Cap Table Management and Other Issues Surrounding Equity Financing Jim Franklin CEO, SendGrid Mark W. Weakley Partner, Bryan Cave LLP

What We Will Cover Cap Table Management Market trends in venture-style financing. What’s happening in the Rocky Mountain tech and VC community.

Cap Table Management

Entrepreneurial Finance Cap Table Management Issues Number of Founders How to split Equity among Founders Plan for changing contribution levels Keep it Simple Few Angels, Advisors Pay them off the cap table

Entrepreneurial Finance Cap Table Management Issues Compensation Options, Warrants, RSU’s Title Inflation “Punished by Rewards” Alfie Kohn Can you attract a fundable team? Ideally ‘been there, done that’ with investor ties Role of Advisors Attorney, Accountant IB (at the end, not the beginning)

Market Trends in Venture-Style Financing

Angel Financing Typical angel financing structures Convertible debt Equity investments Common Stock Series A Preferred “Light”

Angel Financing Convertible Debt converts into preferred equity upon future VC financing conversion price discounted to future equity share price (e.g., 20% to 50%) and often with a cap on the maximum effective valuation represented by the conversion price optional conversion into common stock prior to exit event enables company and investor to avoid protracted and difficult negotiations on pre-financing valuation great for F&F round

Angel Financing Equity Financing Preferred Stock liquidation preference over common stock other potential rights permits lower pricing for employee stock options enables angels to participate in full appreciation of company

Angel Financing: Practice Points Don’t raise angel money unless you have to – it’s expensive. Be prepared for valuation expectations of angels. Keep it simple and build from there.

Key Terms in Venture Deals Investor Return Drivers Investor Protections Governance Rights

Pre-Investment Valuations Determines the price per share 1,000,000 shares outstanding and a $1,000,000 valuation = $1.00/share purchase price $2,000,000 valuation = $0.50/share purchase price A $1,000,000 investment on a $1,000,000 valuation = ?% of the company to the investor?

Valuation: Take-Aways Keep long-term perspective in view. Understand trade-offs between valuation, dividends, liquidity preferences and option pool size. Start with a rational valuation at the F&F / angel stages - valuations too high early cause problems later.

Dividends An 8% dividend on a $1,000,000 equity investment = $80,000 annually Typical dividend terms: mandatory or discretionary cumulative or non-cumulative participating (“double dipping” or non-participating Payable in cash or shares of stock

Dividends: Take-Aways Mandatory dividends that cumulate from date of investment can be extremely dilutive to the founders. Dividends paid in shares of stock are also very dilutive. Limit stock dividends to common stock and clarify how the stock is valued and by whom.

Liquidation Preferences When a company is acquired, “liquidation preferences” determine how the sale proceeds are shared among the stockholders. Example: $1,000,000 of preferred stock sold to investors Company sells for $5,000,000

Liquidation Preferences Two Components Preference Multiple return on investment - (1 -3 times investment amount) Post-preference participation rights Rights of preferred stockholders to participate with common stockholders after paying the preference) full participation, capped participation or no participation

Liquidation Preferences: Take-Aways We are seeing 1x to 2x participating preferences, sometimes with caps (usually set at 3x the investment amount). Use valuation and option pool sizing as “stalking horses” for negotiating preferences.

Investor Protections Pre-emptive Rights Registration Rights Information Rights Class veto rights Co-Sale / Tag-Along Rights Drag-Along Rights

Governance Rights Board seats Board veto / approval rights

Preparing for Investor Diligence Complete all organizational and other documentation Charter, Bylaws, minutes, approvals Stock ledger and cap table IP documentation Key agreements Compliance records Put them in a due diligence notebook

Things That Can Trip You Up Third-party finders were used to sell securities Unregistered finders can create rescission rights Uncertainty around IP ownership Problems of joint ownership NDAs, invention assignments, development logs Public disclosure before patents are filed

Things That Can Trip You Up Equity ownership Documentation of who owns what Poor cap table management Expectations of equity stake Stock issuances and consideration documented (cash, technology, etc.) Stock restrictions in place: vesting and transfer restrictions (repurchase rights, first refusal rights and acceleration) Unclear / unrealistic roles Someone has to be in charge

What’s Happening in the Rocky Mountain Tech and VC World

TechStars Program Mentorship-driven seed stage investment program Began in Boulder, Colorado in 2007 Now located in Boston, NYC and Seattle 10 companies selected out of hundreds for each summer-long program Companies receive $18,000 in seed funding, 3 months of intensive high-quality mentorship and opportunity to pitch to angels and VCs at end of the program

Boulder Open Angel Forum 5 companies present quarterly Seasoned angels only 10 to 15 angels attend True angel stage and dollar amounts openangelforum.com

Founder Institute Pre-seed incubator Applicants evaluated via social science testing Weekly company-building sessions with seasoned CEO mentors Access to free/discounted services US, Europe, Asia and South America founderinstitute.com

Accessing Venture Capital in Denver Active Colorado-based Funds Access Venture Partners (Denver) Altira Group (Denver) Boulder Ventures (Boulder) Colorado Fund (Boulder) Foundry Group (Boulder) Liberty Global (Denver) Meritage Funds (Denver)

Accessing Venture Capital in Denver Other VCs Active in Colorado (2+ deals): DJF Mercury (Houston, Texas) Epic Ventures (SLC, Utah) Flywheel Ventures (Albuquerque, NM) Grotech Ventures (Virginia – D.C. area) Metamorphic (NYC) New World Ventures (Chicago, Illinois) Pelion Venture Partners (SLC, Utah)

Sectors Attracting Financing Social networking / web 2.0 Internet technology and eCommerce Data storage / networking systems /cloud computing Business analytics / intelligence Medical devices Drug discovery CleanTech (energy, capital efficient technologies) Telecom

Q&A