Private and ConfidentialOrrick, Herrington & Sutcliffe LLP

John V. Bautista (Silicon Valley) and Ben Cichostepski (Paris)

May 4, 2015

How to maximize your potential to attract US capital

Prototyping Product or Service

Building Team

Seeking Capital

Working with Advisors

Where are you now?

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Delaware

• Going global quickly

• Investors will be US or French investors who can invest in Delaware companies

• Advantages: Access to more capital ($)

Ease of Company sale

Avoid Cost and Time needed for Flip

Set up SAS as wholly-owned subsidiary for French employees

Required for YC, not required for 500 Startups or others

Easy to set up: Clerky.com

• Disadvantages: May close the door to certain investors

Setting up the Company - Delaware or French SAS?

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French SAS

• Initial focus is European market (customers and employees)

• Smaller capital requirements

• Seeking local investors, government grants and loans

• Expand in US by setting up a wholly-owned Delaware subsidiary to employee US sales and marketing

Setting up the Company - Delaware or French SAS?

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• Incorporate Delaware company – French citizens can be directors and officers

• “Flip” is the exchange (contribution) of French shares for Delaware shares

» Ownership ratios don’t change but usually we do a stock split (Usually 10 million shares for 1,000 shares,)

» Ordinary Shares become Common Stock, usually subject to vesting

» Preferred Shares become Series A Preferred Stock with standard preferred rights

» Set up Preferred Stock Financing Documents (IRA, Voting and ROFR/Cosale)

» French subsidiary remains a wholly-owned or controlled company

» Set up US Option plan for employees globally with subplan for French employees

» Intellectual Property

– French employees assign IP to French company

– US employees assign IP to Delaware company

Flip Process

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• Exchange Agreement – for stockholders who will not incur tax now

» Individual founders or their holding companies - Case by case analysis Tax filing necessary for founders’ holdings.

» French VC’s who are structured as investment funds (FCPI, FPCI)

» Most other US and international VC’s

• Deferred Exchange Agreement – for stockholders who would incur tax, but sale is deferred until (i) stockholder elects to Flip, (ii) IPO or (iii) Company sale.

– Founder retirement accounts (PEA’s)

– French VC’s who are not FCPI or FPCI or which have investment restrictions

• Term Sheet – Important that all constituents agree before implementing

Flip Process

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• Convertible Notes

• SAFEs and KISSs

• Series Seed Preferred Stock

• Crowfunding (Kickstarter and AngelList)

Financing Trends

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• Historically the most common way to raise seed capital

• Converts automatically at Preferred financing at fixed valuation cap, discount or both

• Rolling closings at any time, amount and valuation

• Limitations:

» Term usually does not exceed 1 year (Lender laws)

» Repayment risk on maturity date

» Interest rate

» Phantom liquidation preference

» Debt on balance sheet

Financing Trends – Convertible Notes

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• Co-Authored with Y Combinator and Launched in March 2014 (500 Startups created the KISS)

• Over $200M raised to date for YC companies, some $5M per company, and average is $1M per company

• Converts automatically at Preferred Stock financing at fixed valuation cap, discount or both

• Rolling closings at any time, amount and valuation

• No matury date(a SAFE is equity) and no phantom liquidation preference

• Investors have pro rata rights equal to Series A investors (regardless of investment size)

• See sample term sheet

Financing Trends – SAFEs(Simple Agreement for Equity)

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• Pro Rata or Participation Rights in Series A financing

• Most Favored Nations (MFN) provisions

• Information Rights

• Issuance of Common Stock (Sweetener) for Advisors

Financing Trends – Side Letters

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• Usually requires a Lead Investor

• Limitations:

» Costly Negotiation of Preferred terms, including board composition,, price per share, size of employee stock pool, founder vesting, and other standard investor rights

» Conversion of existing convertible securities

» More investor due diligence

» Less flexibility on different prices per share/valuations

» Higher legal transaction costs

» Sets precedent for future Preferred terms

Financing Trends – Seed Preferred

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• Partner with incubators: The Family, YC, 500 Startups

• Practice your 30 second pitch for networking with Angels: Angels “flock” together

• Angels are usually people you know

• Ron Conway (SV Angel) – Super Angel

• AngelList and Kickstarter

• Minimize number of investors

• All investors need to be accredited - $200k in income in last 3 years ($300k with spouse) or $1M in assets (excluding house)

• Usually $500k - $1M and avoid more than 15% dilution

Process to Raising Seed Capital

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– Leverage your peers and publically available info

– Meet VC’s at networking events

– Sector and stage fit with VC’s

– Find your best intro (such as successful entrepreneur who has made money for the VC or who is Founder of successful portfolio company)

– Maintain momentum – keep investor updated with good news throughout process

Process to Raising Venture Capital –Engaging Investors

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Inbound Introductions (mostly via email)

• Business plans are increasing by ~50% year-over-year.

• ~300 new investment opportunities per month. An active VC firm makes 1 investment per month.

Behind the Scenes – Inbound Introductions

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What Happens When You Send A Pitch to a VC

Behind the Scenes – What Happens When You Send a Pitch Deck to a VC

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E-Mail toVC

• Common reasons for passing without a meeting

» Too early: No product or customers

» Market: outside of VC’s sector focus / area of interest

» History: raised a lot of money, went nowhere, needs a recap

• Common reasons for passing after one meeting

» Team: “CEO” is not a CEO, team doesn’t inspire confidence

» Deal terms: unrealistic raise amount/valuation relative to traction

» Competition: company is too far behind a set of well-funded competitors

» Market: Market is too small to build a $100MM company

Behind the Scenes – Why investors pass?

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• Common reasons for passing in diligence

» Financial: high churn (loss of customers)

inconsistent sales, plan is fiction

» Tech: product instability, technical risk

» Background: management references don’t look good

Behind the Scenes – Why investors pass? (Cont’d)

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• How to get investors’ attention » Repeat entrepreneur – built successful company before with high quality

team

» Early traction and growth

– $100k/month in revenue for software company

– $200kk/month for a commerce company

– 1M+ users for consumer web business

– Fast growth

» Low Paid-in Capital

– Thoughtful approach to fundraising, not “take all you can get”

– Seed round at normal valuation, views investors as partners

» Big market with few incumbants

Process to Raising Venture Capital – Company Status

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• Manage timeline to receive term sheets from multiple investors

» Do not disclose identity of investors to each other

» First term sheet creates lots of leverage for future negotiations

• Model Tem Sheet: Decide in advance the terms that are most important to you

» Get quality advice (lawyers, advisors, other founders), and those who know the VC’s you are talking to

» VC’s will first propose terms orally – set their expectations

• Continue focus on building your business

Process to Raising Venture Capital – After Initial Engagement

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• Not understanding valuation (how it is calculated)

• Getting caught in the weeds (missing the big picture)

• Getting star-struck by a big name, focus on the VC partner who will be your board member

• Not looking down the road (Series A as a precedent for future rounds)

• Not respecting the process (relationship with potential investors)

Process to Raising Venture Capital –Common Mistakes

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• Pre-Money and Post-Money Valuation

• Control (Board and Stockholder)

• Exit Mechanics

• Founder Restrictions

Process to Raising Venture Capital – Key Terms

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• Capital Needed - Next 12-18 months or until next major milestone

» Series A are usually $5M in new capital

• Each VC will want at least 20% ownership

• Series A stock pool size ranges from 8-15%

• 15% dilution (on average) associated with earlier Seed investors

• Result = Founders as a group usually own 50% of the company after Series A

Process to Raising Venture Capital – Key Terms - Valuation

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• At Board level (implemented through Voting Agreement)

» 3 members (2 founders and 1 investor)

» 5 members (2 founders, 2 investors and 1 independent nominated by founders)

» Investor representative will have veto power on certain matters

• At Stockholder level (implemented through Restated Certificate of Incorporation)

» majority or supermajority votes and class votes are better than series votes

» Preferred Stock veto power on Company sale, next round financing, debt

» Pro Rata Rights – right to maintain percentage ownership in next round

Process to Raising Venture Capital – Key Terms - Control

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• Most sales are merger transactions instead of shares sales

• Drag- Along provisions – to prevent minority stockholders from blocking a Company sale and achieve 95% consent to Company sale

• Preferred Stock liquidation preference – 1X non-participating preferred versus fully participating preferred

Process to Raising Venture Capital – Key Terms – Exit Mechanics

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The Term Sheet – Exit Mechanics

Liquidation: 1x, non-participating

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The Term Sheet – Exit Mechanics

Liquidation: 1x, Fully-Participating

26* Additional examples attached.

• Reverse vesting of Founder shares (push for double trigger acceleration of vesting on termination in connection with Company sale)

• Right of First Refusal and Co-Sale Rights on Founder liquidity with de minimums exceptions (10-15%)

• Secondary transactions where Founders sell shares to investors

• No Founder representations should be made to the VC’s

Process to Raising Venture Capital – Key Terms – Founder Restrictions

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Questions?

John Bautista : jbautista@orrick.com

Benjamin Cichostepski : bcichostepski@orrick.com

Process to Raising Venture Capital

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