1.
© Copyright 2022 by K&L Gates LLP. All rights reserved.
Jason Putnam Gordon, K&L Gates LLP
January 19, 2023
jason.Gordon@klgates.com
How to Position Your Startup
for Venture Capital Funding
Idea to IPO

2.
IMPORTANT CAVEATS
 Today’s Discussion is General Information – Not Legal
Advice
 We will be discussing rules and exceptions. Those rules,
exceptions, and exceptions to the exceptions may not be
applicable to your situation.
 You need to retain competent legal counsel to review all
facts and circumstances before weighing in with advice.
 Off-the-cuff answers to your questions are not, and
should not be taken, as legal advice.
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3.
OVERVIEW
 My Background
 Structural Considerations
 Entity Form
 Typical Financing Stages
 Documentation for Founders and Early Employees
 An Overview of SAFEs and Convertible Debt
 Overview of Valuation & Dilution—Pro Forma Cap Tables
 Overview of Venture Financings
 Common Pitfalls
 Q&A
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4.
Background
 Emerging Growth and Venture
Capital attorney-practicing law
since 2005.
 My office is in San Francisco,
but I work with companies
throughout the US and the
world.
 I love working with
entrepreneurs on financings, as
outside counsel, and on exits.
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Jason Putnam Gordon
Partner
+1.415.882.8124
Jason.Gordon@klgates.com

5.
Review of Audience Survey
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6.
Structural Considerations
 Typically a
Delaware C-Corp.
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7.
FOUNDER AND EARLY EMPLOYEE
DOCUMENTATION
 IP Assignments
 Vesting
 Stock Options
 Restricted Stock
 Transfer Restrictions
 Shareholder Agreements
 Restrictions in Bylaws
 Stock Purchase Agreements
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8.
FINANCING OPTIONS
 Convertible Debt/Equity
 Also known as bridge notes
 Convertible debt is the parent of convertible equity,
which can also be known as a SAFE Instruments
 Y Combinator developed the SAFE
 Venture Rounds
 Series Seed and Series A
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9.
CONVERTIBLE SECURITIES
 Convert to future equity securities at a
negotiated discount to a future qualified equity
financing
 This avoids valuing the company
 Far less expensive than a venture round like a Series
Seed or Series A round
 Downsides (At least for Convertible Notes)
 This is debt and may be required to be paid at some point
 Extra liquidation preference above all other equity, unless
otherwise handled
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10.
CONVERTIBLE SECURITIES (CONT.)
 Maturity*
 Interest Rate*
 Conversion Terms
 Amendment Terms, e.g., majority in interest
 Remaining Terms
 It’s not that common to negotiate these
 (*For Convertible Notes, not SAFEs)
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11.
CONVERSION TERMS
 Mandatory conversion at a discount of price paid
in Next Qualified Financing
 Series Seed/A needs to meet the definition of a
“Qualified Financing”
 Equity financing
 Minimum size, e.g., “$2,000,000”
 Discount has to be reasonable or later investors will
not go for it. 20-25% is typically reasonable.
 Conversion Price Cap
 Conversion upon a change of control/sale
 Optional maturity conversion
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12.
FOUNDATIONAL BASICS – VALUATION
AND DILUTION
 Pre-money valuation – the value of the company
before the next round of investment.
 Post-money valuation – the value of the
company after the round of investment.
 Fully-diluted basis – all common stock issued
and outstanding, plus all securities that can be
converted to common, plus (typically) the shares
reserved for equity compensation.
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13.
FOUNDATIONAL BASICS – VALUATION
AND DILUTION
 Very Simple Example (not factoring in the option pool or
any other equity)
 Pre-money $10,000,000
 10,000,000 shares split among three equal founders
 Founder A = 3,333,333 shares or 33%
 Investment $3,000,000 at $1.00/share ($10,000,000 pre-
money/10,000,000 outstanding shares) (Post-money is
$13,000,000)
 Founder A = 3,333,333 of ~25% with a paper value of
$3,333,333
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14.
FOUNDATIONAL BASICS – EXAMPLE
CONTINUED
 Basic Examples with Convertible Securities
 If there had been $450,000 convertible security with 25%
discount only, holder would have received 600,000 shadow
shares. $450,000/((1-.25)*$1.00)
 This example ignores the circular math: in determining the price the new
money will pay and on which the discount will be applied, the investor will
include the shadow shares in the fully diluted basis.
 If there had been a $450,000 convertible security with
$5MM cap only, holder would have received 900,000
shares. $450,000/(5,000,000/10,000,000)
 This example also ignores that the investor will include the shadow
shares in the fully diluted basis, which will change the price per
share the investor pays.
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15.
OVERVIEW OF VENTURE FINANCINGS
 Have a credible business plan with milestones
 Run a Systematic Process
 Have more than enough capital from your earlier seed
rounds
 Connect with the right Investors
 Understand your ideal term sheet
 Prepare for thorough diligence
 Be prepared for cleanup
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OVERVIEW OF VENTURE FINANCINGS
(CONT.)
 Understand your ideal term sheet
 How much of the company is being sold
 Dividends
 Liquidation preferences
 Voting Rights
 Protective provisions
 Optional and Mandatory Conversion
 Antidilution protection
 Vesting for founders
 Documentation
 Attorneys Fees
 No Shop and Confidentiality Provisions
 Whether investors will get a board seat
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17.
OVERVIEW OF VENTURE FINANCINGS
(CONT.)
 Diligence process
 Documentation Process
 NVCA - https://nvca.org/model-legal-documents/
 Series Seed - https://www.seriesseed.com/
 Proprietary forms
 Closing
 Post-Closing Items
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18.
COMMON PITFALLS
 Non-Compliance with Securities Laws, including using finders
 Other Regulatory Issues
 Not managing cap tables
 Thinking that there are “standard” terms
 Side Letters
 Failure to obtain proper corporate authorization
 Not forming an entity or the right entity
 Not getting vesting agreements in place
 Not filing 83(b) elections
 Not paying attention to securities laws
 Risk of employment-law issues
 Undocumented stakes in the company
 IP that resides in other entities
 Tax issues – E.g., federal, state, local
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19.
Questions/Comments