1.
presents
MICK BAIN
WILMERHALE
Legal Land Mines:
Raising Capital

2.
Legal Landmines – Raising Capital
Mick Bain
Janene Ásgeirsson
April 29, 2014

3.
WilmerHale
Setting the Stage – the Company
- Stage of the Company
- Funding needs of the Company: both today and
over time
- Key business objectives and milestones to be
achieved
- Future inflection points

4.
WilmerHale
Setting the Stage – the Investors
- Friends and Family
- Crowdfunding
- Social/ product funding (e.g., Kickstarter)
- Government grants
- Angel investors
- Venture Capital investors
- Strategic investors

5.
WilmerHale
Setting the Stage – What do Investors Care About?
Angels and VCs rank their priorities in a deal very differently
!
Business Attributes Angel VC
!
Investor’s possible involvement 1 3
Investor’s strengths filling gaps in business 2 5
Geographically close 3 6
Potential exit routes (liquidity) 4 1
Investor’s understanding of business 4 2
Presence of (potential) co-investors 6 4
!
Source: Angel Investing: Matching Startup Funds with Startup Companies – A Guide for
Entrepreneurs, Individual Investors and Venture Capitalists (Jossey-Bass).

6.
WilmerHale
Setting the Stage – What do Investors Care About?
- Great Team
- Sound Business Proposition
- Solid Business Plan
- Technical/IP Advantage
- Customer and Market Due Diligence
- Execution

7.
WilmerHale
Setting the Stage – How do VCs Work and What do they Want?
- Funds are partnerships (sometimes limited liability
companies)
- Where do they get their money?
▪ Capital Contributions: GPs – 1%. LPs – 99%
▪ Funds last 10 years. Therefore they need to raise money
about every 3- 5 years.

8.
WilmerHale
Setting the Stage – How do VCs Work and What do they Want?
General Partner LLC
Limited Partners
(individuals and
institutions)
1% of capital /
20% of Profit
portfolio
company
portfolio
company
portfolio
company
99% of capital /
80% of ProfitFund
(2-2.5% total
commitments)
General Partner LLC
Limited Partners
(individuals and
institutions)
portfolio
company
portfolio
company
portfolio
company
99% of capital /
Fund
Management Fee

9.
WilmerHale
Setting the Stage – How do VCs Work and What do they Want?
- How do VCs decide what to invest in?
- What are their expectations?
▪ VC Funds want a 30% return to compensate for risk and liability
▪ This translates to a 3x return of capital over the life of the fund
▪ The home run (10x) pay-offs provide most of the return
% of
Deals
$ million
of Capital
Return
Multiple Return
% of
Return
Home Runs 10% $ 22 10 $ 220 72%
Other Wins 30% $ 28 3 $ 84 28%
Losers 60% $ 40 0 $ - 0%
Expenses $ 10
Total 100% $ 100 3 $ 304 100%

10.
WilmerHale
Setting the Stage – What do Companies Care About?
- Money
- Help
- Limited dilution/High valuations
- Terms they can live with – today and tomorrow
- Speed, efficiency and limited expenses

11.
WilmerHale
Types of Financing Structures
- Cash Loan
- Common Stock
- Preferred Stock
- Convertible Debt

12.
WilmerHale
Compare Structures with Goals
Money? Help? Limited
Dilution?
Company
Friendly
Terms?
Good
Precedent for
Future
Rounds?
Speed/Low
Cost?
Cash Loan Y N Y N N ?
Common
Stock
Y N N N N ?
Convertible
Debt
Y Y ? ? Y Y
Preferred
Stock
Y Y ? ? Y N

13.
WilmerHale
Convertible Debt Terms
- How it works
!
- Benefits
- Postpones valuation discussion (but see “caps”)
- Postpones many terms
- Creditor status
- Fast
- Less expensive

14.
WilmerHale
Convertible Debt Terms
- Typical terms
- Interest rate
- Maturity date
- Automatic conversion in a “Qualified Financing”
- Optional conversion at maturity (common or preferred?)
- Conversion discount
- Conversion cap
- Optional conversion if no financing (common or preferred?)
- Sale terms
- Warrant coverage

15.
WilmerHale
Preferred Stock Terms
!
3 categories of terms:
!
- Economic
!
- Control
!
- Everything Else (TSTDM)

16.
WilmerHale
Preferred Stock Terms
ECONOMIC TERMS
- Pre-money valuation
!
- Option Pool
!
- Liquidation Preference
- 1x
- Multiple
- Participating Preferred
!
- Accruing Dividends

17.
WilmerHale
Preferred Stock Terms
ECONOMIC TERMS
!
- Anti-Dilution
- Weighted-average
- Full ratchet
!
- Redemption Rights
!
- Preemptive/ Participation Rights

18.
WilmerHale
Preferred Stock Terms
CONTROL TERMS
!
- Voting Rights and Covenants
!
- Board Composition and Representation
!
- Drag Along Rights
!
- Vesting

19.
WilmerHale
Preferred Stock Terms
Everything Else
!
- Registration Rights
!
- Information Rights
!
- Right of First Refusal and Co-Sale
!
!

20.
Course Title
Course Title
INSTRUCTOR NAME