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Cap Table Managementand
Other Issues Surrounding Equity Financing
Cap Table Managementand
Other Issues Surrounding Equity Financing
Jim FranklinCEO, SendGrid
Mark W. WeakleyPartner, Bryan Cave LLP
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What We Will CoverWhat We Will Cover
• Cap Table Management• Market trends in venture-style financing.• What’s happening in the Rocky Mountain
tech and VC community.
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Entrepreneurial FinanceEntrepreneurial Finance
Cap Table Management Issues
• Number of Founders• How to split Equity among Founders• Plan for changing contribution levels• Keep it Simple
– Few Angels, Advisors– Pay them off the cap table
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Entrepreneurial FinanceEntrepreneurial Finance
Cap Table Management Issues• Compensation
– Options, Warrants, RSU’s– Title Inflation– “Punished by Rewards” Alfie Kohn
• Can you attract a fundable team?– Ideally ‘been there, done that’ with investor ties
• Role of Advisors– Attorney, Accountant– IB (at the end, not the beginning)
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Angel FinancingAngel Financing
• Typical angel financing structures– Convertible debt– Equity investments
• Common Stock• Series A Preferred “Light”
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Angel FinancingAngel Financing
• Convertible Debt– converts into preferred equity upon future VC
financing– conversion price discounted to future equity share
price (e.g., 20% to 50%) and often with a cap on the maximum effective valuation represented by the conversion price
– optional conversion into common stock prior to exit event
– enables company and investor to avoid protracted and difficult negotiations on pre-financing valuation
– great for F&F round
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Angel FinancingAngel Financing
• Equity Financing– Preferred Stock– liquidation preference over common
stock– other potential rights– permits lower pricing for employee stock
options– enables angels to participate in full
appreciation of company
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Angel Financing: Practice PointsAngel Financing: Practice Points
• Don’t raise angel money unless you have to – it’s expensive.
• Be prepared for valuation expectations of angels.
• Keep it simple and build from there.
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Key Terms in Venture DealsKey Terms in Venture Deals
• Investor Return Drivers• Investor Protections• Governance Rights
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Pre-Investment ValuationsPre-Investment Valuations
• Determines the price per share– 1,000,000 shares outstanding and a
$1,000,000 valuation = $1.00/share purchase price
– $2,000,000 valuation = $0.50/share purchase price
– A $1,000,000 investment on a $1,000,000 valuation = ?% of the company to the investor?
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Valuation: Take-AwaysValuation: Take-Aways
• Keep long-term perspective in view.• Understand trade-offs between valuation,
dividends, liquidity preferences and option pool size.
• Start with a rational valuation at the F&F / angel stages - valuations too high early cause problems later.
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DividendsDividends
• An 8% dividend on a $1,000,000 equity investment = $80,000 annually
• Typical dividend terms:– mandatory or discretionary– cumulative or non-cumulative– participating (“double dipping” or non-
participating– Payable in cash or shares of stock
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Dividends: Take-AwaysDividends: Take-Aways
• Mandatory dividends that cumulate from date of investment can be extremely dilutive to the founders.
• Dividends paid in shares of stock are also very dilutive.
• Limit stock dividends to common stock and clarify how the stock is valued and by whom.
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Liquidation PreferencesLiquidation Preferences
• When a company is acquired, “liquidation preferences” determine how the sale proceeds are shared among the stockholders.
• Example:– $1,000,000 of preferred stock sold to
investors– Company sells for $5,000,000
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Liquidation PreferencesLiquidation Preferences
• Two Components– Preference
• Multiple return on investment - (1 -3 times investment amount)
– Post-preference participation rights• Rights of preferred stockholders to
participate with common stockholders after paying the preference)
• full participation, capped participation or no participation
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Liquidation Preferences:Take-Aways
Liquidation Preferences:Take-Aways
• We are seeing 1x to 2x participating preferences, sometimes with caps (usually set at 3x the investment amount).
• Use valuation and option pool sizing as “stalking horses” for negotiating preferences.
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Investor ProtectionsInvestor Protections
• Pre-emptive Rights• Registration Rights• Information Rights• Class veto rights• Co-Sale / Tag-Along Rights• Drag-Along Rights
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Preparing for Investor DiligencePreparing for Investor Diligence
• Complete all organizational and other documentation – Charter, Bylaws, minutes, approvals– Stock ledger and cap table– IP documentation– Key agreements– Compliance records
• Put them in a due diligence notebook
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Things That Can Trip You UpThings That Can Trip You Up
• Third-party finders were used to sell securities– Unregistered finders can create
rescission rights• Uncertainty around IP ownership
– Problems of joint ownership– NDAs, invention assignments,
development logs– Public disclosure before patents are filed
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Things That Can Trip You UpThings That Can Trip You Up
• Equity ownership – Documentation of who owns what– Poor cap table management– Expectations of equity stake– Stock issuances and consideration documented
(cash, technology, etc.)– Stock restrictions in place: vesting and transfer
restrictions (repurchase rights, first refusal rights and acceleration)
• Unclear / unrealistic roles– Someone has to be in charge
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What’s Happening in the Rocky Mountain Tech
and VC World
What’s Happening in the Rocky Mountain Tech
and VC World
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TechStars ProgramTechStars Program
• Mentorship-driven seed stage investment program
• Began in Boulder, Colorado in 2007• Now located in Boston, NYC and Seattle• 10 companies selected out of hundreds for each
summer-long program• Companies receive $18,000 in seed funding, 3
months of intensive high-quality mentorship and opportunity to pitch to angels and VCs at end of the program
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Boulder Open Angel ForumBoulder Open Angel Forum
• 5 companies present quarterly• Seasoned angels only• 10 to 15 angels attend• True angel stage and dollar amounts• openangelforum.com
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Founder InstituteFounder Institute
• Pre-seed incubator• Applicants evaluated via social science
testing• Weekly company-building sessions with
seasoned CEO mentors• Access to free/discounted services• US, Europe, Asia and South America• founderinstitute.com
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Accessing Venture Capital in DenverAccessing Venture Capital in Denver
• Active Colorado-based Funds– Access Venture Partners (Denver)– Altira Group (Denver)– Boulder Ventures (Boulder)– Colorado Fund (Boulder) – Foundry Group (Boulder)– Liberty Global (Denver)– Meritage Funds (Denver)
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Accessing Venture Capital in DenverAccessing Venture Capital in Denver
• Other VCs Active in Colorado (2+ deals):– DJF Mercury (Houston, Texas)– Epic Ventures (SLC, Utah)– Flywheel Ventures (Albuquerque, NM)– Grotech Ventures (Virginia – D.C. area)– Metamorphic (NYC)– New World Ventures (Chicago, Illinois)– Pelion Venture Partners (SLC, Utah)
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Sectors Attracting FinancingSectors Attracting Financing
• Social networking / web 2.0 • Internet technology and eCommerce• Data storage / networking systems /cloud
computing• Business analytics / intelligence• Medical devices• Drug discovery• CleanTech (energy, capital efficient
technologies)• Telecom
Presented by: Mark Weakley
Phone Number: 303-417-8549
Email Address: [email protected]
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