Startup Company Lawyer

Index

Below is a comprehensive list of posts.

CONVERTIBLE NOTE BRIDGE FINANCINGS

1. Should a startup company raise its seed round using a convertible note or Series A Preferred Stock?

2. What does a convertible note bridge financing term sheet look like?

3. What should the interest rate for a convertible bridge note be?

4. What should the conversion discount be for a bridge note into preferred stock?

5. What type of financing forces an automatic conversion of the promissory note into Preferred Stock?

6. What happens to the convertible promissory note if the maturity date is reached and there hasn’t been a financing?

7. What happens if the Company is sold after the convertible bridge note is issued and before the maturity date or the next round of financing?

8. What should the maturity date of the convertible note be?

9. What should the terms of bridge loan warrant coverage be?

10. Can you have multiple closings in a convertible note bridge financing?

11. What does subordination mean in a convertible bridge note?

12. What is a security interest in connection with a convertible note?

13. What should the representation and warranties in the note purchase agreement be?

14. Why should a majority of investors be able to amend the convertible notes?

15. Who pays legal fees in a convertible note bridge financing and how much does it cost?

16. What is the economic difference between a conversion discount and warrant coverage for a convertible note?

SERIES A FINANCINGS

1. What trends does WSGR see in venture financings?

2. What does a Series A term sheet look like?

3. What do definitive agreements for a Series A financing look like?

4. Are Series A term sheets binding?

5. What is preferred stock and why is it issued to investors?

6. How do you calculate Series A price per share?

7. Can you have multiple closings in a Series A financing?

8. What is a dividend preference?

9. What is a liquidation preference?

10. What is the amount of a typical liquidation preference?

11. What is the difference between non-participating preferred stock and participating preferred stock?

12. What is a cap on a participating preferred liquidation preference?

13. What is the priority of the liquidation preference when the Series B financing occurs?

14. Why do preferred stockholders have odd economic incentives upon a sale of company when they have non-participating preferred stock or particpating preferred stock with a cap?

15. What are redemption rights?

16. Why is preferred stock convertible into common stock?

17. When should preferred stock be automatically converted into common stock?

18. What is anti-dilution protection?

19. What is weighted average anti-dilution protection?

20. What is full ratchet anti-dilution protection?

21. What is a pay to play provision?

22. What are carveouts to anti-dilution protection?

23. What are protective provisions?

24. What stockholder approval is necessary to complete a venture financing?

25. What are information rights?

26. What are registration rights?

27. What are demand registration rights?

28. What are piggyback registration rights?

29. What are S-3 registration rights?

30. What is a market standoff or IPO lockup provision?

31. What is a right of first offer or right to maintain proportionate ownership in future financings?

32. What is a right of first refusal and co-sale agreement?

33. What is a drag-along or bring-along provision?

34. What should the composition of the board be like and how are the board seats allocated?

35. What are board observer rights?

36. What is a management rights letter?

37. What should legal fees for a Series A financing be?

38. What should the terms of the no shop be?

39. Why should a term sheet be confidential?

40. What are the conditions to closing of a Series A financing?

41. What does the legal opinion cover?

SERIES B FINANCINGS

1. What does pari passu mean?

2. Should the Series B liquidation preference be senior to the Series A?

3. Should the Series B have a separate protective provision?

COMPANY FORMATION

The third series of posts will be on incorporation, founders stock, option plans and other company formation issues.

1. What state should I incorporate in?

2. How many shares should be authorized in the certificate of incorporation?

3. What is par value?

4. What is an agent for service of process?

5. How do you calculate Delaware franchise taxes?

6. What trademark and other legal issues are involved in selecting a company name?

7. What inspection and information rights does a stockholder have?

[to come]

FOUNDERS ISSUES

1. Should founders stock be subject to vesting before a venture financing?

2. What should the vesting terms of founder stock be before a venture financing?

3. What is an 83(b) election?

4. What is qualified small business stock?

5. What is Series FF stock?

[to come]

STOCK OPTIONS

1. What is Section 409A?

2. What’s the difference between an ISO and an NSO?

3. How do you set the exercise price of stock options?

GENERAL

1.  What is important in a confidentiality agreement or non-disclosure agreement (NDA)?

M&A

1. What stockholder approval is necessary to sell a company?

2. What are directors’ duties and what can they do to protect themselves in a sale of company?

[to come]

Financing Trends

Wilson Sonsini Goodrich & Rosati just published a report on private company financing trends for the period from 2005 through the first quarter of 2007. According to VentureOne, WSGR represents more companies that receive venture financings than any other law firm in the United States. In 2006, WSGR represented companies in over 500 venture equity and debt financings, which was 20.1% market share among U.S. law firms. The reason why WSGR hasn’t published a report like this is probably because everyone has been too busy getting deals done to collect and sort through the data.

The report covers valuation trends, amounts raised by series, up rounds vs. down rounds, liquidation preferences, pay-to-play, dividends, anti-dilution and redemption rights.

A link to the entire report is available on the WSGR web site. [Update: a link to the report for the period from January 1, 2005 to June 30, 2007 is here, a link to the report for the period from January 1, 2005 to September 30, 2007 is here, and a link to the latest report for the period from January 1, 2005 to December 31, 2007 is here.] Below is a excerpt from the first report:

Analysis: Looking beyond the Medians. Aggregate industry data for pre-money valuations, financing amounts, and other financing metrics are publicly available from several sources. This data can be quite useful, and many entrepreneurs refer to these sources to set their own expectations as to amounts raised and valuations in future financings. However, our data shows that in many instances, the medians and other aggregate data have little relevance to individual deals. The distributions of deal values and deal sizes do not follow a classic bell curve and do not cluster near the median. On the contrary, the distribution curves are remarkably flat.

For example, although the median Series A pre-money valuation for 2006 was $6 million, almost one-fourth of Series A financings exceeded $12 million in pre-money valuation, more than twice the median value. At the lower end, approximately 19% of Series A financings reflected pre-money valuations of one-half or less than the median valuation. Pre-money valuations in Series B and later-round financings were also widely dispersed relative to the median. Amounts raised per round also vary widely from the median, although to a lesser extent than deal valuations. Aggregate 2005 - 2006 Series A financings, for example, had a median amount raised of $4 million but 16% of Series A financings raised $10 million or more.

In summary, although industry financing statistics are useful as points of reference, their importance can be easily exaggerated. Entrepreneurs should understand that financings vary widely and learn to emphasize the specific economic and other factors pertaining to their particular businesses.

With regard to valuation trends:

Valuation trends. Although median valuations may not be pertinent for individual deals, they are useful as an indicator of industry trends. Our data indicates that the median valuations for later-round deals increased substantially from 2005 to 2006, particularly for later-stage financings. In 2006, 31% of Series B rounds reflected valuations of $30 million or more, and 37% of Series C and later rounds reflected valuations of $61 million or more.

Series A - The median Series A valuation was $6.0 million in 2005 and again in 2006, and decreased to $5.0 million in Q1 2007.

Series B - The median Series B valuation increased from $16.5 million in 2005 to $20.0 million in 2006 and decreased to $12.5 million in Q1 2007.

Series C and later - The median valuation for Series C and later rounds increased from $30.0 million in 2005 to $45.0 million in 2006 and decreased to $37.0 million in Q1 2007.

With regard to amount raised by series:

Amounts Raised - By Series. As indicated in the charts, amounts raised have been widely dispersed relative to the medians. However, despite a strong supply of money in the venture sector, the median amounts raised by series did not change substantially during the period covered by this data set.

Series A - The median amount raised for Series A financings was $4.0 million in 2005 and 2006.

Series B - The median amount raised for Series B financings was $8.0 million for 2005, increasing to $9.0 million in 2006.

Series C and later - The median amount raised for Series C and later-round financings was $10.0 million in 2005 and 2006.