U.C. San Diego STARTUPS & PIZZA: Sourcing Funding for NewCo February 15, 2018

The Startup Lifecycle Idea Proof of Concept Building Scaling Maturity and Exit Financing Naming Conventions

Seed Financings General Characteristics Amount raised Investors Instruments Convertible notes; Simple agreements for future equity (SAFEs); or Seed equity, usually in the form of convertible preferred stock (but occassionally using common stock)

Seed Financings Types of Seed Investors Friends and Family Angels Super-Angels

Seed Financings Types of Seed Financing Instruments Convertible Notes General Conversion Events Next Equity Financing Conversion Corporate Transaction Conversion Maturity Conversion Conversion Price Discount Rate Valuation Cap

Seed Financings Types of Seed Financing Instruments (continued) SAFEs

Seed Financings Types of Seed Financing Instruments (continued) Convertible Preferred Stock For instance, Series Seed financing documents often do not include some or all of the following terms: Registration rights Rights of first refusal and co-sale Price-based anti-dilution provisions Drag-along rights Investor designees on the board of directors

Seed Financings Types of Seed Financing Instruments (continued) Common Stock Common stock is the simplest form of equity investment Vote for the company's board of directors and on other stockholder matters Receive dividends, if and when declared by the board Receive their proportional share of the company's remaining assets if the company is liquidated

Seed Financings Choosing the Right Seed Instrument Considerations Investor Sophistication Investor Preference Cost vs. Amount Raised Time Market Cycle

Seed Financings Choosing the Right Seed Instrument (continued) Pros and Cons of the Instruments Convertible Notes Pros Familiarity Simplicity Cost Equity Incentives Cons Uncertainty Maturity and Interest Unintended Outcomes Excessively Low Valuation Caps

Seed Financings Choosing the Right Seed Instrument (continued) Pros and Cons of the Instruments SAFEs Pros Simplicity No Maturity or Interest Similarity to Convertible Notes Equity Incentives Cons Unfamiliarity Uncertainty Unintended Outcomes Tax Treatment

Seed Financings Choosing the Right Seed Instrument (continued) Pros and Cons of the Instruments Convertible Preferred Stock Pros Certainty for Investors Certainty for Founders Simplicity for Next Financing Familiarity Cons Complex Documents Cost Equity Incentives

Seed Financings Choosing the Right Seed Instrument (continued) Pros and Cons of the Instruments Common Stock Pros Simplicity Cost Equality Cons Equity Incentives