Explores venture capital financing, transaction documents, deal terms and trends.

1. Terms and Trends in Venture
Financings– from across WilmerHale
Daragh Murphy
Attorney Advertising

2. Venture Capital Financing – the Basics
What is a venture capital transaction?
 Type of private equity capital typically provided for early-stage, high-potential,
growth companies in the interest of generating a return through an eventual
realization event such as an IPO or sale of the company
 Venture capital investments are generally made as cash in exchange for
shares in the invested company
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3. Transaction Documents
Pre-Closing
Term Sheet
Certificate of
Incorporation
Signing and
Closing
Operative Documents
Ancillary Documents
• Stock Purchase Agreement
• Management Rights Letters
• Investor Rights Agreement
• Voting Agreement
• Director Indemnification
Agreements
• Right of First Refusal and CoSale Agreement
• Legal Opinion of Company
Counsel
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4. Deal Terms
Stock Purchase Agreement
 Type and Amount of Shares
 Purchase Price
 Representations and Warranties of Company, Founders and
Investors
 Conditions to Closing/Closing Deliverables
 Counsel and Expenses
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5. Deal Terms
Certificate of Incorporation
 Pay-to-Play
– If an investor does not participate in a future financing, its
preferred stock automatically converts to common stock or a
“shadow” series of preferred stock without anti-dilution and/or
other rights
 Redemption Rights
– At election of preferred holders as a class after 3-5 years
– All or portion
– Price can be original purchase price plus dividends or FMV
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6. Deal Terms
Certificate of Incorporation
 Dividends
– When, as and if declared or paid on common
– Accruing / cumulative
 Liquidation Preference
– Non-Participating
– Participating
 Anti-dilution Provisions
– Weighted average – broad v. narrow (i.e., exclude common stock
equivalents and shares reserved for issuance under incentive
plans)
– Full ratchet
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7. Deal Terms
Certificate of Incorporation
 Director Voting Rights
– Right of a class of stock to elect one or more directors
 Protective Provisions
– Right of a class of stock to approve key matters (e.g., equity
issuances, transactions)
 Optional Conversion
 Mandatory Conversion
– At a qualifying IPO or upon a class vote
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8. Transaction Documents

Investor Rights Agreement
– Covers ongoing rights and obligations of investors and ongoing obligations of the
company, including registration rights and company covenants (management and
information rights, preemptive rights, matters requiring investor director approval)

Voting Agreement
– Agreement among stockholders, generally investors and founders to vote shares for
various matters, including board designees and drag-along rights

Right of First Refusal and Co-Sale Agreement
– Grants rights to the company and investors on sales of stock by founders and “key
holders”
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9. Trends We’ve Observed
 More Founder Leverage in Early Stage (Seed) Financings
 More Focus on Key Provisions (more flexibility at the margins
for Founders)
 More Acceptance of Founder Liquidity terms
 Significant Founder Investment at the Outset
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10. More Founder Leverage in Early Stage
(Seed) Financings
 Founders may be able to negotiate that Seed Investors do not
get a board seat, or any protective provisions in the charter
– Seen more frequently by our Palo Alto office.
 R&D Company in Palo Alto was able to negotiate a separate
voting agreement with a founder veto on M&A;
– Caveat: rights had to be unwound in next financing 6 mos later
 Two companies out of Boston doing Series A rounds where
Investors wanted Series A director approval to
hire/fire/change compensation for executive officers:
– One financing died over this disagreement;
– One ended with a compromise where Series A Director vote was
required for decisions regarding CEO, but not other execs.
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11. More Focus on Key Provisions (more
flexibility at the margins for Founders)
 Because of high volume of VC financings, lawyers are
focusing on negotiating key terms (future voting/control,
financial terms), leaving more wiggle room for favorable
founder terms in smaller matters
– Registration rights for founder shares;
– Carve-out from ROFR provisions for up to 5% of founder shares;
– Founder voting rights not limited to founders providing services to
the Company (e.g. on amendment s to key agreements, consent
required for a company sale);
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12. More Acceptance of Founder Liquidity
 In later stage (Series C or D) financing, VCs are becoming
more amenable to giving Founders liquidity
– More visible trend in Palo Alto, partly in recognition of high cost of
living and serial entrepreneurship of many founders
 Conversation is shifting to more about how much they can sell
than whether they can sell at all.
 VCs are cognizant that they won’t be able to keep a founder
happy if he/she has working for 2-3 years to build a company
but not able to pay the rent.
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13. More Acceptance of Founder Liquidity
 One quirky trend: “Series FF” Preferred Stock (Palo Alto)
– Founder issues himself 80% Common Stock and 20% Series FF
Preferred Stock (acts like common, but with conversion feature)
– When purchased by a Preferred Investor in connection with a
Preferred Financing, the FF Preferred automatically flips to the
series of Preferred Stock being purchased
– E.g. If Company is raising a $10M Series B, and Founder wants
to sell $2M of his “FF” Preferred Stock, Investor pays $8M to the
Company, and $2M to the Founder, and ends up with $10M worth
of Series B Preferred Stock, as the FF flipped into Series B.
– This is a way to get founders some liquidity while solving for the
problem that Preferred Investors do not want to buy Common
Stock, and a high priced Common Stock sale could affect future
409A valuations.
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14. Significant Founder Investment at the
Outset
 Founders who put in a significant amount of their own cash up front
looking for a creative way to structure that investment; want to be “at
the table” with preferred investors
– Separate class of founder preferred stock with its own rights (unlikely to
be able to keep this for long)
– Convertible notes that will convert into the next round of institutional
investment (we recommend this approach)
 Founder’s participation in preferred round can lead to very high prorata depending on how the IRA is written
– E.g. One NY company had one of two-person founding team invest in
preferred; IRA was written such that pro-rata was based on total shares
held, not just preferred shares held. Other founder was NOT HAPPY (one
founder no longer with the company)
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keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP
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