The Language & Structure of Angel & Venture Deals
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This document outlines the language and structure of angel and venture capital deals, covering types of deals such as common equity, preferred equity, and convertible notes. It details the common structures involved, including term sheets and critical deal terms such as liquidation preferences and anti-dilution provisions. The presentation also touches upon regulatory considerations and key concepts necessary for startups and investors in navigating these financial agreements.
The Language & Structure of Angel & Venture Deals
- 1. THE LANGUAGE AND STRUCTURE OF ANGEL AND VENTURE DEALS JULY 28TH, 2015 ©MCCARTHY LAW, LLC 2015 LEGAL ISSUES FOR STARTUPS AND ENTREPRENEURS
- 2. FOUR SECTIONS OF THIS PRESENTATION • Types of Deals • Common Structure of Deals • Critical Deal Terms • Other Key Concepts
- 3. SECTION I: TYPES OF DEALS • Common Equity • Preferred Equity • Convertible Notes • Less Common Deals
- 4. COMMON EQUITY • Common Among Less Sophisticated Investors/Startups • Simple • Implies a Valuation • Pre/Post-Dilution Issues
- 5. PREFERRED EQUITY • Most Common Venture Vehicle/Most Sophisticated Investors • Varying Levels of Complexity • Liquidation Preferences • Huge Variation in Fairness/Characteristics of How Startups Treated
- 6. CONVERTIBLE NOTE • An Investment Vehicle that Has Characteristics of Debt and Equity • Initially Debt. Upon Triggering Event, Converts into Equity. • Delays Valuation Question • Originally Used in Bridge Financing, Now Super Common in Early-Stage Startups
- 7. LESS COMMON INVESTMENT VEHICLES • FACE • KISS • Convertible Equity • ROBS • Revenue-Based Financing
- 8. SECTION II: COMMON STRUCTURE OF DEALS • Term Sheet • Disclosure Documents • Investor Due Diligence • Accredited Investor Certs • Final Deal Agreements • Federal Filings
- 9. TERM SHEETS • Broad Strokes • Agreement to Agree • Where You Learn Exactly About Seriousness Level of Your Investors’ Interest • Not a Binding Document
- 10. DISCLOSURE DOCUMENTS • Securities Laws • Material Misstatement or Omission • CYA • Forward-Looking Statements
- 11. INVESTOR DUE DILIGENCE • You’re Responsible for Having the Documents in Place • Investors Do the Legwork Here
- 12. ACCREDITED INVESTOR CERTIFICATION FORMS • For Most Startups, Only Let Accredited Investors Invest • 200k/year Individual, 300k/year Married Couple • $1,000,000 in Assets Excluding Primary Residence
- 13. FINAL DEAL AGREEMENTS • Stock Purchase Agreement • Preferred Stock Purchase Agreement • Convertible Note Agreement • Fully Fleshed Out, All Legal Concepts
- 14. FEDERAL FILINGS • Form D • Associated State Filings • Additional Filings May Be Required – Depends on the Size of the Round
- 15. SECTION III: CRITICAL DEAL TERMS • Liquidation Preference • Anti-Dilution Provisions • Representations and Warranties • Qualified Financing • Conversion Price • Valuation Cap
- 16. LIQUIDATION PREFERENCES • Investor Gets Money Back First • Participating vs. Non- Participating • Usually a Multiple • 1x Considered Standard
- 17. DILUTION, ANTI- DILUTION PROVISIONS • Issued vs. Authorized Stock • Option Pool • Pro Rata Participation Rights • Automatic Grant to Maintain Ownership %= Crazy!
- 18. REPS & WARRANTIES • Company Has to Certify It Has Its Excrement Together • If You Didn’t Set Your Company Up Correctly, Probably In Violation of This • IP, Authority, Compliance with Laws, Full Information
- 19. KEY CONCEPTS, CONVERTIBLE NOTES Coming Slides
- 20. QUALIFIED FINANCING • Typically, Threshold for Automatic Conversion for a Convertible Note • Point at Which Investors Convert to Preferred Equity • $1,000,000 Standard Size
- 21. CONVERSION PRICE • Size of Discount Convertible Note Investors Receive to Later Investors • 20% Discount Standard
- 22. VALUATION CAP • Provides a Reasonable Estimate of What Convertible Note Investors Think Company Should be Worth Next Round • $5 MM Cap, $10 MM Raise
- 23. SECTION IV: OTHER KEY CONCEPTS • Regulation D Offering • Rule 504 vs. 506 Offerings • Tag-Along/Drag-Along/Co-Sale • Right of First Refusal
- 24. ADDITIONAL READING • Venture Deals by Brad Feld and Jason Mendelson • Deal Terms by Alex Wilmerding
- 25. THAT’S IT! • Kieran@ColoradoStartupLawyer.com • @CoStartupLawyer • www.coloradostartuplawyer.com Thanks for Coming!