This document provides an overview of the venture capital financing process from idea to IPO. It discusses key topics such as the venture capital model, ideal venture capital investors, preliminary considerations for financing, the term sheet, deal documentation, diligence process, side letters, common pitfalls, and closing and post-closing issues. The presentation is intended to provide a general educational overview rather than legal advice for any specific situation.

1. © Copyright 2022 by K&L Gates LLP. All rights reserved.
Alidad Vakili, K&L Gates LLP
April 28, 2022
How to Do a Venture Capital
Financing
Idea to IPO

2. These materials have been prepared solely for educational purposes.
The presentation of these materials does not establish any form of
attorney-client relationship with the author or K&L Gates. Particular
legal issues should be addressed through consultation with your own
legal counsel, not by reliance on this presentation or these materials.
Attorney Advertising. Prior results do not guarantee a similar outcome.
© K&L Gates LLP 2022.
Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, please
be advised that any U.S. federal tax advice contained in this
communication (including any attachments) is not intended or written to
be used, and cannot be used, for the purpose of (i) avoiding penalties
under the Internal Revenue Code or (ii) promoting, marketing or
recommending to another party any transaction or matter addressed
within.
klgates.com 2

3. IMPORTANT CAVEATS
 Today’s Discussion is General Information
 We will be discussing general principals and concepts,
which may not be applicable to your specific situation.
 Answers to your questions during this presentation are
not, and should not be taken, as legal advice.
 For any particular issues you would like to discuss,
please feel free to reach out to me after this
presentation.
klgates.com 3

4. OVERVIEW
 My Background
 Venture Capital Model
 Ideal Venture Capital Investors
 Preliminary Considerations
 The Term Sheet
 Deal Documentation
 Diligence
 Side Letters
 Common Pitfalls
 Closing and Post-Closing Issues
klgates.com 4

5. BACKGROUND
 Corporate attorney with a practice
focus on Emerging Growth and
Venture Capital.
 I work out of our San Francisco
office and have worked with
companies throughout the US and
the world.
 I enjoy working with and helping
entrepreneurs on startup
adventures from startup to liquidity.
klgates.com 5
Alidad Vakili
Counsel
+1.415.882.8039
alidad.vakili@klgates.com

6. Review of Audience Survey
klgates.com 6

7. VENTURE CAPITAL MODEL
 What are VCs looking for when they invest in a
company?
 Short Answer – a homerun
 Management
 Market
 Great technology / product
 Scalable business
klgates.com 7

8. IDEAL VENTURE CAPITAL INVESTORS
 Investor Objectives
 Traditional VC Funds
 Generally have a 10 year life span
 Create a portfolio of companies where a few will generate
large returns
 Other investors have different objectives
 Angel investors
 Strategic investors
 Corporate VC Funds (different than traditional VC Funds)
klgates.com 8

9. IDEAL VENTURE CAPITAL INVESTORS
 Company Objectives
 Smart money – investors that will add value beyond
their $ investment
 Investors who will be supportive of the company
 Investors who know the company’s industry
 Investors who are interested in helping grow the
business
klgates.com 9

10. PRELIMINARY CONSIDERATIONS
 Correct structure
 Entity
 Jurisdiction
 Modeling round
 Style of Deal Documentation
 NVCA – https://nvca.org/model-legal-documents/
 Series Seed – https://www.seriesseed.com
 Other
klgates.com 10

11. PRELIMINARY CONSIDERATIONS
 Definitions:
 Pre-money valuation – the value of the company before
the next round investment
 Post-money valuation – the value of the company after
the round of investment
 Issued and outstanding basis – all stock issued and
outstanding
 Fully-diluted basis – all common stock issued and
outstanding, plus all securities that can be converted to
common stock (e.g., preferred stock, warrants, options,
shares reserved for equity compensation)
 Priced Rounds Nomenclature
klgates.com 11

12. PRELIMINARY CONSIDERATIONS:
DEFINITIONS ILLUSTRATED
klgates.com 12
Pre-Money Valuation: $40,000,000
New Investment: $10,000,000
Post-Money Valuation: $50,000,000
Price/Share: $1.25
Fully Diluted Pro Forma Cap Table
Pre-Money Post-Money
No. of Shares Ownership % No. of Shares Ownership %
Common 20,000,000 62.50% 20,000,000 50.00%
Preferred 5,000,000 15.63% 5,000,000 12.50%
Options (if exercised) 2,000,000 6.25% 2,000,000 5.00%
Warrants (if exercised) 1,000,000 3.13% 1,000,000 2.50%
Notes (converted) 500,000 1.56% 500,000 1.25%
Safes (converted) 500,000 1.56% 500,000 1.25%
Remaining Option Pool (not yet exercised) 2,000,000 6.25% 2,000,000 5.00%
New Option Pool 1,000,000 3.13% 1,000,000 2.50%
New Investment 8,000,000 20.00%
Total Shares 32,000,000 100.00% 40,000,000 100.00%
New Investment Shares = $10,000,000 (new investment) / $1.25 (price/share) = 8,000,000
Format and figures are for illustrative purposes only

13. THE TERM SHEET: TYPICAL TERMS
 How much of the company is being sold
 Dividends
 Liquidation preferences
 Voting rights
 Protective provisions
 Optional and mandatory conversion
 Anti-dilution protection
 Registration rights
 ROFR and co-sale rights
 Drag along
 Pro rata rights
 Vesting for founders
 Documentation
 Attorneys’ fees
 Legal opinion
 No Shop/Exclusivity and confidentiality provisions
 Whether investors will get a board seat and/or board observer rights
klgates.com 13

14. DEAL DOCUMENTATION
 Main Financing Documents
 Stock Purchase Agreement
 Disclosure Schedules
 Amended and Restated Certificate of Incorporation
 Investors Rights Agreement
 Voting Agreement
 Right of First Refusal and Co-Sale Agreement
 Other documents
 Closing checklist
 Board and stockholder consents
 Waivers
 Side letters
 Pro Forma Cap Table
 Legal opinion
 Cleanup
klgates.com 14

15. DEAL DOCUMENTATION: SIDE LETTERS
 Letter agreements outside main deal documents
 Typical rights include
 Information / inspection rights
 Observer seat
 Pro Rata Rights
 Commercial agreements
 Other risk-mitigating related covenants
klgates.com 15

16. DILIGENCE PROCESS
 Steps
 Organize company records
 Set up a data room
 Diligence request list
 Topics
 Corporate records
 Capitalization
 Business plan and financials
 Intellectual Property
 Material Agreements
 Employment
 Disputes and Litigation
 Subsidiaries
 Miscellaneous
klgates.com 16

17. INTERPLAY BETWEEN THE DEAL
DOCUMENTS AND DILIGENCE
 Diligence –
 The process investors use to identify and assess risk.
 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 investors can use to assess risk.
 Covenants, commonly in the Investors’ Rights Agreement are
contractual obligations that the company must undertake post
closing.
klgates.com 17

18. KEY DILIGENCE ISSUES
 Ownership of intellectual property
 Capitalization issues
 Grants of stock options
 Securities law compliance
klgates.com 18

19. CLOSING AND POST-CLOSING ISSUES
 Closing Logistics and Order
 Board consent
 Stockholder consent
 Filing charter
 Satisfaction of closing obligations
 Exchange of signature pages (held in trust pending closing)
 Release of signature pages and wiring of funds
 Closing – signatures pages released and funds received
 Typical post-closing action items
 Securities filings
 228 Notices
 Issuing stock certificates
 Closing binder
klgates.com 19

20. COMMON PITFALLS
 Not being ready
 Not preparing before you start negotiating your term
sheet
 Negotiating your term sheet before you seek legal
guidance
 Negotiating before you have created a proforma cap
table
 Finders
 Securities law issues
 Not having good clean company records
klgates.com 20

21. Questions/Comments