1. Allan Chao
Startup Consultant
Startup V8
allan@startupv8.com
UC Berkeley Extension, Summer 2012

2. Question of the day:
How much does it cost to raise money?

3. The Agenda
 Quiz
 Quick review of last session
 Startup Legal Issues
 Finance and Incubation
 Guest Speaker: Justin Hovey (attorney)
 Guest Speaker: Jorden Woods (fundraising consultant)

4. Quiz Time
Good luck!
10 minutes max

5. Quick review of prior material
 Positioning and Targeting  Pay-per-click (PPC)
 Demographics  Google Adwords
 Psychographics  Social Media (SM)
 Segmenting  Blogging, Twitter
 Public Relations (PR)
 Value Proposition / Unique Selling
 Launch Strategy
Proposition
 Analytics
 Differentiation
 Virality
 Competitors
 Offline Marketing
 MySpace vs Facebook  “on-the-ground” campaigns
 First Mover Advantage  Events
 Risk and myth  Traditional marketing
 TV, radio, magazines
 Niche  Referrals
 Critical Mass  Revenue vs Profit
 Two-sided markets  Business Models: B2C, B2SMB, B2E
 Revenue Models
 Source Data Analysis
 Advertising
 Conversion Funnels
 Subscription Models
 Search Engine Optimization (SEO)
 Organic  Freemium
 Techniques  Churn rate
 Blackhat marketing  Product Market Fit
 Pivot

7. Most common Legal Issues
 Non-disclosure Agreement (NDA)
 Contracts
 With cofounders, employees, vendors, customers,
clients, etc.
 Incorporation
 General advice

8. NDA
 Non-disclosure Agreement
 Most commonly “Mutual Non-disclosure Agreement”
 Used for protecting your ideas and execution
 Tends to be overused by novice entrepreneurs
 Most professionals in the startup environment do not
sign NDAs unless there is another agreement in effect
 Investors
 Consultants
 Contractors

9. 5 Legal Entities to do Business
 Non Incorporated:
 Sole Proprietorship
 Partnership
 Incorporated
 C-Corporation
 LLC
 S-Corporation

10. Non-incorporation (not companies)
 Sole Proprietorship
 Individual doing something.
 Requires minimal paperwork
 Taxes apply to individual
 Personal liability
 Partnership
 A few partners with equal ownership of the company
 Requires much less paperwork than incorporation
 Taxes apply to partners
 Personal liability for all partners

11. Benefits of Incorporation
 More “formal” and professional
 Make purchases on behalf of the company, without
giving out personal information
 Liability shield
 Company is liable, avoid personal liability
 Clear ownership and rules of rights and
responsibilities
 E.g. reporting requirements
 Raising money from investors
 Lasts longer than the owners

12. Types of Incorporation
 LLC
 The “simplest” legal entity
 No stock, no shares, only “members”, loosely organized
 Very poor organizational structure for investors
 Pass-through taxation
 C-Corporation
 The “most organized” legal entity
 Company owned by stock and shares. Clear rights and ownership.
 Best organizational structure for investors.
 Double taxation
 S-Corporation
 Similar to C-corporation
 Limited number and types of shareholders
 Pass-through taxation

13. Shares
 Company is owned by its shareholders
 Shares give voting rights for major issues
 Profits distributed according to shares
 E.g. 1,000,000 shares outstanding (100% of ownership)
 Founder 1: 400,000 shares
 Founder 2: 400,000 shares
 200,000 shares reserved for first round of investors
 Common Stock
 Standard ownership and voting rights
 Preferred Stock
 Many variants, e.g. first pay-out in case of closure or acquisition
 This is one of the causes for the “how high are you aiming” issue
 Stock options
 Used for less important employees, option to buy stock at a low strike
price. No ownership yet, so no voting rights.

14. Vesting
 Vesting
 “vest” fraction of shares each month over time
 Usually 4 years (1-yr cliff) for employees
 Usually 2 years (no cliff) for advisors
 No vesting for investors
 E.g. 1,000,000 shares (100% of ownership)
 Founder 1: 400,000 shares vesting over 4 years
 Founder 2: 400,000 shares vesting over 4 years
 200,000 shares reserved for first round of investors
 Founder 1 vesting example
 After 1-11 months: no ownership
 After 12 months: 100,000 shares (reached cliff)
 After 13 months: 108,333 shares (1/48th per month)
 After 48 months: 400,000 shares (fully vested)

15. Dilution
 Dilution
 After all outstanding shares have been distributed
 In order to raise money, create new shares and issue them to next
round of investors
 All existing shareholders get diluted
 Started with 1,000,000 shares (100% of ownership)
 Original
 Founder 1: 400,000 shares = 40%
 Founder 2: 400,000 shares = 40%
 Seed investors: 200,000 shares = 20%
 E.g. 700,000 shares created for Series A
 Founder 1: 400,000/1,700,000 = 23.5%
 Founder 2: 400,000/1,700,000 = 23.5%
 Seed investors: 200,000/1,700,000 = 11.7%
 Series A investors: 500,000/1,700,000 = 29.4%
 ISO pool: 200,000/1,700,000 = 11.7%

16. Patents
 When is the right
time to file a patent?
 Patent Trolls

18. Methods of Financing a startup
 “organic” growth versus “land-grab” growth
 How high are you aiming?
 Personal Wealth
 Debt Financing
 Bank loans are very unlikely because startups fail
 Personal loans are much more common
 Frequently in the form of convertible debt
 Equity Financing
 Venture capital

19. Equity Financing
 Goal = Give away significant ownership of your
company to raise money and bring on talent.
 Founders
 Very generally, founders start with an equal split 50-50
or 33-33-33
 More complicated ways to calculate… google “founder
equity calculator”
 Thinking that the idea is worth significantly more (e.g.
80-20) shows inexperience and lack of understanding
 Capitalization tables to predict effects of dilution
 Employees expect to get vesting stock

20. Equity Fundraising Rounds
 Friends and Family $50-250k
 Convertible notes
 Angels up to $1 M
 Super angels up to $2.5 M
 VCs Series A $3+ M
 Normally 2-3 rounds… ABC exit.
 Rounds DEF = “cramdown” rounds… bad terms
 The one goal of investors is to exit. $$$$$

21. Convertible Notes
 Basically, straight debt that has a maturity date
 If the startup raises venture capital, the debt “converts” into
equity
 The conversion rate is based on the valuation at the time of
venture capital, with some discount for the additional risk
 Convertible notes are easy (fewer terms, less paperwork),
and do not require valuation of the company
 Most commonly used with Friends and Family and Angel
investors.

22. Investors want to Exit
 Option 1: IPO = Initial public offering
 Makes the most money ($1 billion +)
 Hardest to do (very few companies make it this far)
 Notables: Facebook, Groupon, LinkedIN
 Option 2: Acquisition
 Usually makes less money ($10 million - $1 billion)
 “Easier” to do
 Notables: YouTube (Google), Skype (Microsoft), Instagram
(FB)
 Option 3: “Lifestyle business”
 Makes the least money (recurring “passive” income of <$1 M)
 “Easiest” to do
 No angel or VC investor will invest in a lifestyle business. 
 Notables: 4-hour workweek

23. The Startup Lifecycle
 http://www.netvalley.com/silicon_valley/Legal_Bridge_From_El_Dorado_to_Silicon_Valley.html

24. Venture Capital history
http://techowtest.files.wordpress.com/2012/03/historyofstartupsandbubbles1.png

25. Equity Financing caveats
 Takes a long, long, long time to raise money.
 Very involved process
 Prepare to spend money to raise money
 Preparation workshops
 Preparing Presentations
 Flights to investors
 Dinner
 Beware of losing your company
 Term sheets must be reviewed by your lawyer!

26. Tools for calculating equity
 Equity Calculator
 Determining equity split between founders
 http://foundrs.com/calculator/index.php
 Capitalization Tables
 http://www.askventure.com/download-sample-share-cap-
table-template-of-a-venture-capital-term-sheet/
 Dilution Calculators
 http://www.ownyourventure.com/equitySim.html
 http://hackfwd.com/dilution

27. Alternative Financing
 Crowd Funding
 Kickstarter.com
 Rockethub
 Competitions / Grants
 Solo Funding
 Bank loans unlikely
 Second mortgage
 Credit cards!!??
 Start eating ramen noodles 

28. Incubation
 Programs that help entrepreneurs get started on their
projects in exchange for 5-10% equity
 Very small seed capital ($20,000)
 Networking and relationship building
 Presentations to angel investors
 Application based… very competitive (internationally)

29. Incubator Examples
 Incubators
 Y-combinator (Mountain View, CA)
 Techstars (Boulder, CO)
 Excelerate Labs (Chicago, IL)
 Graduates of Incubators
 Dropbox
 Scribd
 Reddit
 Justin.tv
 Posterous

30. Crunchbase, AngelList
 Crunchbase
 Useful for finding funding status of startups
 http://crunchbase.com/
 AngelList
 Useful for finding info about individual investors
 http://angel.co/

32. Justin Hovey Bio
 Mr. Hovey focuses on venture financings, mergers and
acquisitions and corporate and securities matters.
Mr. Hovey's practice includes advising entrepreneurs
and start-up companies, venture capital financings,
mergers and acquisitions and initial public offerings as
well as counseling public companies in securities and
compliance matters. Mr. Hovey’s startup practice
focuses primarily on companies in the gaming, social
media, online advertising and entertainment space.

33. Questions to ask Justin
 When should a startup incorporate?
 How can cofounders protect themselves from bad
breakups?
 What do you think about using LegalZoom to
incorporate?
 What’s the most common legal problem that startups
face?
 What’s the difference between a good attorney and a
great attorney?

34. Jorden Woods Bio
 Jorden Woods is a Silicon Valley serial entrepreneur who
has founded and led 3 IT-focused companies over the last
12 years: two enterprise software companies and a
management consultancy. He very much enjoys working
with entrepreneurs and fast-paced high-tech companies in
either a consulting or operational capacity.
 As a Silicon Valley serial entrepreneur he has significant
experience in the areas of mobile/wireless solutions, Web
2.0/3.0, online/mobile video gaming, enterprise software,
networking, medical software/devices, Ajax/RIA
technologies, and globalization.

35. Questions to ask Jorden
 What are the most common fundraising issues that
startups face?
 What are investors looking for in entrepreneurs and
startups?
 What’s the best way for an entrepreneur with a
qualified startup to find investors?
 What is the process of raising money and how long
does it take?
 What are the personal liabilities for an entrepreneur
who receives funding for his company?

37. Homework
 (Team) Prepare your Final Presentation

38. Final Project Presentations
 Present your startup to an investment firm
 Target a 15 minute presentation
 Pitch deck
 Business plan
 Demo (wireframes, mockups?)
 How far you’ve gotten in your project (code, deployed?)
 5-10 minutes of questions and discussions
 Alternative Final Project Presentation
 15 minutes about a startup case study or research subject