The document provides an overview of start-ups and venture capital financing. It discusses the sources of venture capital funding, the legal structures and documents needed for corporations, and the typical elements of a venture capital deal such as preferred stock terms, liquidation preferences, and anti-dilution protection. The summary also outlines potential returns for founders and how networking in Silicon Valley can lead to new opportunities and learning experiences.

1. Start-Ups
F o r m a t i o n & V C
F i n a n c i n g
A p r i l 2 0 1 1
Vladimir Defrančeski
Palo Alto CA

2. Intro
BoundBreaker, Silicon Valley Advisor
Stanford JD, UCSD MA, UCLA BA, UCSD Biotechnology Mfg. prof. cert.
Sony Engineering and Manufacturing of America
Venture Law Group, Wilson Sonsini Goodrich & Rosati, Baker & Mckenzie
$250Mil+ in venture capital transactions and M&A exits
Start-ups:
Rackable (NASDAQ: SGI)
FMS Corp.
BlooSee, Inc. ($650K Series A in 4/2011)
b. Beograd, Wash. DC 1980’s, California 1988 -

3. Ecosystem
SOURCES OF VENTURE CAPITAL
5% Pension Funds, Endowments, Sovereign Funds, Corporations,
Funds of Funds, Family Offices, High Net Worth Individuals...
$13Bn in 2010 into US VC Funds
Fund Management Companies: Sequoia, Benchmark, Kleiner, NEA, DFJ...
Venture >25%
Capital IRR
Funds:
I, II, III,..
You (less 20% carry)
Investments Exits
0 Incubators 5 Only 2 1/2 10 years
Angels ways to exit:
Friends - Sell to the public
and Family - Sell to an acquirer
~ Private market

4. Legal Environment
Corporate Law
Securities Law
Intellectual Property Law
Employment Law
Tax Law
[Immigration Law]

5. Corporate Law
Only one form of currency for Silicon Valley
venture capital investing: shares of stock in a
corporation
There are 50 state jurisdictions, but only 2 are
used: Delaware or California
Key elements of a corporation:
Liability of owners limited to the assets of the corporation
Owned by stockholders - one share, one vote; each class
and series of stock must be treated equally
Directed by directors - personal liability
Managed by managers - appointed by directors
Equity or Debt -> investor <- Dividend or Compensation
Stockholders are subordinate to Creditors

6. Corporate Law
Documents required to create and maintain a corporation:
The constitutional document with which the
Public Charter corporation receives its permission from the
state to exist. Only stockholders can change.
Bylaws are the rules for governing the
Bylaws corporation. Stockholders or Directors can
Non- change.
Public
Minutes Minutes are the written record of Director
actions, instructing the Officers to do things.

7. Securities Law
Only two classes of stock used for tax reasons:
Common Stock - for founders, employees and
consultants
Preferred Stock - for investors
All stock must be registered unless there is an
exemption from registration:
State and Federal exemptions for private sales of
stock
Securities Act of 1933 Section 4(2)
Regulation D: Accredited Investor
Regulation S

8. IP Law
Intellectual Property is a Business Asset.
There are 5 main ways to protect it:
Patents: preliminary, utility, design
Copyrights: automatic and registered
Trademarks: marking, use, Lanham Act
Trade Secrets: keep your secrets secret
Assignment

9. Employment Law
At-will employment
Notice and severance mechanisms
W-2s vs. independent contractors
Noncompetes are evil and illegal in SV, unless
you get paid a lot of money
Vesting - not more than 5 years

10. Tax Law
Fair market value
Corporate income is double taxed
[Avoid worldwide income taxation]
Long term capital gains tax
83b
Options are taxed at exercise
Interest payments are taxed as ordinary
income, so avoid interest*
*California Lender Law

11. The Start-Up
Delaware corporation: (1) Certificate of
Incorporation, (2) Bylaws, (3) Minutes
Board of Directors:
founders -> common + investor + independent
Appoint Officers: CEO, CFO and Secretary
Issue Stock: Restricted Stock Purchases
Founders’ stake 85% -> 45%
Common Stock :: Preferred Stock

12. The Venture Round
Delaware Corporation
Post-Money
Stockholders
Series B
Preferred Stock
VC
34%
Pre-Money Board of Directors 6,500,000
Series A
13% Angels
2,500,000
15% Option Pool
1,500,000
Officers 8% Option Pool
1,500,000
Common Stock
Common Stock
85% Founders
8,500,000
Employees 45% Founders
8,500,000
[Creditors]
10,000,000 19,000,000
shares shares

13. Elements of the
Deal
Investor Right Transaction Document(s)
Liquidation preference Charter
Anti-dilution protection Charter
Protective provisions Charter
Voting rights Charter/Bylaws/Voting Agt
Registration Rights Investor Rights Agt (IRA)
ROFR & Co-Sale IRA/ROFR & Co-Sale Agt
Drag-along ROFR& Co-Sale Agt

14. How much money can
you make?
90% of exits are M&A
90% of M&A exits are $50Mil - $100Mil
So, if you own __%, $50Mil - $100Mil x __%
$50Mil x 45% = $22Mil / 3 = $7.33Mil
{$500Mil x 10% = $50Mil / 3 = $16Mil}
But, to get there: listen and change

15. BATNA
You meet great VCs, angels, engineers and
entrepreneurs
You learn a lot, fast, from the best
You get great new ideas
You go work for Google
You have no regrets
And, it’s iterated ∞ live and die many times

16. Silicon Valley
Contact
Vladimir de Franceschi De Franceschi ∞ Shefayee
mobitel +1 (650) 391-4837 Attorneys at Law
vladimir@dfscounsel.com 228 Hamilton Avenue
http://www.linkedin.com/in/vladod 3rd Floor
Skype: vlado.def Palo Alto CA 94301
@vladodef www.dfscounsel.com
vlado@boundbreaker.org
http://www.dfscounsel.com/links has links to resources on start-ups,
entrepreneurship and venture capital: sample deal docs, cap table
simulators, deal database, video lectures, angel directory...