This document discusses various sources of financing for startups, including self-funding, friends and family investments, angel investors, venture capitalists, and government grants. It notes that angels and VCs have different priorities when evaluating deals, with angels focusing more on involvement and filling gaps, while VCs prioritize potential exit routes. For early financing, startups typically use convertible debt, as it has minimal costs and postpones valuation negotiations. The document also outlines some key venture capital investment terms.

1. Term Sheets
Michael D. Bain, WilmerHale
iNNOVATOR EVENING
Attorney Advertising

2. Financing Trends
• Down-rounds
• Multiple Return Liquidation Preferences and
subsequent rounds are senior to the existing
liquidation preferences
• Antidilution ratchet
• Corporate Reorganizations
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

3. Sources of Money
•
•
•
•
•
•
•
Self-Funding
Friends and Family
Angels
Organized Angels
Venture Capitalists
Strategic Partnerships
Government Grants
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

4. Angels and Important to an Angel very differently
What’s VCs rank their priorities in a deal
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 or
industry
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, 2000).
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

5. Why Angels vs. VCs
•
•
•
•
•
•
•
Need cash quickly
Proactive mentoring and counseling
Avoid valuation of the Company
Major milestone in reach
Business Plan not complete
Stealth mode/Avoid scrutiny
Lack of VC interest
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

6. Goals in Early Rounds
•
•
•
•
•
•
•
Seek VC-friendly terms and conditions
Receive quality, critical early-stage advice
Move quickly
Minimize transaction costs
Improve Company’s prospects/reputation
Minimize number of stockholders
Avoid future legal problems
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

7. Typical Seed Stage Deals
•
•
•
•
Cash Loan
Common Stock
Convertible Debt
Convertible Preferred Stock
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

8. Cash Loan
• Requires repayment in cash along with periodic
interest payments
• Typically less sophisticated investors
• Often changes form
• Unfavorable Use of Proceeds
• Quick and easy
• Seek to delay principal and interest payments until
Series A Round
• No dilution
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

9. Common Stock
• Affects Option and Restricted Stock Pricing
• Often combined with additional VC rights
o
o
o
o
Registration Rights
Board Seat
Information Rights
Right of First Refusal
• Valuation
• Control
• Probably least desirable
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

10. Convertible Debt
•
•
•
•
•
•
•
•
Most desirable
Minimum transaction costs
Very quick
Minimizes problems with VCs
Minimum additional rights
Postpones valuation analysis
Better than Common Stock for the Investor
Typically convertible at holder’s option
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

11. Convertible Preferred Stock
•
•
•
•
•
Full set of rights typically associated with VCs
Too much control for too little money
Uses up “Series A”
Significant transaction costs
Requires valuation
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale

12. Venture Capital Terms to Know and
Understand
• Liquidation Preferences
• Participating preferred
stock
• Super liquidation
preferences
•
•
•
•
Dividends
Anti-dilution adjustments
Weighted average
Full ratchet
• Drag along rights
• Extraordinary put rights
• Redemption rights
• Board control
• Fair market value
redemption
• Increase in conversion
price
• Pay to play
Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000;
1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors
and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/codeof-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm
Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to
keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale