Posted by Andrew Ledbetter on August 30, 2012

A_Ledbetter_LR.jpgCONTRIBUTED BY
Andrew Ledbetter
andrew.ledbetter@dlapiper.com

 

As anticipated in our previous blogs, the SEC yesterday proposed rules to permit general solicitation and general advertising in Rule 506 and Rule 144A offerings.  The release proposes to create a new Rule 506(c), in which the prohibition against general solicitation would not apply to offers and sales of securities, provided that:

  • The issuer takes reasonable steps to verify that the purchasers are accredited investors;
  • All purchasers of the securities are accredited investors, either because they come within one of the enumerated categories or the issuer reasonably believes that they do, at the time of the sale of the securities; and
  • All terms and conditions of Rule 501 (definitions), Rule 502(a) (integration) and Rule 502(d) (limitations on resale) are satisfied.

Effectively, the SEC has proposed a new exemption that would permit sales of restricted securities to accredited investors, without any manner of sale limitations or specified information requirements. 

The main issue in the proposal is what issuers must do to “take reasonable steps to verify” that purchasers are accredited investors.  The model the SEC has proposed would neither mandate specific verification steps nor assure issuers and investors that adequate steps have been taken.  The model will likely require issuers to obtain reliable third party information most of the time, rather than relying on questionnaires, contractual representations, or similar confirmations from a purchaser.

Continue Reading

Posted by Megan Muir on June 03, 2012

Megan Muir.jpgCONTRIBUTED BY
Megan Muir
megan.muir@dlapiper.com 

This weekend I spent a day with Rebecca Lovell (on right in photo) and a group of 60+ University of Washington Technology Management MBA students who were doing their final project prior to graduating - a venture capital investment competition. The Tech Management MBA is designed specifically for technology industry professionals and the venture capital competition (with Rebecca teaching) was a component added recently to give them some exposure to entrepreneurs in fund-raising mode and to give them a better understanding of the issues early stage tech investors consider. Although the students were only playing at being VCs, they did so with four real startups, giving the entrepreneurs a half day of practice pitching their companies and answering questions a potential investor might ask. UW TMMBA VCIC June 2012 TVA.jpg

The four companies that took time out of their busy startup schedules to present to the students were:

  • Relaborate, makers of software to simplify the process of creating quality content for business blogs;
  • SkyFu, with tools and data to assist a business with online reputation management;
  • Saltbox, creators of a sales force communication and learning application; and
  • Booktrope, with a book publishing model that offers more support than self-publishing.

Continue Reading

Posted by Trent Dykes on December 21, 2011

Kappus, Anthony R._photo_4742.jpg

CONTRIBUTED BY
Anthony Kappus
anthony.kappus@dlapiper.com

This installment of our series Understanding VC Financing examines liquidation preferences.  Along with dividend rights, conversion rights, and anti‑dilution provisions, liquidation preferences are an essential economic term of the preferred stock typically sold in a VC financing.

Liquidation preferences govern how a company allocates and distributes the proceeds from a sale, merger, dissolution, or other liquidation event.  The liquidation preference entitles holders of preferred stock to receive distributions of proceeds from an exit transaction before holders of common stock and other series of preferred stock with a lower preference priority and, in certain cases, entitles preferred stock to participate with holders of common stock after payment of the initial preference amount.

Continue Reading

Posted by Trent Dykes on October 18, 2011

Mimi_Hunter.jpgCONTRIBUTED BY
Mimi Hunter
mimi.hunter@dlapiper.com

Due diligence is a fact gathering process by which a buyer or investor obtains information about the business they are seeking to buy or in which they are seeking to invest, both from a business and legal perspective. Due diligence is a critical phase of any financing or merger/acquisition, but it can be a confusing and burdensome process, especially for companies going through their first transaction. This article summarizes the basic aspects of a company’s role in the due diligence process of an investment from a venture capital fund (a “VC”), in an effort to help companies be more prepared.

Continue Reading

Posted by Megan Muir on September 11, 2011

Foundry Group.jpgMegan Muir.jpgCONTRIBUTED BY
Megan Muir
megan.muir@dlapiper.com 

If I was not already a huge fan of Foundry Group, this video (posted on Geekwire last week - thank you John Cook!) would have put me over the edge. They had me the second I saw the suits.

Last week Foundry Group released “I’m a VC”, with more than a nod to Saturday Night Live’s Digital Shorts. Jason Mendelson wrote, directed and sang, together with his fellow Foundry partners, Brad Feld, Seth Levine, and Ryan McIntyre, with help and cameos by others.

The video was produced in connection with the release of the new book by Feld and Mendelson, Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist.  Buy it from their site AsktheVC and the authors will autograph your copy. On their firm’s site, the Foundry guys have some good commentary on their recent foray into film.  The video is a great laugh, but in all seriousness the book is going to be suggested reading for all of my startup clients.

BTW, if you have trouble getting the I’m a VC tune out of your head, try listening to "Here Comes Another Bubble" by the Richter Scales from a few years back. And keep an eye out for Feld at about 1:23.

Posted by Asher Bearman on August 22, 2011

pic-tyler.jpgCONTRIBUTED BY
Tyler Hollenbeck
tyler.hollenbeck@dlapiper.com

In an earlier post we defined the term “pre-money valuation" and explained how this valuation is used to calculate the price per share at which stock is sold in a VC financing.  Actually determining this “pre-money” or “pre-investment” valuation, though, is often one of the most fundamental terms for founders and investors to negotiate, as it effectively sets the relative percentage ownership levels of the two groups (assuming a fixed investment amount).

Despite this fundamental character, “calculating” an appropriate valuation (or even a range thereof) can be quite difficult with startups, particularly pre-revenue or pre-product companies, for which traditional financial valuation methods (such as revenue multiples or discounted cash flow analysis) often have limited applicability.  Accordingly, many investors believe that valuing startups is more of an art, based on intuition and experience, than a science.  As a result, valuations in VC financings are often driven more by market supply and demand forces than by empirical calculations, trending up or down based on the availability of VC funds and the supply of new startups (see, for example, the recent commentary on increasing valuations in Silicon Valley and Fred Wilson's post on frothy valuations).  

However, several recent blog posts from prominent investors have provided interesting insight into how, at least some, VCs approach valuations from an empirical perspective, which are worthwhile reads if you have not done so already:

Posted by Megan Muir on June 12, 2011

Megan Muir.jpgCONTRIBUTED BY
Megan Muir
megan.muir@dlapiper.com 

Martin Zwilling has posted some good tips on creating your investor pitch in his Startup Professionals Musings blog piece "Limit an Investor Pitch to 10 Pages and 10 Minutes".  His list of topics covers all of the basics, and if you nailed each one of them, at a minimum you would have a concise and informative pitch deck.  Zwilling gives short descriptions and questions you should answer for each topic that create a good roadmap, particularly for a first time entrepreneur who may not be certain what information to include or how to present it.  A few of his suggestions that I thought had particularly useful commentary are below.  Note that Zwilling sticks to his "shorter is better" philosophy in his post.

  • Problem and market need. Give the “elevator pitch” for your startup. Explain in analogies your mother could understand, and quantify the “cost-of-pain” in dollars or time. Fuzzy terms like “not user-oriented” or “too expensive” are not helpful.
  • Business model.  Explain how you will make money and who pays you (real customer). In this section, you need to be passionate about recurring revenue, profit margin, and volume growth. Implicit in this is the go-to-market strategy.
  • Marketing, sales, and partners. Describe marketing strategy, sales plan, licensing, and partnership plans. Here is also a good place for a rollout timeline with key milestones. Make sure your marketing budget matches the scope of your plan.

If you decide to take this approach, I suggest you create some more detailed slides on various topics, particularly the description of your product/technology, your proposed business model, and how your marketing/sales efforts will enable you to meet your financial projections.  You can refer to these additional slides when you get into a deeper discussion with a potential investor.  Once you have their interest, you can afford to take a little more space and time to walk through the various aspects of your business.

Posted by Asher Bearman on April 21, 2011

pic-asher.jpgCONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

Our first installment in our newest series Understanding VC Financing terms addresses a hot issue at the moment - transaction costs and attorney fees.  Much has been written about this topic in recent months.  For example, with respect to seed round financings, Fred Wilson recently called for attorney fees to be $5,000 for such deals.  Bill Carleton responded with his thoughts on GeekWire.  In typical series priced round of newly issued preferred stock (i.e., Series A, B, C, etc.), however, the transaction agreements are more complex and it's almost always the case that a VC firm will want to perform some level of legal diligence.  For example, before investing a few million dollars in a tech company, a VC typcially will want to confirm that the company owns its intellectual property, which can require patent searches, open source code analysis, review and invention assignment agreements, and/or more.  Accordingly, the costs of these preferred rounds tend to be much greater than the costs of doing a seed round.

The Sinking Dollarphoto © 2008 Reuben Whitehouse | more info (via: Wylio)It is customary for the company to pay for the legal costs incurred by VCs in a series financing, so entrepreneurs are often sensitive about both their own counsel's fees for a preferred financing as well the possible fees of the investor's counsel.  Often, this can be stated as the "reasonable" costs; however, the distinction is not much different in practice.  What is important is that often the parties negotiate a cap - or a maximum amount - that the company must pay.  In our experience, the range can be dramatic.  For example, a follow-on round with little diligence and few changes to the existing agreements can be done for $15,000-$25,000 if everyone is on the same page throughout in terms of keeping the process streamlined.  Alternatively, I've also seen complicated financing deals that were heavily negotiated throughout that cost $40,000-$50,000 and, in cases where the diligence was particularly extensive or turned up problems that had to be cured prior to the closing, the amounts can easily exceed $100,000 (all the more reason to spend a little up front to make sure that your documenation is in order before going into a financing).

Continue Reading

Posted by Asher Bearman on April 05, 2011

Having a basic understanding of key venture capital terms and mechanics can be a great value to entrepreneurs looking to raise capital. In particular, it can be easy to get tripped up by the volume of foreign terminology and acronyms and the speed at which they are thrown around by venture capitalists and startup lawyers. This semantic minefield can put otherwise highly sophisticated entrepreneurs at a disadvantage in negotiating with venture capitalists and can cause them to enter into deals on unfavorable terms or force them to lean too heavily on their attorneys, increasing legal costs.

In this series, we have prepared a form of venture capital term sheet and will be providing commentary on the various deal points (i.e., what they mean, what is "market", what to watch-out for, etc.).

We will be adding new posts with more detail regarding various key portions of these terms.

Readers may access a Word version of the sample term sheet here: Sample Series A Term Sheet.DOC

The National Venture Capital Association also has created its own form of term sheet.

 

Continue Reading