This webinar is critical for entrepreneurs who will be raising a preferred round in the near future. This webinar is designed to teach you what to expect when your company sells preferred stock in a venture round. During this webinar, veteran Silicon Valley venture capital attorney Jason Putnam Gordon will cover the following topics: · What venture capitalists are looking for when they invest in a company · What makes a company a potential investment for a venture capital fund · Pre-round issues · What makes a good investor and how to find them · How to negotiate a term sheet · The deal documentation · The diligence process · Closing issues · Post-closing issues · Common pitfalls when raising venture capital · And much, much more

1. How to Do a Venture Capital Financing
Presented on September 9, 2021 by Jason Putnam Gordon
Email: jgordon@polsinelli.com

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• Today’s Discussion is General Information – Not Legal Advice
• We will be discussing rules and exceptions thereto. Those rules,
exceptions, and exceptions to the exceptions may not be applicable
to your situation.
• You need to retain competent legal counsel to review all facts and
circumstances before weighing in with advice.
• Off-the-cuff answers to your questions are not, and should not be
taken as, legal advice.
Important Caveats

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• My Background
• Venture Model
• Ideal VC Investors
• Preliminary Considerations
• Term Sheet Negotiation
• Deal Documentation
• Diligence
• Side Letters
• Closing and Post-Closing Issues
Overview

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• Venture Capital and Emerging Growth Company attorney—
practicing law since 2005.
• Polsinelli is an Am Law 100 firm with approximately 900 attorneys in
over twenty offices throughout the US.
• My office is in San Francisco, but I work with companies throughout
the US and the world.
• I love working with entrepreneurs on financings and as outside
general counsel.
My Background

5. Venture Capital Model
▪ Objectives
▪ Traditional VC Funds
▪ Build a portfolio where a few companies will be home runs
▪ Fund’s life is usually around 10 years
▪ Angel investors have different considerations
▪ Strategic investors have different considerations

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Venture Model (continued)
Idea(s)
(Intangible Assets)
Technicians who have
skills like: sales,
marketing, business
acumen
(Services)
Investors
(Capital)
Company Increases in Value

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Venture Capital Model (continued)
Figures are for illustrative purposes and should not be interpreted to be applicable to your situation.

8. Who Makes a Good Investor (and how to
find them)
▪ Company’s Objectives
▪ Investors that will add value beyond dollars contributed
▪ Investors that will be supportive of the company

9. Preliminary Considerations: Definitions
▪ Pre-money valuation – the value of the company before the next round of
investment
▪ Post-money valuation – the value of the company after the round of
investment
▪ Fully-diluted basis – all common stock and anything that can be converted
to (or may become) common stock, e.g., preferred stock, warrants,
options, or option pool
▪ When dealing with convertible securities, assumptions must be made and should be
scrutinized.
▪ Names for Priced Rounds

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▪ Format and figures are for illustrative purposes and should not be interpreted to be
applicable to your situation.
Preliminary Considerations: Definitions Applied
Pre-money Valuation $40,000,000
New Investment $10,000,000
Post-money Valuation $50,000,000
$40,000,000 pre-money valuation /
37,000,000 pre-money shares =
$1.0811 price/share
$10,000,000 new investment / $1.0811
price/share =
9,250,000 new shares
issued

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▪ Correct structure
▪ Modeling round
▪ Style of Deal
▪ NVCA – https://nvca.org/model-legal-documents/
▪ NVCA-light
▪ Series Seed - https://www.seriesseed.com
▪ Other
Preliminary Considerations

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Term Sheet Negotiation: Typical Term Sheet Terms
▪ How much of the company is
being sold based on a
valuation
▪ Dividends
▪ Liquidation preferences
▪ Voting Rights
▪ Protective provisions
▪ Optional and Mandatory
Conversion
▪ Legal opinion
▪ ROFR & Co-Sale
▪ Drag along
▪ Registration Rights
▪ Anti-dilution protection
▪ Vesting for founders
▪ Documentation
▪ Attorneys Fees
▪ No Shop and Confidentiality
Provisions
▪ Whether investors will get a
board seat and/or observer
seat
▪ Pro Rata Rights

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▪ Main Financing Documents
▪ Stock Purchase Agreement
▪ Amended and Restated Certificate of Incorporation
▪ Investors Rights Agreement
▪ Voting Agreement
▪ Right of First Refusal and Co-Sale Agreement
▪ Other documents
▪ Board and stockholder consents
▪ Waivers
▪ Side letters (discussed in a moment)
▪ Pro Forma Cap Table
▪ Potentially a legal opinion
▪ Cleanup
Deal Documentation

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• Letter agreements outside of the main financing documents
• Common rights include
• Information rights
• Observer seat
• Pro Rata Rights
• Commercial agreements
• Other risk-mitigating related covenants
Deal Documentation: Side Letters

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▪ Steps
▪ Investor request for information
▪ Example - https://www.cooleygo.com/documents/sample-vc-due-diligence-request-
list/
▪ Open up a data room
▪ Topics
▪ Corporate records
▪ Business plan and financials
▪ Security Issuances
▪ Material Agreements
▪ Disputes and Litigation
▪ Intellectual Property
▪ Subsidiaries
▪ Miscellaneous
Diligence Process

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▪ Diligence – The process during which investors obtain
information about the company to identify and assess risk if the
investment is made.
▪ Deal Documentation –
▪ The representations in the stock purchase agreement provide
statements of fact regarding categories of risk, which when read in
connection with the disclosure schedule accurately conveys the
information by which the investors can assess risk.
▪ Covenants, commonly in the Investors’ Rights Agreement are
contractual obligations that the company must undertake post closing.
Interface Between Deal Documentation and Diligence

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▪ Typical Order of Operation of Closing
▪ Board consent
▪ Stockholder consent
▪ Filing charter
▪ Then closing can happen usually with escrowed signature pages
▪ Typical post-closing action items
▪ Securities filings
▪ 228 Notices
▪ Issuing stock certificates
▪ Closing binder
Closing and Post-Closing Issues

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• Negotiating before you have run a proper pro forma
• Securities laws issues
• Finders
• Poor record keeping
• Napkin promises
Common Pitfalls and Traps for the Unwary

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