Más contenido relacionado
La actualidad más candente (20)
Similar a Terms and Trends in Venture Financings from across WilmerHale (20)
Terms and Trends in Venture Financings from across WilmerHale
- 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
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
2
- 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
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
3
- 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
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
4
- 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
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
5
- 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
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
6
- 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
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
7
- 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”
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
8
- 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
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
9
- 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.
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
10
- 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);
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
11
- 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.
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
12
- 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.
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
WilmerHale
13
- 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)
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
14