MassChallenge Bootcamp

3

Sources of Capital: Mass ChallengeJuly 7, 2011

Jean Hammond - Angel Investor, Member Golden Seeds, Launchpad Venture Group and Hub Angels

Dan Allred - Senior Relationship Manager, Silicon Valley Bank

Phil Holberton SBIR consultant …. Babson and Brandeis

Miguel Granier –Founder/Director Invested Development

Ed Mallen – CEO TimeTrade

Funding Options

High Growth Business Model

Angel & Venture Term Sheets

Pitching the Business Plan

Preparing for Growth & Exits

Building a Fundable Team

Non-Dilutive Capital Alternatives

TCN Roundtable Curriculum

Negotiation & Valuation

TCN ProgramsFinancing Roundtables

Special Events

Expert Lunch Series

Venture Coaching

Interactive Expert Panel Breakfasts and Evening Events on Early Stage Fundraising topics.

Small working lunch sessions led by Experts for member entrepreneurs.

• 1-Day Venture Fast Track

• Mixers• Co-Promotions and

Partnership Events• Networking Events• Team Building

Fairs• Large Panel

Presentations

Members-only tailored Mentoring Program led by teams of serial entrepreneurs.

6

Agenda

• Capital Sources:– What is your company’s growth profile, how much capital is needed?– Where are the funding sources

• Panel Presentations– Equity Funding VCs & angels (and other State Sources)– Debt Capital: venture debt– Process for SBIR grants– Social Entrepreneurship– Entrepreneur views

• Q & A

7

High Growth Company? Normal Growth Company?

How fast will it grow?• Factors to Consider

– How large is the total market?

– Is technology unique or are there other barriers to entry?

– How large will your sales and marketing team need to be to address that market?

– Is the company extremely scalable?

– What are the cash needs?

– How long will it take for the business to be profitable?

– How profitable when scaled?

– How predictable are the cash flows?

– How experienced and complete is your team in the industry; have they entered a new or emerging market, and is team successful in start-ups?

– What are the multiples in the category?

• These help determine the amount of funding / expected return

• In general, normal growth ‘revenue companies’ that grow one resource at a time can payback debt capital as they grow

What Stage is this Company?

• Crystal Stage: Idea to Business Plan and Technology Proof• Figuring out if there is a business there• Key activity – learning from the market proving technology• Entrepreneur / visionary

• Demonstration Stage: Business Plan to Prototype• Good understanding of "successful offering“ • Customer discussions started• Interest from investors/ advisors- ideally a mentor or a coach

• Market Entry Stage: Running Market Effectiveness Trials• Real entrepreneur team, sweat invested, define marketing trials• Product / Service in a ‘Beta’ test or about to ship for revenue• Multiple customer/partner discussions underway• Starting relationship with marquee customer• Supportive ‘door opening’ investors / advisors / mentors

• Early Growth Stage: Early Repeatable Business Model• Complete team – detailed knowledge of challenges this firm faces• Technology works – and we can show it (and have patents, etc.)• Reference-able relationship with marquee customers• Marketing and sales processes… with a repeatable, scalable business model• Estimate of total cash required; identification of “deep enough pockets” to match market potential

• Scaling Stage: Repeatable Growth• Mapping of market growth (and capital required) to revenues is understood

• Equity investors are trying balance return expectations against risk• Risk is lower at later stages

Many types of Entrepreneurship: Don’t raise money until you know where you are

5 ye

ar g

row

th r

ate

$1-3M >>>>

Investment required to reach breakeven

Project finance/Other

sources

Small CAPEX“normal growth”

business(MOST COMMON)Mostly bank debt

Home run long shot(VERY RARE!)

VC Funding

Cheap fast growing business (RARE!)

Angel Funding (and some VC)

Higher

Lower

50%

Blended Funds

Debt

Non-profitFunds

Summary of Capital Sources

11

Equity Capital Sources: High Growth Companies

Estimate exit potential based on multiples of revenue levels achieved Use projected 4-5 year revenues to estimate exit potential• Companies with low profits and/or revenues < $2M: arms length equity capital not interested• Angels look for $7-10M revenue targets with room for growth• VCs (most) need to see north of $30-40M revenue with great potential

• No “exact” rules but stage of VC fund and total capital in use will point toward exit expectations

Stage Crystallize Idea & Early

Demonstration

Demonstrate Product &

Market Interest

$500,000 and $5,000,000,

EarlyScalingGrowth

Repeatable Growth

Source Founders, Friends & Family,Grants

AcceleratorsIndividual Angels &

Angel Groups

Most

Venture Funds

Investment

$25,000 to $100,000

$100,000 to $500,000

$5,000,000 and up(initial capital may be smaller)

Market Entry & Early Growth

Angel Groups and Angel Group Syndication

Micro-cap Funds

12

Sources of Equity Funds for Entrepreneurs

Sources: Money Tree and UNH Venture Center

• Sources: Money Tree and UNH Venture Center

• Angels (est.):– Angel groups ~10-15%,

– Informal networks and one-time-investors ~15-20%,

– Super angels ~25-30%,

– Family offices ~35-45%

13

founders

employees

angels

Equity Capital: Goal is Increasing Value Do you want 90% of $1M Firm or 10% of a $100M Enterprise

founders

employees

angels

VCs

foundersemployees

• Remember it’s the area of the pie slice not the %

• All parties agree … focus on building value

Equity requires an exit

14

Agenda



• Q & A

15

Equity: Friends & Family, Angel or VC ??

• No right answer• Family funds are flexible but losses hurt those you care about

– Do NOT leave it to “what you thought you heard”– www.virginmoneyus.com/

• Investors in Your Backyard: How to Raise Business Capital from the People You Know by Asheesh Advani

• Angels– May coach more especially at the beginning – Often very interested in ‘early’ exits… for angels a 2.5x exit in 2 years is the

same (58% IRR) return as a 10x exit in 5 years • VCs

– Support CEOs with CEO forums etc.… very active role in hiring– Connections, connections… lots of exit experience– Swing from the fences… BUT a 10-15x return on $20-50M in is a big return

• Rational approach -- understand capital requirements of your business and the multiples for your type of play in your industry

16

Process with Average Angel Group

• Application – on line– Combined with an introduction

• Screening – we read, phone call, or hold a meeting• Presentation – at our forum meeting

– We assess interest in deal (at least 5 people)

• Due diligence – starts with a 2 hour meeting• Investigate market, business model, product, team

– about 1-1.5 months

• Deal negotiation• Valuation, terms, expectation alignment • Documents• Closing – signatures & $$• Board relationship and quarterly reporting

17

Company Attributes that Improve Odds with Angel Groups

Factors Companies getting angel investment

Companies that don’t

CEO Some experience or ‘coachable’, wants listen

CEO talks about him or her ‘expertise’ forever

Team Enthusiastic! match to required skills, “owners”

One person, says no one will work without $$

Unique, Need

A neat idea, could be bigTalks to customers- needed

Seems ‘me too’“my” idea -doesn’t talk to mkt.

Stage Lots done, working code, just needs mkt. entry $$

Idea and ppt., or a complex science project, or “old”

Market size, str.

Market is big and can be reached Market is huge orMarket extremely fragmented

Total investment

Cash flow breakeven soon,Can use more $$

Needs $10-20M more after this round

Valuation Willing discuss a range of values & funding strategies

Is fixated on a very unrealistic high value

18

Angel (group) Attributes that Lead to Deals

• Each angel group gets 10-20 applications for each presentation and ¼ of those presenting get funded

• Despite the huge amount ($20B)* of angel money, there are always more entrepreneurs (other presenters at same meeting)

• A Champion (at an angel group) is most important– Champion has expertise to match company

– Champion and CEO having fun together

– Group respects Champion

• Work is done by convivial team– Due diligence completed quickly

– Terms negotiation fast (lawyers work)

• Level of interest is similar to funds required by company

Selecting a VC

• Talk with fellow entrepreneurs, VC friends and service providers

• Check compatibility with focus, stage, and investment size• Learn as much as you can, including

– Competitive investments– Successful investments– Interests/background of partners

• Develop a prioritized list of funding sources• Plenty of organizations and on-line sources to help• Wherever possible, get an introduction

– Other VCs, entrepreneurs, attorneys

Engaging Feedback

• Solicit input to gauge VCs interest and fit– Understand investor assumptions– VCs can add value even when your company isn’t an

investment candidate for their firm– Don’t argue their reasoning, ask questions to test your

hypotheses

• Give yourself time between VC meetings to be able to react to the feedback – Don’t overshop it without initial feedback– Keep the door open so you can follow-up

• Remember these are long-term relationships with hopefully multiple rounds of funding; keep the VCs as your friends

Responding to Feedback

• Give yourself time between VC meetings to be able to react to the feedback – Don’t overshop it without initial feedback

• Keep the door open so you can follow-up– Remember these are long-term relationships with

hopefully multiple rounds of funding; keep the VCs as your friends

• When you do follow-up, refer to their feedback and how it helped shape your thinking

• Know that sometimes it’s a good business, but just not VC-backable

22

Raising Money ?

• Your Diligence: Checking out ANY Investor

• Know the social rules of the road – get introduced, as high as possible up the food chain!

• Check the investment history

• Check out things like stage of the fund

• The investment size is close enough to fit

• If possible, find the best-fit partner

• Be sure to make your presentation fit

• Call the CEOs of the portfolio and find out how the investor behaves

• Get members of your advisory board or board to play an active role

• MassDevelopment - www.massdevelopment.com• Emerging Tech Fund for manufacturing facilities & equipment

• Massachusetts Life Sciences Center - www.masslifesciences.com• Accelerator loan program for early-stage companies • Life Sciences Tax Incentive Program - Cooperative Research Grants

• BDC Capital - www.bdcnewengland.com• SBA 504 and specialty financing (brownfields, recycling, etc.)

• MA Community Development Finance Corp. - www.mcdfc.com• Gap financing to promote jobs

• Massachusetts Workforce Training Fund - www.detma.org/workforce• Matching grants for workforce development

• Business incubators with a range of services and networks (ATMC in Fall River, Enterprise Center at Salem State College)

MA QUASI-PUBLIC LENDERS & INVESTORS

http://www.mcdfc.com/

• MCRC - MA Capital Resource Company – www.masscapital.com

• Finances manufacturing, distribution and service companies

• MCRC’s Life Insurance Initiative

• Capital for economic development

• MA Economic Stabilization Trust www.commcorp.org/trust

• Manufacturers, including restructures

• Mass Technology Development Corp. - www.mtdc.com• Equity & sub debt for early stage technology companies since 1982• Usually $250-$500K• Jobs – leverage – technical innovation – nurture entrepreneurship

• Mass Technology Collaborative - www.mtpc.org• Debt/equity for renewable energy technology firms

MA QUASI-PUBLIC LENDERS & INVESTORS

Federal, State, City Business Support

MSBDC – MA Small Business Development Centers• 6 SBDCs throughout the state• MA Export Center• PTAC/ Government Contracting

– Types of loans• SBA Backed Bank Loans

• 504s

• Department of Commerce

• Export Loans

• Other federal agency resources, i.e., USDA

26

Examples of Equity Investors in Boston

• Angel Groups– Hub Angels– Common Angels– Launchpad– Mass Medical Angels– Walnut Group– Golden Seeds– Boston Harbor

• Smaller VCs ($25-150 million funds)– Launch Capital– Long River– Founders Collaborative– Next Stage

• Bigger VCs ($250+ million funds)– Castile– Polaris– Highland– Atlas– Charles River– 406– Venrock– Oxford Bioscience– NorthBridge

27

Agenda



• Q & A

TimeTrade makes a “click-to-schedule” capability for websites, e-mail, and socialmedia that changes the way you do business.

‘Click-to-Schedule” creates new customers more quickly than you can now, and increases the satisfaction level of customers you already have.

Who Uses TimeTrade?

30 million Click-to-Schedule prospecting, sales and Customer-care appointments each year

30 million Click-to-Schedule prospecting, sales and Customer-care appointments each year

4,000 TimeTrade customers4,000 TimeTrade customers

Angel Networks

High Net Worth individuals

Experienced Entrepreneurs

High Net Worth individuals

Experienced Entrepreneurs

Angels

Financing

Personal & Business Networking

Venture Firms

Network Angels to Angel Firms

Business Case and Sales model Developed

Develop the Relationships Early

Scaling Apparent

Banks

Integral to the Process

Debt, Business Modeling, Networks

Financing Technology:Trends in debt & equity termsheets

Dan AllredSilicon Valley Bank

(617) [email protected]

Twitter: @dgallredhttp://danallred.tumblr.com

mailto:[email protected]

http://danallred.tumblr.com/


Technology Risk vs. Market Risk

Funding sources: the lines are blurring

Debt vs. Equity

Debt• Lower risk: first money to

be paid back• Relatively inexpensive• First lien on company assets• Negative covenants

Equity• Higher risk: lives & dies with

the company• Very expensive• Unsecured (typically)• BOD governance

Primary uses of debt

• Financing assets– Working capital– Fixed assets

• Financing growth– Growth capital– “Venture debt”

• Special situations– Bridge loans– Financing “near” assets

Think like a lender

The traditional credit model– Primary source of repayment: cash-flow

• Question: what is the probability that cash-flow will be sufficient to support operations and repay the loan?

– Secondary source of repayment: collateral value • Question: what is the probability that the liquidation

value of the assets would be sufficient to repay the loan should the cash-flow prove insufficient?

Think like a “venture lender”

A twist on the traditional credit model– Primary source of repayment: cash-flow from

future equity• Question: what is the probability that the investors will

provide additional equity sufficient to support operations and repay the loan?

– Secondary source of repayment: enterprise value• Question: what is the probability that the enterprise

value (IP, customer base, licenses, etc.) is sufficient to repay the loan should the venture support prove insufficient?

Venture debt termsheets• Uses of capital

– General corporate purposes– Financing specific fixed assets

• Security– First priority lien on all business assets– Typically a negative pledge on IP

• Structure– 6-9 month interest-only draw period followed by ~30-36 month

principal repayment– Few financial covenants– Standard negative covenants (i.e. consents needed for M&A,

subordinate financing, changes in management, etc.)• Pricing

– Interest rates in the high single digits to low double digits– Warrants typically equal to ~0.25-1.00% fully diluted ownership

Think like a working capital lender

Another twist on the traditional credit model– Primary: cash-flow within the working capital cycle

• Question: what is the probability that the accounts receivable are collectable in a timeframe sufficient to revolve the loan?

– Secondary: collateral value of working capital assets• Question: what is the probability that the Bank could collect

the accounts receivable and liquidate the other working capital assets after the Company ceases operations?

Working capital termsheets• Uses of capital

– Financing working capital assets such as A/R and inventory– Sometimes includes a portion available to finance POs

• Security– First priority lien on all business assets– Typically a negative pledge on IP

• Structure– Revolving line of credit with formula borrowing base (i.e. 80% of A/R)– Financial covenants to measure liquidity (i.e. balance sheet covenant)

& performance to plan (i.e. income statement covenant)– Standard negative covenants (similar to prior slide)

• Pricing– Prime based interest rates ranging from Prime to mid double digits

based on liquidity levels– Commitment fee ~0.5-1.0% and perhaps unused line fees as well– Warrants may be included if there is an element of “venture risk”

Special Situations

A few examples:

Questions?

Dan AllredSilicon Valley Bank


Twitter: @dgallredhttp://danallred.tumblr.com




Using SBIR Grants in Your Funding Strategy

Phil Holberton

Material Courtesy of NIH

SBIR - Grant Awards

• Innovation

• Basic and Applied

Research

• Proof of Principle

SBIR Purpose and Goals

Small Business Innovation Development Act of 1982

• Stimulate technological innovation

• Use small business to meet Federal R&D needs

• Foster and encourage participation by minorities and disadvantaged persons in technological innovation

• Increase private-sector commercialization innovations derived from Federal R&D

• PHASE II – R44• Full Research/R&D

• $1M and 2-year Award (SBIR)

• Commercialization plan required

• PHASE III• Commercialization Stage

• Use of non-SBIR Funds

• PHASE I – R43• Feasibility Study • $150K and 6-month (SBIR)

SBIR: 3-Phase Program

SBIR Eligibility Criteria

Organized as for-profit U.S. business

Small: 500 or fewer employees, including affiliates

PD/PI’s primary employment must be with small business concern at time of award and for duration of project period

At least 51% U.S.- owned by individuals and independently operated or At least 51% owned and controlled by another (one) business concern that is at least 51% owned and controlled by one or more individuals

• DOD• HHS• NASA • DOE • NSF • DHS• USDA• DOC• ED• EPA• DOT

SBIR Participating Agencies

$672M

http://images.google.com/imgres?imgurl=http://www.globalfinancier.com/images/Moneystack.jpg&imgrefurl=http://www.globalfinancier.com/wst_page6.html&h=364&w=400&sz=24&hl=en&start=38&tbnid=vrUFh2elAVHcxM:&tbnh=113&tbnw=124&prev=/images?q=capital+funding&start=20&gbv=2&ndsp=20&hl=en&sa=N

Lessons Learned Along the Way

• Do Homework & Research Possibilities

• Connect and Network with Program Officials

• Ask Questions

• Be Respectful and Professional

• Program Managers - Want Us to Succeed

9 Grants = $2.6 Million9 Grants = $2.6 Million

Phil HolbertonPhone: 781-259-9719

Email: [email protected]

Start Now

FUNDING OPTIONS FORSOCIAL ENTREPRENEURSAn overview of funding resources available

to for- and not-for-profit Social Entrepreneurs

DEFINING THE DIFFERENCE

What is a Social Entrepreneur?• A social entrepreneur recognizes a social problem

and uses entrepreneurial principles to organize, create, and manage a venture to achieve social change (Wikipedia)

Are all Social Enterprises/Ventures not-for-profit?

• Social Enterprise can be for- or not-for-profits.• Leverage revenue-generating models and don’t

rely on grant financing alone (or at all)

Funding Options for Social Entrepreneurs

GOING BEYOND THE IDEA (PRE-SEED)

How to get those first few dollars• Forget the bank!• Risk/return might be too high even for F3…

Leveraging the mission to get financing• Seek out grants, awards, competitions and

fellowships that match your mission and current requirements


GETTING SEED FUNDING

Proving the concept• Business plan (how you will scale)• Successful small pilot (potential not profits)• Team (buying experience)• Demand not need (selling not giving)

Where to get your first real investment• Scale grants – from larger organizations• Mission/Program Related Inv. – from foundations• Impact Angels – high-net worth individuals and

groups• Seed/Super Angel Funds – like ID!


SCALING THE ENTERPRISE

Money, scale, and impact• Show them the money (have proven revenue)• Show them the scale (illustrate a vast market

and product iterations)• Show them the impact (measure the

improvements)

Returning the capital• Debt repayment schedule (easy if you have

revenue)• Exists for equity (the hardest thing in S.E.)


INVESTED DEVELOPMENT (ID)

ID is a Boston-based investment management firm focused on scalable innovations for emerging markets. •BSP Fund

– Seed-stage investment fund committed to supporting entrepreneurs with radically affordable innovations in alternative energy and mobile technologies.

•BETA– provides pre-seed support and co-creates

enterprise with innovators whose technologies fit the BSP Fund focus areas.


© 2008 Foley Hoag LLP. All Rights Reserved. Presentation Title | 65© 2011 Foley Hoag LLP. All Rights Reserved.

TCN & Mass ChallengeJuly 7, 2011

Paul G. SweeneyPartner


© 2011 Foley Hoag LLP. All Rights Reserved.

Angel Group and Venture CapitalTerm Sheets



These materials have been prepared solely for educational purposes. The

presentation of these materials does not establish any form of attorney-client

relationship with the author or Foley Hoag LLP. Specific legal issues should

be addressed through consultation with your own counsel, not by reliance on

this presentation or these materials. Attorney Advertising. Prior results do not

guarantee a similar outcome. © Foley Hoag LLP 2011.

United States Treasury Regulations require us to disclose the following: Any

tax advice included in this document and its attachments was not intended or

written to be used, and it cannot be used by the taxpayer, for the purpose of

(i) avoiding penalties under the Internal Revenue Code or (ii) promoting,

marketing or recommending to another party any transaction or matter

addressed herein.


The Lawyer’s Perspective – Paul Sweeney

Corporate Partner at Foley Hoag LLP

Close to 100 angel and venture capital financings (debt and equity) since 1998.

SCVNGR (Highland, Google Ventures, Balderton - $15M)

Vanu (Charles River Ventures, Norwest - $32 M)

Centive (Polaris, TWP - $28 M)

Kyruus (Highland, Venrock - $5.5 M)



General Trends

Angel and venture capital has finally begun to flow again since 2008 freeze

Valuations are rising in some sectors, although deals still take more time, and terms are trending more favorable to companies and founders

Syndicates are still desirable to investors

Early stage deal sizes tend to be shrinking

Huge need to be quick and lean


What is a term sheet?

aka- “Letter of Intent,” “Memorandum of Understanding,” “Agreement in Principle”

Basic agreement on the material terms of the transaction – Road map, marching orders

More detail is generally better (especially for the company/seller)


Non Binding (But…..)

Generally not a binding agreement

–Subject to actual documents being negotiated

–Subject to due diligence

–Subject to other closing conditions (consents, etc.)

Confidentiality (“No Shop”)

–No disclosure of terms (and even existence) of the term sheet

Exclusivity

–Investor has some period of exclusivity (45 to 90 days)

If you really want to mess up your transaction, this is the place to do it


Founders’ Main Concerns

Loss of control over your company

Dilution of your personal equity position

Stock subject to repurchase if terminated

Is the financing adequate for your plans

Future capital needs and dilution

Success of partnership with angels and VCs – access to key industry contacts, future $, business guidance


Investors’ Main Concerns

Accuracy of valuation (both present and projected)

Risk level of investment

Projected returns on investment (ROI)

Liquidity if business in distress (downside protection)

Ability to participate in later rounds (upside protection)

Influence and control over management and strategic direction


Pre-Money Valuation

“Pre-Money Valuation” = value of the company before the new money is invested

– Helps calculate price per share, and % of the company being sold

Share Price = Pre-Money Valuation

Pre-money Shares Outstanding

Critical Issue –What shares are counted as “Outstanding”?– All outstanding options?

– All options reserved for issuance under the option pool?

– Note: The higher this number, the lower the share price, and thus the higher the number of shares issued for the same amount invested


Post-Money Valuation

“Post-Money Valuation” = pre-money valuation + the amount invested.

Pop Quiz: New investor values your company at a pre-money valuation of $10,000,000, and offers to invest $5,000,000 into the company.

Question: What percentage of the company would the investor own after the investment?

A: 33%

B: 50%

C: It’s too soon after lunch for a math quiz


Key Terms – Pre Money Valuation

Pre Money Valuation (Without Option Pool)

33%

67%

Investors

Founders


Key Terms – Pre Money Valuation

Pre Money Valuation (With Option Pool)

33%

47%

20%

Investors

Founders

Option


CAUTION!

Pre-Money Valuation is only one of many economic terms.

“You can name the valuation, if I can name all the other terms.”

- Angel / VC Investor


Convertible Preferred Stock

Why Convertible Preferred Stock?– “Stock” – All the upside of equity ownership

– “Convertible” – Converts into common stock

– “Preferred” - Preference over common stock on dividends, distributions, liquidation, redemption, etc.


Liquidation Preference

Applies when a “liquidation event” occurs (usually M&A)

When distributing liquidation proceeds, preferred stock has right to get its money back (and perhaps more) before the common stock gets anything.


Liquidation Preference

Sometimes “multiples” are used (1x, 2x, 3x the investment amount). Sometimes accruing dividends are included.

“Preference overhang” is the total amount of proceeds due to the preferred stock – can make the common stock virtually worthless.

Three main flavors:

– Non-participating

– Participating preferred (without cap)

– Participating preferred (with cap)


Liquidation Proceeds

Source: www.wikipedia.org


Non-Participating Preferred



Participating Preferred



Current Trends (Q1/11 – Q2/11)

For Series A financings, 28-50% had some form of participating preferred.

For Series B+ financings, 55-72% had some form of participating preferred.

Source: Foley Hoag’s Perspectives – June 2011


Antidilution Protection

Addresses Investors’ concern re: valuation

Protect investors in a “down round” - when new money comes in later at a pre-money valuation (or price per share) that is lower than the previous round’s post-money valuation.

All preferred stock converts to common stock at a certain ratio, usually 1-for-1.

Anti-dilution protection, if triggered, changes the conversion ratio, resulting in the preferred getting more shares of common upon conversion


Weighted Average

Takes into account the proportional relevance (or weight) of each component in the calculation rather than treating each component similarly.

Result - the conversion ratio based on the average of the price at which the company sold the new stock, valuing the common stock outstanding at the pre-adjusted conversion price.

Sometimes formulated as “broad-based” and sometimes as “narrowly-based” (“narrowly-based” is more favorable to the protected preferred stock.)

More typical, and much less onerous to un-protected stockholders, than full ratchet.


Full Ratchet

The conversion ratio of the protected preferred stock is “ratcheted down” to the lowest price at which securities are sold in the down-round.

This applies even if only one share is sold! Treats all down-rounds the same, irrespective of number of shares actually issued.

Very onerous, and not the standard approach.

Usually seen in company’s without bargaining leverage, in distress, or with a history of down rounds.


Current Trends (Q1/11 – Q2/11)

For Series A financings, 8% had full ratchet; remainder were evenly split between narrowly based and broadly based weighted average.

For Series B+ financings, 18% had full ratchet.

Source: Foley Hoag’s Perspectives – June 2011


Other Key Terms for Company

Dividends

Redemption

Voting Rights – Board Seats

– “Protective Provisions”

Pre-emptive rights

Information rights

Registration rights

Legal fees / Drafting control


Other Key Terms for Founders

Reverse Vesting

Non-competition and Non-solicitation Agreements

Non-Disclosures and IP Development Agreements

Right of first refusal

Drag along rights / Tag along rights


Convertible Notes

Automatic conversion on qualified financing

Discounts are increasingly common; sometimes coupled with a cap on valuation

Paid or converted upon acquisition

Interest Rate

Maturity Date

Collateral (secured or not)

% needed to amend terms


Final Thoughts

Focus on what’s in the best interest of the company.

Don’t be afraid to ask “why” when terms are proposed.

All money is not created equal. Choose your investors wisely – their belief in YOU is more important than their capital.


Other Resources

www.emergingenterprisecenter.com:– Glossary (commonly used terms)

– Ask the Startup Lawyers (common questions and answers; submit your questions!)

– EEC Perspectives (our quarterly publication tracking terms of New England VC deals)

NVCA Model Venture Capital Financing Documents (including model term sheet):– www.nvca.org (click “Resources” then “Model Legal

Documents”) or use http://bit.ly/bj7Pn

– Forms are intended as starting point only

Paul G. SweeneyPartner



Questions?


•Jeff Bussgang

•Colin Angle

Economy & Finance

MassChallenge Bootcamp