Early Growth Financial Services

FEBRUARY 3, 2015

Today, we’re tackling participating versus non-participating preferred stock, a fundamental economic term in VC deals that goes to the heart of the business agreement between investors and management in connection with a sale of the company. This post by Ian Engstrand first appeared on Founders Workbench. From time to time on Founders Workbench we give a brief primer on common terms and issues in venture financings.

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Preferred Stock Stock Finance Participating Preferred 47

Growthink Blog

JANUARY 24, 2011

The question is whether they need to issue common or preferred stock. The answer depends on how and what rights are defined in the preferred stock. This is an extremely valuable preference that can best be shown by example.

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Preferred Stock Common Stock Stock Liquidation Preference 102

Startup Professionals Musings

SEPTEMBER 26, 2015

For later investments, the price is equity, with a percentage of the owner stock to be assigned to the investor. Type of stock assigned to the investor. Investors typically demand preferred stock, to give themselves certain voting and liquidation privileges over later shareholders.

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Term Sheet Demand Preferred Stock Stock 297

Scott Edward Walker

APRIL 9, 2012

ii) why are convertible notes issued instead of shares of common or preferred stock? In the context of a seed financing, the debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing.

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Liquidation Preference Preferred Stock Finance Common Stock 92

VC Cafe

JUNE 11, 2011

Some of the posts that got my attention this week… 5 Ways To Raise Funds for Your Startup – Mashable brings a good reminder on the ways to raise funding: friends/family/fools, incubators, convertible debt, preferred stock and VC.

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Preferred Stock Incubator Analytics Stock 98

K9 Ventures

NOVEMBER 21, 2011

If there is one piece of advice I would give to the founders of BST, it is to consider selling a part of their personal stock in the company at that stage. If things go well, and your company succeeds beyond your wildest dreams, it will end up being the most expensive house ever (because you could have held your stock and made a lot more on it). 3) Setting a precedent for the price of the Common Stock : This is the biggest issue with founder liquidity.

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Founder Liquidation Preference Preferred Stock Common Stock 74

The Startup Lawyer

JANUARY 10, 2012

In most equity financing rounds, an investor will ask for (and get) a term called a liquidation preference. A liquidation preference is the amount that must be paid to a preferred stock holder before any sale proceeds may be paid to the holders of common stock (i.e., The amount of the liquidation preference is usually expressed as a multiple, with the most common liquidation preference being “1X non-participating.” Preferred Stock

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Liquidation Preference Participating Preferred Preferred Stock Pre-Money Valuation 61

VC Cafe

OCTOBER 23, 2010

Fred Wilson , Paul Graham and Seth Levine all agree that as an entrepreneur one would prefer uncapped convertible debt to equity, but investors typically won’t go for it. Preferred Stock Purchase Agreement Series Seed Form SPA. B ack in March, Andreessen Horowitz and Fenwick & West, LLP published a series of documents that would help structure early stage investments in startups.

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Early Stage Preferred Stock Term Sheet Stock 73

The Startup Lawyer

JULY 13, 2011

The deal documents called the preferred stock “Series Seed&# shares but after opening up the documents I quickly realized the deal terms were NOT the same as those in the well-known Series Seed document set. For example, the well-known Series Seed has a 1x non-participating liquidation preference , while the version I reviewed had a 1x participating preference. Preferred Stock

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Liquidation Preference Preferred Stock Participating Preferred Finance 58

Scott Edward Walker

SEPTEMBER 21, 2011

Finally, unless the startup is raising at least approximately $750,000, it generally is not in the company’s interest to issue shares of preferred stock. What about issuing shares of common stock?

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Preferred Stock Accredited Investor Common Stock SEC 56

The Startup Lawyer

MARCH 1, 2010

The board is set up to consist of 3 directors: 1 director elected by the common (founders); 1 directors elected by the preferred (investors); 1 “independent&# director (i.e., 2) Series Seed Stock Preferred Stock Purchase Agreement. Tags: Preferred Stock documents lawyer seed funding

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Redemption Preferred Stock Term Sheet Dividend 64

Scott Edward Walker

JULY 7, 2011

Here are the issues I have addressed to date: common mistakes dealing with VC’s valuation liquidation preferences stock options exploding term sheets and no-shop provisions anti-dilution provisions dividends Board control protective provisions drag-along provisions pay-to-play and pull-up provisions conversion rights In today’s post, I examine the redemption rights of investors.

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Term Sheet Redemption Venture Capital Dividend 46

The Startup Lawyer

MARCH 1, 2010

The board is set up to consist of 3 directors: 1 director elected by the common (founders); 1 directors elected by the preferred (investors); 1 “independent&# director (i.e., 2) Series Seed Stock Preferred Stock Purchase Agreement. Tags: Preferred Stock documents lawyer seed funding

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Redemption Term Sheet Dividend Vesting 40

The Startup Lawyer

MARCH 11, 2010

A variety of model startup seed funding docs have been released in the past year or so: TechStars Series AA Preferred , YCombinator Series AA Preferred , and TheFunded Founder Institute’s Plain Preferred. For example, a founder stock purchase agreement is 12+ pages long because founders can, have, and will fail and/or bail on startups (hence the vesting schedule & startup repurchase option).

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Delaware Preferred Stock Hockey Stick Merger 46

The Startup Lawyer

MARCH 11, 2010

A variety of model startup seed funding docs have been released in the past year or so: TechStars Series AA Preferred , YCombinator Series AA Preferred , and TheFunded Founder Institute’s Plain Preferred. For example, a founder stock purchase agreement is 12+ pages long because founders can, have, and will fail and/or bail on startups (hence the vesting schedule & startup repurchase option).

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Delaware Hockey Stick Preferred Stock Merger 43

ReadWriteStart

APRIL 7, 2011

The majority of financings was structured as preferred stock (69%), as opposed to convertible note financings (31%), and the vast majority of those (83%) had their conversion price capped. The median amount raised in preferred stock financings was $1.1

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Preferred Stock Finance Seattle Silicon Valley 127

Gust

JUNE 7, 2014

In some other cases, all Preferred investors are treated pari passeux , so steps 5/6 and 7/8 below would be combined into one.). 5) Senior Preferred Stock and warrants. 6) Any preference multiple on (5). 7) Junior Preferred Stock and warrants.

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Early Stage Warrant Preferred Stock Stock 199

ithacaVC

APRIL 25, 2014

The model includes a simple waterfall analysis using both participating and non-participating preferred (see line 44 and then columns M and O). The larger the preferred stock liquidation preference the larger the impact of participating preferred. Columns I and J are important as they show the % of preferred stock ownership compared only to preferred stock outstanding.

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Cap Table Preferred Stock Pre-Money Valuation Liquidation Preference 66

Berkonomics

MARCH 8, 2018

The option price should be set by appraisal under IRS rule 409a, and certainly should be low enough to recognize that common stock options are not worth as much as preferred stock, given the many preferences of the latter.

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Early Stage Vesting Stock Options Preferred Stock 109

Startup Professionals Musings

JANUARY 29, 2018

I’ll never forget that great sense of excitement I felt when I incorporated my first business, and realized that I was now the proud owner of 10 million shares of common stock. Unfortunately, in my years since as a small business advisor, I have seen too many founders squander this asset through a lack of understanding of some basic legal and operational issues, or by handing out nominally “free” stock to the wrong people at the wrong time.

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Stock Vesting Preferred Stock Dilution 138

Feld Thoughts

JULY 27, 2011

Series A Preferred Stock Purchase Agreement. When Jason and I set out to write Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist , we both agreed that we wanted to try to create as useful and durable a reference guide for entrepreneurs interested in raising a round of venture capital as we could. As a result, we created a Resources page on Ask the VC and decided to load it up with legal documents that are part of a venture capital financing.

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Term Sheet Merger Preferred Stock Venture Capital 291

Startup Company Lawyer

JANUARY 9, 2011

Convertible debt with a price cap seems to be the preferred structure for early-stage financings. A logical alternative to convertible debt is a priced Series A preferred stock financing. Mark Suster does a good job analyzing whether convertible debt is preferable to equity , and concludes that convertible debt is better. Convertible debt with a price cap preserves the investor’s “equity&# ownership, but gives the investor extra liquidation preference.

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Preferred Stock Liquidation Preference Stock Common Stock 47

ithacaVC

JUNE 29, 2018

This typically results when the company has raised a lot of money and the preferred stock liquidation preference would absorb an out sized portion of the exit proceeds. I have posted a few times on management carve out plans (back in February 2011 and November 2011 ; wow, time flies!!). Our portfolio companies routinely adopt carve out plans when the founders/employees equity values are not likely to provide enough incentive to get a company to an exit.

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Management Liquidation Preference Preferred Stock Dilution 40

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. A term sheet for a convertible note deal may run two or three pages, versus 8-10 pages for a typical Series A Preferred Stock financing. (I’ve

Finance 174

Finance Term Sheet Preferred Stock Bridge Financing 174

View from Seed

OCTOBER 15, 2014

You should still work with your board about what format they prefer.). Examples of housekeeping include the following list, though not every item will appear every time: Finance: Cash out date, burn rate, 409A valuation, cap table, common/preferred stock dashboard.

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Seed Stage Cap Table Warrant Metrics 338

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 ” ). per share for 2,000,000 shares of newly issued Series A Preferred Stock.

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Finance Preferred Stock Term Sheet Equity 109

Business Plan Blog

APRIL 10, 2012

In the context of a seed financing, the debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing.” In layman’s terms, investors will give money to a startup but instead of getting money back, they get preferred stock in return. ii) why are convertible notes issued instead of shares of common or preferred stock?

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Preferred Stock Finance Equity Stock 40

View from Seed

DECEMBER 4, 2014

Additionally, you should put whatever agreement you reach to paper , even if you have not yet incorporated or had your legal counsel draw up the founder stock paperwork. You can then work with your law firm to formally draw up founder common stock paperwork either then or subsequently.

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Equity Founder Sweat Equity Common Stock 325

Startup Company Lawyer

AUGUST 31, 2012

Other folks, such as Mark Suster, have also written about whether convertible debt is preferable to equity. Fred Wilson has been openly critical of convertible debt , and prefers priced equity rounds. Manu Kumar has also indicated that he prefers priced equity rounds to convertible debt. ” As a result, Ted introduced the Series Seed preferred stock documents as an alternative to convertible debt for early stage investments.

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Convertible Security Security Equity Preferred Stock 58

Startup Professionals Musings

MARCH 7, 2015

Most professional investors will expect preferred stock, a board seat, rights to later rounds and perhaps anti-dilution protection. One of the big questions that every entrepreneur struggles with is how much funding they should request from investors in the first round.

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Preferred Stock Equity Dilution Exit Strategy 296

Startup Professionals Musings

MAY 18, 2015

When an entrepreneur first incorporates his or her business, he or she may find him or herself the proud owner of 10 million shares of common stock, commonly called founder’s shares. Make sure the government waits for a stock sale to collect taxes. This is called stock dilution control.

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Stock Common Stock Vesting Startup 282

The Startup Lawyer

JUNE 22, 2010

For this article, let’s assume this equity is the Series A Preferred Stock purchased by a venture capital fund. compensate the angel for the early risk), the convertible promissory note will have an automatic conversion discount feature by which the angel investor will exchange the convertible debt for shares of the Series A Preferred Stock at a discount to the price per share paid by the venture capital fund at a Qualified Financing.

Pre-Money Valuation 66

Pre-Money Valuation Preferred Stock Valuation Stock 66

Scott Edward Walker

JUNE 9, 2011

Here are the issues I have addressed to date: common mistakes dealing with VC’s valuation liquidation preferences stock options exploding term sheets and no-shop provisions anti-dilution provisions dividends Board control protective provisions drag-along provisions pay-to-play and pull-up provisions In today’s post, I examine conversion rights of investors. As many of you know, VC investors are typically issued shares of preferred stock, not common stock.

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Term Sheet Conversion Rights Venture Capital Conversion 53

Steve Blank

OCTOBER 24, 2017

To turn your company’s stock into cash, you engaged a top-notch investment bank (Morgan Stanley, Goldman Sachs) and/or their Silicon Valley compatriots (Hambrecht & Quist, Montgomery Securities, Robertson Stephens). None of this was law, and nothing in writing required this; this was just how these firms did business to protect their large institutional customers who would buy the stock. Founders can now outvote the preferred stock holders (the investors).

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Founder Stock IPO Common Stock 182

Berkonomics

OCTOBER 1, 2015

Most sophisticated investors will take either a promissory note or preferred stock, both of which come before founder or management stock in a sale or liquidation. Further, preferred stock holders can be recipient of accrued dividends in a sale or liquidation.

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Liquidity Event Dividend IRR Preferred Stock 112

Startup Professionals Musings

AUGUST 1, 2016

Experienced entrepreneurs understand investor expectations of Board representation, preferred stock, and payments based on interim milestones.

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Due Diligence Intellectual Property Dividend Preferred Stock 206

Berkonomics

DECEMBER 20, 2018

The licensee is not concerned with your awarding of options to buy stock on advantageous terms. Starting next week, we’ll examine the process and advantages of raising money using various financial tools from notes to preferred stock to other more esoteric tools.

IP 68

IP Intellectual Property Equity Dilution 68

Startup Professionals Musings

NOVEMBER 30, 2015

A C-corporation is more complex and expensive, and is recommended only if you expect to pitch to professional investors who demand preferred stock, or to more than 100 potential shareholders. Aspiring entrepreneurs often ask me what to do first when starting a business.

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Entrepreneur Intellectual Property Stealth Preferred Stock 214

Early Growth Financial Services

OCTOBER 2, 2014

In short, convertible equity is a form of financing that gives investors the right to preferred stock once a triggering event occurs. Lately I‘ve been getting more and more questions about convertible equity: “What is it?” and “Should I use it?” So I figured now’s the right time to answer a few questions and fill in some blanks. So what’s that mean? First some background… Convertible debt Convertible debt is a common feature of startup seed rounds, used in more than ?

Equity 38

Equity Preferred Stock Seed Stage Finance 38

Feld Thoughts

SEPTEMBER 27, 2011

The potential bad news is that if the merger is an all stock deal, the company will need to find a way to find cash to pay back the loan or negotiate a way for the acquiring company to deal with the debt. In the case of an early-stage startup that hasn’t issued preferred stock yet, the debt converts into stock of the acquiring company (if it’s a stock deal) at a valuation subject to a cap.

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Conversion Sales Stock Aggregator 213

ithacaVC

APRIL 5, 2011

A cap table is a written record (in Excel, for example) of who owns stock in your company. It lists every owner out by amount owned, type of stock (common or preferred), and date purchased. One rule of simple cap tables is to issue “normal” stock to founders (common stock only) and investors (typically preferred stock, but sometimes common stock to early friends and family). I am a huge fan of simple cap tables.

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Common Stock Stock Cap Table Preferred Stock 43

Agile VC

DECEMBER 4, 2014

Additionally, you should put whatever agreement you reach to paper, even if you have not yet incorporated or had your legal counsel draw up the founder stock paperwork. You can then work with your law firm to formally draw up founder common stock paperwork either then or subsequently.

Equity 264

Equity Cofounder Founder Sweat Equity 264

Scott Edward Walker

APRIL 22, 2012

ii) why are convertible notes issued instead of shares of common or preferred stock? If the noteholders invested $500,000 and the price per share of the Series A Preferred Stock were $1.00, the noteholders would convert the loan at an effective price of $0.50

Finance 80

Finance Liquidation Preference Founder Pre-Money Valuation 80