Learn about how your startup can seek the right routes of funding.

1. © Copyright 2016 by K&L Gates LLP. All rights reserved.
Presented by Stan Lewandowski
stan.lewandowski@klgates.com
650.798.6743
September 22, 2016
Silicon Valley Startup: Idea to IPO
Pre-Series A Funding Vehicles

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 2016.
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4. INTRODUCTIONS
§ Stan Lewandowski, Esq., Partner (Emerging
Growth/Corporate/M&A)
§ Works primarily in the Silicon Valley and SF offices of
K&L Gates in Palo Alto but often works from other
locations
§ Advised clients (issuers and investors) in more than 100
closed angel and venture capital financings
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5. OVERVIEW OF COMMONLY USED VEHICLES
§ Friends, Family and … (FFF)
§ Convertible Promissory Notes (Notes)
§ Simple Agreements For Equity (SAFEs)
§ Keep It Simple Agreements (KISSes)
§ Other Options (crowdfunding, grants, etc.)
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6. CONVERTIBLE PROMISSORY NOTES
§ Debt instruments with a conversion into equity feature
§ Features
§ Maturity date
§ Interest
§ Mostly, automatic conversion into equity in a qualified financing
§ Conversion discount (~20%) or a valuation cap (max. pre-money
valuation), or…
§ Premium on acquisition (1X+)
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7. CONVERTIBLE PROMISSORY NOTES
§ Conversion Options – Automatic Conversion
§ Upon Qualified Financing
§ What is a Qualified Financing?
§ Discount
§ Valuation Cap
§ Fully Diluted Capitalization
§ What if the valuation cap in the note is lower than that agreed by
the company and the investors?
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8. CONVERTIBLE PROMISSORY NOTES
§ Conversion Options – Automatic Conversion
§ If No Qualified Financing or Acquisition Before Maturity Date
§ Conversion into Common Stock at a Pre-Agreed Valuation Cap
on a Fully Diluted Basis
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9. SAFE (CONVERTIBLE EQUITY)
§ Convertible equity instrument
§ No debt features
§ Interest
§ Maturity
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10. SAFE (CONVERTIBLE EQUITY)
§ Four available versions
§ Price cap, no discount (no minimum amount for conversion)
§ Discount, no price cap (no minimum amount for conversion)
§ Price cap and discount
§ Most favored nation (MFN) provision (no price cap or
discount but MFN treatment, minimum amount for
conversion)
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11. SAFE (CONVERTIBLE EQUITY)
§ Price Cap, no Discount (no minimum for conversion)
§ Price cap = valuation cap
§ Conversion into Standard Preferred Stock or Safe Preferred
Stock
§ Same or different price per share
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12. SAFE (CONVERTIBLE EQUITY)
§ Discount, no Price Cap (no minimum for conversion)
§ Discount rate = [100 - the discount]%
§ Conversion into shares of Standard Preferred Stock based
on principal amount divided by price of Standard Preferred
Stock sold in Equity Financing
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13. SAFE (CONVERTIBLE EQUITY)
§ Price Cap and Discount
§ Conversion into number of shares of Preferred Stock equal
to:
§ The principal amount divided either by:
§ Safe Price (valuation cap/capitalization of company), or
§ Discount Price (standard price of stock sold in Equity
Financing x discount rate), whichever results in a greater
number of shares
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14. SAFE (CONVERTIBLE EQUITY)
§ Most Favored Nation (MFN) provision
§ (no price cap or discount but MFN treatment, minimum
amount for conversion)
§ What’s the benefit?
§ Amendment of existing documents to reflect better terms
offered to investors purchasing issuer’s convertible securities
in the future
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15. SAFE (CONVERTIBLE EQUITY)
§ Now, what if:
§ Company is acquired by another person before conversion of
your principal amount into preferred stock?
§ You can elect to:
§ Receive your money back, or
§ Automatically receive shares of common stock equal to the
principal amount divided by FMV of company’s common
stock, if you fail to elect receipt of cash
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16. SAFE (CONVERTIBLE EQUITY)
§ Now, what if:
§ Company terminates its operations, liquidates, dissolves or
winds up before conversion of your principal amount into
preferred stock?
§ You will:
§ It depends
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17. SAFE (CONVERTIBLE EQUITY)
§ Now, what if:
§ Your investor asks for participation rights as part of its
investment?
§ Few options are available
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18. KISS DOCUMENTS
§ Two versions
§ Debt
§ Equity (more favorable to the issuer)
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19. KISS DOCUMENTS
§ Comparison of Debt and Equity Versions
(substantially similar, except for interest and maturity)
§ Treatment in financing
§ Conversion into preferred stock in a qualified financing round
(~$1M, for instance) at a price that’s lesser of cap or discount
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20. KISS DOCUMENTS
§ Comparison of Debt and Equity Versions
(substantially similar, except for interest and maturity)
§ Treatment in acquisition
§ You elect to either convert principal into shares of common stock
at a valuation cap or multiple of investment plus interest (2X)
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21. KISS DOCUMENTS
§ Comparison of Debt and Equity Versions
(substantially similar, except for interest and maturity)
§ Treatment at maturity
§ If not converted in equity financing or part of an acquisition, then,
on or after maturity, the majority in interest will elect to either
convert into Series Seed Preferred Stock at a cap OR demand
repayment from issuer
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22. KISS DOCUMENTS
§ Comparison of Debt and Equity Versions
(substantially similar, except for interest and maturity)
§ Most favored nation treatment
§ Right to exchange the existing instrument for one issued
subsequently to other investors on terms more favorable than
the terms of the instruments issued to existing investors if such
subsequent issuance occurs before conversion or repayment of
the existing instrument
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23. KISS DOCUMENTS
§ Comparison of Debt and Equity Versions
(substantially similar, except for interest and maturity)
§ Information and participation rights
§ Rights for “Major” Investors? Who is Major Investor?
§ What are the rights?
§ Information
§ Participation (pro rata, 1X+ investment amount)
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24. OTHER OPTIONS TO SECURE CAPITAL
§ Crowdfunding (www.kickstarter.com)
§ Factoring (selling AR)
§ Customer financing
§ Grants
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25. THANK YOU
For Further Questions Please Contact:
Stan Lewandowski
Partner, K&L Gates LLP
(650) 798-6743
E-mail: stan.lewandowski@klgates.com
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