Gust

NOVEMBER 28, 2023

Over the past 20 years, the typical structure for seed/angel deals has shifted from common stock (in the mid-1990s) to convertible notes (late 1990s through early 2000s) to full Series A convertible preferred (mid-2000s) to convertible notes with a cap (late 2000s) to Series Seed convertible preferred or similar (present).

Due Diligence 91

Due Diligence Term Sheet Common Stock Stock 91

Gust

JUNE 8, 2022

How to protect your SaaS business during market uncertainty Public tech stocks have been on a downward trend the last few months in the US & Europe. Looking at SaaS specifically, Byron Deeter, partner at Bessemer Venture Partners, said the median company in their index of subscription software stocks is down 53%, […].

Europe 91

Europe Marketing Stock Partner 91

Gust

DECEMBER 22, 2011

Stock Purchase Agreements with founders require them to assign all IP rights they may have already created or acquired (for example, code written or domain names purchased by the individual) to the corporation in exchange for their shares of founders’ stock.

Intellectual Property 149

Intellectual Property Technical Review Software Review IP 149

Gust

DECEMBER 15, 2011

Having taken stock of the main legal documents and actions involved in forming and operating a new startup, let’s crack open the “case” (disregarding the warnings about voiding your warranty) and examine a few of the steps, documents and key decisions to be made in getting a new startup ready for business.

Naming 141

Naming Delaware Tajikistan California 141

Gust

MAY 22, 2012

Instead, we all want the company to grow and prosper so that our debt gets converted to stock ownership in a year or two. It’s technically a loan, but nobody wants it to actually be a loan and get paid back.

Technical Review 111

Technical Review Oregon Due Diligence Term Sheet 111

Gust

JUNE 7, 2014

5) Senior Preferred Stock and warrants. 7) Junior Preferred Stock and warrants. 9) Common Stock (including any Preferred that converted to Common, any exercised options, and all Founders stock) and Common stock warrants. So, here is the typical payout order, from first to last: 1) Salaries owed to employees.

Warrant 157

Warrant Preferred Stock Early Stage Common Stock 157

Gust

NOVEMBER 14, 2011

Investors will validate pre-existing investments and stock ownership to create an accurate market capitalization sheet for your company. They try to confirm from industry analysts that your differentiators are indeed unique, and that there are no future competitors or big gorillas in stealth mode just around the corner.

Technical Review 152

Technical Review Due Diligence Intellectual Property Private Equity 152

Gust

JULY 18, 2012

For startups, it’s also important to understand that Board approval is required for a corporation to issue any new shares of stock or other equity instruments such as stock options. For that reason, approval of the latest employee stock option grants recommended by the CEO is a routine action item at most startup Board meetings.

Stock Options 188

Stock Options SEC Stock Government 188

Gust

SEPTEMBER 17, 2014

If you’re wildly successful early on or if they help you achieve a great valuation they actually pay a significant price for their eventual stock even though they took much more risk than a future investor and backed you early. Less than you’ll probably grant your most junior employees in stock options? Stock Option plans.

Liquidation Preference 153

Liquidation Preference Valuation Term Sheet Stock 153

Gust

DECEMBER 8, 2011

Enter into agreements between Newco and founders, early contributors, outside advisors or service providers under which they contribute or assign all intellectual property related to the company’s business to Newco in exchange for the issuance of founders’ stock (Common Stock). Make escrow arrangements for restricted stock (i.e.,

Intellectual Property 139

Intellectual Property Non-disclosure Agreement Delaware Stock 139

Gust

NOVEMBER 15, 2012

Parts of the answer are that (a) there are enormous regulatory requirements relating to secondary markets, and (b) there are no analysts tracking private company stocks.

Seed Stage 131

Seed Stage Hockey Stick Cap Table Liquidation Preference 131

Gust

DECEMBER 1, 2011

In Part II, we’ll get into certificates of incorporation, stock purchase agreements, IP assignments and related matters. Good stuff! All opinions expressed are those of the author, and do not necessarily represent those of Gust.

IP 114

IP Intellectual Property Equity Liquidity Event 114

Gust

SEPTEMBER 29, 2011

For a traditional VC financing round structured as a sale of preferred stock, the best resources I can recommend are the Term Sheet Series by Brad Feld and Jason Mendelson and Startup Company Lawyer by Yokum Taku. (For more on working with startup lawyers, see Mark Suster’s classic post, How To Work With Lawyers At A Startup.).

Finance 178

Finance Term Sheet Preferred Stock Bridge Financing 178

Gust

OCTOBER 11, 2012

While you will definitely need to be a corporate entity before you can accept funding from any investor (or issue stock options to any employees), the specific corporate status of the venture at this stage is much less important to investors than its functional status.

Delaware 122

Delaware Stock Options Cofounder Stock 122

Gust

SEPTEMBER 20, 2012

Under the Crowdfunding provisions of the JOBS Act, a startup company will, for the first time, be able to sell shares of stock to anyone (that is, “the crowd”) once the SEC publishes the final rules for the program in January of 2013. The key questions are: Who can you MARKET to? Who can you SELL to?

Accredited Investor 121

Accredited Investor SEC Stock Startup 121

Gust

MAY 31, 2014

In a larger startup post Series A or B, the board might be expanded to five people, with two directors chosen by the Common stock holders (the founders), two by the investors (often one by each of two VC funds), and one independent director agreed to by everyone.

Common Stock 159

Common Stock Startup Stock Founder 159

Gust

SEPTEMBER 5, 2012

Like any promissory note, it bears interest (usually at a nominal rate) and has a maturity date on which the loan must be repaid if it hasn’t been converted to stock (typically around 18 months). This is true, although interest is generally paid in stock upon conversion. How can this possibly make sense?

Finance 134

Finance Convertible Security Equity Seed Stage 134

Gust

SEPTEMBER 6, 2012

So, if I were just going to buy stock in your company today, we would agree on a valuation today, I’d give you the money today, you’d give me the appropriate percentage of the company’s stock, and we’d be all set. But that’s NOT what we’re doing. So how do we solve this problem?

Valuation 117

Valuation Equity Stock Angel Investor 117

Gust

MAY 7, 2014

Ultimately, the company will be either sold to a larger company (at a higher price) or begins to sell shares through the public stock market (“going public” with an “IPO”). But as the company grows and becomes more valuable, the value of the fund’s corresponding percentage grows as well.

Venture Capital 154

Venture Capital IPO Limited Partner Carried Interest 154

Gust

APRIL 11, 2014

The measurable economic value of new shares issued to investors (“net tangible book value per share” in Accountantese) is immediately diluted by the existing shares, which make up the majority of the company’s stock. The exception is a stock split , where every share converts into, say, 10 shares.

Dilution 162

Dilution Equity Prospectus Pre-Money Valuation 162

Gust

NOVEMBER 13, 2013

Equity-based crowdfunding (that is, providing regular people with the opportunity to purchase stock in private companies) will not be legal in the US until the first quarter of 2013 at the earliest.

Securities and Exchange Commission 137

Securities and Exchange Commission Equity Early Stage Startup 137

Gust

JULY 31, 2012

Editor’s Note: For a great tip on unloading private stock, read this post about how you can donate it.d. One-half of angel-funded companies fail, which is why a winning Investment Strategy for Angels includes diversification. That is, to invest in several companies (rather than a few) each with the potential for home-run returns.

Exit Strategy 135

Exit Strategy Angel Investor Capital Gains Startup 135

Gust

OCTOBER 17, 2011

The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. This clause attempts to protect the conversion price of stock of angel investors, prior to additional financing, from being reduced to a price equal to the price per share paid in a later “down” round.

Term Sheet 158

Term Sheet Pre-Money Valuation Due Diligence Post-Money Valuation 158

Gust

OCTOBER 21, 2011

i) Preferred Stock (if a Preferred Financing is pending at the time of the transaction) or, (ii) if no Preferred Financing is pending, to Common Stock at a price per share equivalent to a fully diluted pre-money valuation of $3 million, to be paid in the same form of consideration (e.g.,

Finance 79

Finance Pre-Money Valuation Term Sheet Liquidity Event 79

Gust

NOVEMBER 4, 2011

This discussion expands on my Quora answer to a specific question: “ Why were the stock options of MySpace employees worthless even though the company was sold to News Corporation for hundreds of millions? ” The complete story includes a startup-within-a-startup, investments and exits by two VC firms, and some genuine corporate drama.

Valuation 98

Valuation Pre-Money Valuation Merger Vesting 98

Gust

APRIL 9, 2014

Over time, other people receive pieces of equity in exchange for work (employee stock options), money (seed, angel and venture investors), services (attorneys, directors, etc.). The Founder of a company starts by owning all the shares representing ownership of the company.

Dilution 150

Dilution Equity Vesting Stock Options 150

Gust

OCTOBER 26, 2014

All you need is a blog, Twitter, email, some business card stock, and a little creativity. One of the keys to keeping start-up costs low is to find creative and affordable ways of doing what you need to get done, rather than just spending cash. Don’t think about the exit.

Bootstrapping 176

Bootstrapping Startup Merger Salary 176

Gust

OCTOBER 5, 2011

Mandatory Conversion : The Notes and any accrued interest will be converted into the Company’s next issued series of preferred stock resulting in new money of not less than $1,000,000 (an “ Eligible Financing ”) at a discount to the per-share price of such preferred shares of 25% (the “ Conversion Price ” ).

Finance 79

Finance Preferred Stock Term Sheet Early Stage 79

Gust

NOVEMBER 23, 2014

Yet you should offer a reasonable monthly fee and/or some stock options to show you are serious about the position. Formalize the compensation. Most advisory board members sign up because the want to help you, not because of the compensation. If you want out-of-town members on your board, you reimburse the travel expenses.

Advisory Board 185

Advisory Board Stock Options Startup Stock 185

Gust

MAY 24, 2012

As a quick review, most startups begin life as corporations with a single class of equity securities, referred to as Common Stock , issued to founders, employees, and outside service providers. Options and warrants, when issued, are also typically exercisable for shares of Common Stock.

IPO 159

IPO Equity Common Stock Stock 159

Gust

DECEMBER 8, 2013

As an employee, you salary will likely be low, your job security low, so the job title better be large, and the stock options better be large. Investing in a startup, or joining a startup, is always a very big risk, so the potential return better be large. What traction can be measured today?

Due Diligence 174

Due Diligence Sweat Equity Intellectual Property Burn Rate 174

Gust

FEBRUARY 23, 2014

On the other hand, maybe you can emulate Priceline.com , whose official spokesperson, William Shatner, agreed to do the spots for free in exchange for stock in the company. Big fat advance checks and long-term royalties are often the norm. How to find and connect with the celebrity you want.

Matching 151

Matching Campaign Stock Distribution 151

Gust

DECEMBER 18, 2013

In contrast, doing a full Series A round might be $25,000 – $30,000 each, and even a Series Seed might be $10,000 each); that it typically provides many fewer rights and protections for investors ; and that while everyone investing in a Series Seed round will be investing on the same terms at the same valuation, with a series of Convertible (..)

Founder 150

Founder Valuation Seed Money Common Stock 150

Gust

NOVEMBER 11, 2011

Then, through sheer grit and scrappiness (as well as stock instead of cash to developers ), they scrapped together an ecommerce component that immediately drew more traffic, some cool brands in the field, and rave reviews from users. They got a basic site up, and… traffic was fantastic.

eCommerce 107

eCommerce Valuation Stock Community 107

Gust

OCTOBER 12, 2011

The agreement contains language providing that, at the Company’s option , the notes may be converted to shares of Common Stock at a predetermined valuation. First, a word about the maturity date. In my experience, a term of 12 to 24 months is common, with 12 months being on the short end.

Finance 107

Finance Term Sheet Pre-Money Valuation Early Stage 107

Gust

OCTOBER 31, 2011

Taking cash –and/or stock –from a big partner who can leverage your business, even at a number that doesn’t thrill you– allows you to put a notch in your belt, build credibility with investors, and prepare to move to your next act. And even then it will be nearly impossible to sell any big chunk of the holdings).

IPO 70

IPO Valuation Stock Partner 70

Gust

OCTOBER 17, 2012

Now let’s get back to the business of selling more product and less stock! The idea that angels are suckers while VCs have cornered the market on building great companies is simply not supported by the data. Editor’s note: this post originally appeared on TechCrunch .

Angel Investor 152

Angel Investor Venture Capital Seed Stage Silicon Valley 152