Startup Seed Funding: From Bootstrapping to Equity Financing

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<ul><li><p>Startup Seed Funding</p><p>Kristine M. Di BaccoAssociateFenwick &amp; West, LLPSirk RohCOOEGFSFrom Bootstrapping to Convertible Debtand Series Seed Financing</p><p>#seedfunding</p></li><li><p>Who We Are*Seed Funding Your Startup</p></li><li><p>Presentation Overview*Bootstrapping The leap from bootstrapping to investmentPreparing for investment capitalDifferent ways to structure your first investment round:Convertible debtSeries seed preferred stockCurrent deal flowSample term sheetsSeed Funding Your Startup</p></li><li><p>Bootstrapping*</p><p>Better focus on executionNo dilutionIndependenceCaveats: Keep personal finances separate from business!Seed Funding Your Startup</p></li><li><p>Moving On Up*How do you go from that bootstrap stage to the next level? </p><p>First stepSeed Funding Your Startup</p><p>First stepHow do you go from that bootstrap stage to the next level? </p></li><li><p>Friends and Family*Smaller investmentFormalize processBe transparent about risksWhat happens when you start bringing in professional investor? </p><p>Seed Funding Your Startup</p></li><li><p>Preparing for Professional Investors *Angels vs VCsTailor money raising issues, going from bootstrap to next levelWhat does it mean to talk to professional investorsHow to build a financial model that appeals to investorsTop-down vs bottom up projectionsFinances need to tell a story</p><p>Seed Funding Your Startup</p></li><li><p>Two Ways to Do Seed Financings*Seed Funding Your StartupConvertible Debt(generally when raising &lt; $2M)Series Seed Preferred Stock(generally when raising &gt;$2M)</p></li><li><p>Convertible Promissory Notes*Simple TermsAmount of money raise, interest, maturity/defaultMore Negotiated TermsWhat is a qualified financing?Optional conversion on non-qualified financing?Kicker payment on change of control (sale of company)</p><p>Seed Funding Your Startup</p></li><li><p>Sample Convertible Note Term Sheet: Official Terms*Convertibility on Qualified FinancingConvertibility on Non-Qualified FinancingSale of the CompanyTerm: PrepaymentClosing(s)SubordinationNote Purchase AgreementSeed Funding Your Startup</p></li><li><p>vs. Series Seed Preferred Stock: Valuation and Purchase terms*Pre-money valuation is negotiated:How market factors inIf youre pre-revenue, need milestonesDeal flowExamples of pre-money valuation for different types of companiesSize of option pool Reps and warranties from Company slimmed down from Series AMinimal closing conditions </p><p>Seed Funding Your Startup</p></li><li><p>Series Seed Preferred Stock: Conversion and Distribution Rights*No price-based anti-dilution protections Non-participating liquidation preferenceNo preferential dividend rightsNo redemption rightsSeries Seed board seatLimited protective provisions and voting rights</p><p>Seed Funding Your Startup</p></li><li><p>Series Seed Preferred Stock: Contractual Stockholder Rights*Better rights given to future investors guaranteed to Series Seed investorsRight of first offer on future financings (optional)Limited information rightsDrag-along for smaller investors and common stock (optional)No registration rightsNo Company covenantsNo co-sale rights</p><p>Seed Funding Your Startup</p></li><li><p>Sample Term Sheet and Investment Documents*Seed Funding Your StartupGo to</p><p>Also, check out the Fenwick &amp; West VC Survey (done quarterly):</p></li><li><p>Convertible Notes or Series Seed Preferred?*Seed Funding Your Startup</p><p>Convertible NotesSeries SeedProsDoesn't require company valuation (but may need to negotiate a "valuation cap")Quick/cheapMore prevalent for smaller $ roundsClearer definition around investor rightsStarts long-term capital gains clock (important if early exit)Relatively quick (cheaper than Series A)ConsValuation uncertainty for investors (unless there is a cap)Requires negotiations around valuationHigher legal feesMore expensive than convertible note</p></li><li><p>Questions?*Seed Funding Your StartupWe look forward to hearing from you!Sirk </p></li></ul>


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