Startup Seed Funding: From Bootstrapping to Equity Financing

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    14-Jul-2015

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  • Startup Seed Funding

    Kristine M. Di BaccoAssociateFenwick & West, LLPSirk RohCOOEGFSFrom Bootstrapping to Convertible Debtand Series Seed Financing

    #seedfunding

  • Who We Are*Seed Funding Your Startup

  • 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

  • Bootstrapping*

    Better focus on executionNo dilutionIndependenceCaveats: Keep personal finances separate from business!Seed Funding Your Startup

  • Moving On Up*How do you go from that bootstrap stage to the next level?

    First stepSeed Funding Your Startup

    First stepHow do you go from that bootstrap stage to the next level?

  • Friends and Family*Smaller investmentFormalize processBe transparent about risksWhat happens when you start bringing in professional investor?

    Seed Funding Your Startup

  • 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

    Seed Funding Your Startup

  • Two Ways to Do Seed Financings*Seed Funding Your StartupConvertible Debt(generally when raising < $2M)Series Seed Preferred Stock(generally when raising >$2M)

  • 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)

    Seed Funding Your Startup

  • 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

  • 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

    Seed Funding Your Startup

  • 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

    Seed Funding Your Startup

  • 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

    Seed Funding Your Startup

  • Sample Term Sheet and Investment Documents*Seed Funding Your StartupGo to www.seriesseed.com

    Also, check out the Fenwick & West VC Survey (done quarterly): http://www.fenwick.com/publications/Pages/silicon-valley-venture-survey-first-quarter-2014.aspx

  • Convertible Notes or Series Seed Preferred?*Seed Funding Your Startup

    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

  • Questions?*Seed Funding Your StartupWe look forward to hearing from you!Sirk Roh415.234.3437www.earlygrowthfinancialservices.com@EarlyGrowthFS