Igniters Tech Consulting Dr. Aylin Akturk Sahin Kurum Logo Igniters Tech Consulting A General Overview of Funding/Shareholder Agreements Used by University Owned/Partnered Venture Capital Funds

These materials have been prepared solely for educational purposes. The presentation of these materials does not constitute legal advice, nor does it establish any form of attorney-client relationship with the author. Specific legal issues should be addressed through consultation with your own counsel, not by reliance on this presentation or these materials. Any tax advice included in this presentation was not intended or written to be used, and it cannot be used by the taxpayer, 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 herein.

SUBJECTS TO BE COVERED: 1) OVERVIEW OF UC BERKELEY’S SKYDECK FUND AND MIDDLE EAST TECHNICAL UNIVERSITY (ODTU)’S INVESTMENT FUND 2) SIMPLE AGREEMENT FOR FUTURE EQUITY (SAFE) 3) CONVERTIBLE NOTES 4) EQUITY FINANCING AGREEMENTS 5) CLAUSES RELATED TO IP

SKYDECK FUND: UC Berkeley is ranked number 2 among the 50 undergraduate programs which produce the most venture capital-backed entrepreneurs in the USA. In 2011 Berkeley has launched a startup accelerator program called SkyDeck that is a JV between College of Engineering and the Business School. In 2012 SkyDeck Fund was established. In just 6 six years, SkyDeck Fund invested in 200 technology startups and has 6 exits so far. This year SkyDeck Fund has started to invest in startups participating at Accelerator Program. Participating companies receive 100,000 USD in the form of a SAFE

ODTU INVESTMENT FUND: ODTU invests in early stage tech startups that participate at Growth Circuit Accelerator Program. ODTU also invests in non participating startups through application. ODTU uses SAFE and convertible notes as a fast and easy way of investing. Program participating companies and non participating companies receive amounts raging from 10,000 USD to hundreds of thousand Dollars depending In their stage.

SIMPLE AGREEMENT FOR FUTURE EQUITY (SAFE): Warranty that investment money will be converted to preferred shares at a later financing event. Actual valuation is delayed until a Series A Financing Round Simple, fast and cheap to execute Even working with an attorney, legal costs are minimum SAFEs are not debt, so no maturity date, no deadline for repayment No interest rate

SAFE: What happens if there is no equity financing and the investment amount does not convert to shares? If there is no liquidity event, then the Investor shall wait. -Liquidity Event: IPO or change of control If there is liquidity event before a financing round, then Investor has 2 options -receive a cash payment equal to the Purchase Amount (Investment) OR -automatically receive from the Company a number of shares of Common Stock equal to the Purchase Amount divided by the Liquidity Price

SAFE: Lock the ownership percentage by valuation cap! ie. SkyDeck SAFE’s valuation cap is 2 M. By investing 100 K, SkyDeck locks in at least 5% equity in the next financing round IF ANY! Valuation Caps at early stage startups are anywhere between 1 M-8 M Investor gets all the preferred stock rights without negotiating tens of different terms of next round Startups are in a SAFE position as they are not obliged to pay back the investment unless there is a liquidity event

CONVERTIBLE DEBT: DEBT Instruments Maturity date: usually between 1-2 years Interest rate Valuation cap + discount Investors may get their money back with interest on maturity date if they choose to or convert their money to preferred stock in the next round

PITFALLS OF SAFE AND CONVERTIBLE NOTES: For startups: Don’t forget that you are giving away future equity For investors: Startups are in a SAFE position as they are not obliged to pay back the investment unless there is a liquidity event

PREFERRED STOCK PURCHASE AGREEMENTS (SHAREHOLDER AGREEMENTS) WHAT RIGHTS? Liquidation preference: Investors have liquidation preference over common stockholders (ie. founders) When the company is sold or insolvent, early investors usually get 1X the investment amount plus unpaid dividends At bigger rounds investors get 2X or 3X the investment amount plus unpaid dividends

PREFERRED STOCK PURCHASE AGREEMENTS (SHAREHOLDER AGREEMENTS) WHAT RIGHTS? 2) Protective provisions: Investor approval is required alter the rights, powers or privileges of the Preferred Stock in a way that adversely affects the Preferred Stock 3) Information rights: Investors may get information about company financials whenever they deem necessary or in 3-6-12 month periods. ie. unaudited annual or quarterly financial statements 4) Board Seat: Usually at Series A rounds and later

5) Right of First Offer: Investor may purchase its pro rata percentage of issuance of new securities until an IPO 6) Drag Along: requires the investors and founders to vote in favor of deemed company acquisition if majority of common stock holders and preferred stockholders vote in favor. 7) ROFR and Co-Sale (Tag-Along Right) Prevents the founder to sell shares without investors are offered first to purchase the shares or participate in the sale of shares

IP CLAUSES SAFE-Convertible Notes: IP should be properly assigned to the Company before closing and the Founders should sign NDA/Tech Assignment Contracts for their work after investment. Equity Financing Contracts: Case by Case: ie. Investor may demand licensing rights regarding Company IP for a certain period of time

THANK YOU FOR YOUR TIME! HAPPY TO ANSWER ANY QUESTIONS ABOUT ANYTHING (EXCLUDING RELIGION AND POLITICS)