This document provides an overview of how startups can position themselves for venture capital funding. It discusses foundational concepts like entity structure, founder agreements, financing stages from convertible notes to Series A/B rounds. Key terms are explained like pre-money valuation, post-money valuation, and dilution. Common mistakes made by startups are also outlined such as non-compliance with securities laws and not properly managing equity records. The presentation aims to give founders a better understanding of attracting VC investment and negotiating favorable deal terms.

1. How to Position Your Startup for Venture
Capital Funding
Presented on August 26, 2021 by Jason Putnam Gordon
Email: jgordon@polsinelli.com

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• 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.
Important Caveats

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• My Background
• Structural Considerations
• Documentation for Founders and Early Employees
• Funding Stages
• Overview of SAFEs and Convertible Debt
• Overview of Valuation and Dilution
• Venture Financings
• Common Mistakes
Overview

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• Venture Capital and Emerging Growth Company attorney—practicing law
since 2005.
• Polsinelli is an Am Law 100 firm with approximately 900 attorneys in over
twenty offices throughout the US.
• My office is in San Francisco, but I work with companies throughout the
US and the world.
• I love working with entrepreneurs on financings and as outside general
counsel.
My Background

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▪ Highlights from the audience survey.
What is your Background?

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Big Picture
Create Increasing Value
Idea(s)
(Intangible Assets)
Technicians who have
skills like: sales,
marketing, business
acumen
(Services)
Investors
(Capital)

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Big Picture
Create Increasing Value
Idea(s)
(Intangible Assets)
Technicians who have
skills like: sales,
marketing, business
acumen
(Services)
Investors
(Capital)
Company Increases in Value

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Structural Considerations
▪ Almost always a Delaware C-
Corp.
▪ Seed funding – Capital to put
together prototype and initial
team.

9. Founder and Early Employee
Documentation
▪ IP Assignments
▪ Vesting
▪ Transfer Restrictions
▪ Shareholder Agreements
▪ Restrictions in bylaws
▪ Stock Purchase Agreements

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• 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
• Priced Rounds
➢ Series Seed and Series A
Initial Financing Options

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• 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)
Convertible Securities (Cont.)

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• 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 Conversion upon maturity or something less than a qualified
financing
Conversion Terms

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• Convertible Securities
➢Upsides:
❑Most common; cheaper, simpler;
❑No valuation of the company, nearly impossible at this early stage,
and helps justify lower FMV for stock options/restricted stock
➢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
Decision Points

14. 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.

15. Foundational Basics – Valuation and
Dilution
▪ Simple Example (not factoring in the option pool or other equity):
▪ Pre-money $10,000,000
▪ 10,000,000 shares split among three equal founders - Founder A = 3,333,333 shares or 33.3%
▪ 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 = 3,333,333/13,000,000 = ~25.6% with a paper value of $3,333,333
▪ Add in Convertible Securities
▪ (If there had been $1,000,000 in convertible securities with 25% discount only, holders
would have received 1,333,333 shadow-series shares.) (Founder A =
3,333,333/14,333,333 = 23.3%)
▪ (If there had been $1,000,000 in convertible securities with $5MM cap only, holdesr
would have received 2,000,000 shares. $1,000,000/(5,000,000/10,000,000) *Founder A
= 3,333,333/15,000,000 = 22.2%

16. Foundational Basics - Example
Continued
▪ Subsequent Round:
▪ Pre-money is $30,000,0000
▪ Investment is $10,000,000 ($30,000,000/13,000,000 shares =
(~$2.31/share)
▪ ~4,329,000 shares to new investor (=$10,000,000/$2.31)
▪ Total outstanding shares post close is 17,329,000
▪ Founder A – has ~19.2% (3,333,333/17,329,000)
▪ Previously, the stake was worth $3,333,333
▪ Now it’s worth $7,699,999
▪ Decrease in percentage ownership from 33.3% to 25.6% to 19.2%
▪ Increase in value from ~$0 to $3,333,333 to $7,699,999

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• Right Investors
• Understanding your ideal term sheet
▪ How much of the company is being sold based on a valuation
▪ 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
Venture Financings

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▪ Non-Compliance with Securities Laws
▪ Other Regulatory Issues
▪ Not managing cap tables
▪ Thinking that there are “standard” terms
▪ Finders
▪ 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
Common Pitfalls

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