Seed Funding: From Bootstrapping to Equity Financing

vs. Series Seed Preferred Stock: Valuation and Purchase terms

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• Pre-money valuation is negotiated:• How market factors in• If you’re pre-revenue, need

milestones• Deal flow• Examples of pre-money valuation

for different types of companies

• Size of option pool • Reps and warranties from

Company slimmed down from

Series A• Minimal closing conditions

Seed Funding Your Startup

Page 12: Startup Seed Funding: From Bootstrapping to Equity Financing

Series Seed Preferred Stock: Conversion and Distribution Rights

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• No price-based anti-dilution

protections • Non-participating liquidation

preference• No preferential dividend rights• No redemption rights• Series Seed board seat• Limited protective provisions

and voting rights

Seed Funding Your Startup

Page 13: Startup Seed Funding: From Bootstrapping to Equity Financing

Series Seed Preferred Stock: Contractual Stockholder Rights

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• Better rights given to future investors guaranteed to Series Seed

investors• Right of first offer on future financings (optional)• Limited information rights• Drag-along for smaller investors and common stock (optional)• No registration rights• No Company covenants• No co-sale rights

Seed Funding Your Startup

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Sample Term Sheet and Investment Documents

14Seed Funding Your Startup

Go to www.seriesseed.com

Also, check out the Fenwick & West VC Survey (done quarterly):

http://www.fenwick.com/publications/Pages/silicon-valley-venture-survey-first-quarter-2014.aspx

Page 15: Startup Seed Funding: From Bootstrapping to Equity Financing

Convertible Notes or Series Seed Preferred?

15Seed Funding Your Startup

Convertible Notes Series Seed

Pros • Doesn't require company valuation (but may need to negotiate a "valuation cap")

• Quick/cheap• More prevalent for

smaller $ rounds

• Clearer definition around investor rights

• Starts long-term capital gains clock (important if early exit)

• Relatively quick (cheaper than Series A)

Cons • Valuation uncertainty for investors (unless there is a cap)

• Requires negotiations around valuation

• Higher legal fees• More expensive than

convertible note

Page 16: Startup Seed Funding: From Bootstrapping to Equity Financing

Questions?

16Seed Funding Your Startup

Kristine M. Di Bacco

650.988.8500

www.fenwick.com

@fenwickwest

Check out Kristine’s bio!

We look forward to hearing from you!

Sirk Roh

415.234.3437

www.earlygrowthfinancialservices.com

@EarlyGrowthFS