Financing OptionsScott M. Stanton

PartnerMorrison & Foerster LLP

Lab to Launch – San Diego

• Corporations and Limited Liability Companies– Both have limited liability for

owners/managers– Tax treatment can differ

• C Corporation’s earnings are taxed at corporate level

• S Corporation and LLC are pass-through entities

– Corporations are more common as investment vehicle in start-ups

• Delaware vs. California

Choosing the Best Entity for Your Venture

Lab to Launch – San Diego

• Corporations– Stockholders– Board of Directors– Officers

• Limited Liability Companies–Members–Managers–Managing Members– Officers

Control Issues

• Intellectual Property– Clearly defined assignment– Patents– Business plans– Licenses

• Capital – Adequacy and segregation to avoid piercing the corporate veil

• Keep the Stated Value Low

Contributions to the Venture

• Authorized vs. Issued• Common vs. Preferred• Founder Stock– Pricing– Vesting• Upfront and Term• Acceleration

– Repurchase rights

Equity on Formation

• Yourself• Friends & Family• Seed Capital• Bank Loans• Government

Grants• Business/Trade

Credit

• Angels• Crowd Funding• Equity Crowd

Funding (coming)

• VC’s• Strategics

Sources of Funds

• No General Solicitation (for now)• Accredited Investors• Unregistered Finders• Crowdfunding with equity

• Registered Portals• $1M per year• Investor limits

– Income/net worth tests– Max of $100k if investor income/net worth over

$1M

Legal Issues of Offering Securities

Valuation

Pre-Money Valuation $900,00090%+Investment Amount 100,00010%=Post-Money Valuation $1,000,000100%

Pre-Money Valuation $200,000 67%+Investment Amount 100,000 33%=Post-Money Valuation $300,000 100%

• Straight Debt• Convertible Debt• Preferred Stock• Warrants• Options

Types of Securities

• Board Representation• Approval Rights• Liquidation Preference• Anti-dilution• Financing Participation Rights

Financing Terms

Presented by Scott Stanton, Morrison & Foerster LLPsstanton@mofo.com

Thank you.

Lab to Launch – San Diego