1. Legal Issues and Valley Trends Financing Issues – Getting Your Money Capital Issues – Spending Your Money Formation Issues – Saving Your Money

2. FINANCING ISSUES 1. More Bridge Financings 2. Tougher Financing Terms

3. More Bridge Financings Typically cheaper than a full-blown financing Can close on funds without establishing a valuation Difficulty in raising funds (especially follow-on financings) Can create value before seeking VC Funding Company pays a risk premium to the Note Holders (up to 35-40%) a. Warrants – defer dilution and no cheap stock issue b. Discounting – results in immediate dilution and possible cheap stock issue

4. Tougher Financing Terms Ratchet Provisions – up to 24 months! a. Historically for high risk companies. b. Undesirable – causes significant dilution, which demotivates management team and deters new investors Two Traunch Deals a. To change deal valuation – increase shares if milestones not hit b. To reduce amount of initial investment until performance

5. Tougher Financing Terms cont’d Liquidation Preference a. Used to be 1X, with variations b. Now 3X is typical (with prejudice to earlier preferred shareholders (e.g., 1X to B, 1X to A, participate Common and B only)

6. Tougher Financing Terms cont’d Indemnity Investors want to be indemnified if Company breaches Reps and Warranties. Purpose – give investors alternate venue and Cause of Action other than Securities Law Does not make sense in equity deals a. “Double Dipping” b. Unlimited risk to Company c. Investors paying legal fees out of their own pockets (e.g., funds paid to Company)

7. Tougher Financing Terms cont’d Shares to Investors on Board a. Historically not given to VCs because own substantial equity in company b. Many VC funds have side funds for individuals and employees and insist on shares for board service – same as granted to other directors

8. CAPITAL ISSUES 1. Valuations 2. Finder’s Fees 3. Legal Fees

9. Valuations Financings: decrease in valuations by 50% Compromises a. Performance-based measures, such as two tranche deals and milestones b. Greater down-side protection, such as limited ratchet, greater liquidation preference c. Do more frequent financings – less money = less dilution until create greater value

10. Finder’s Fees Finder’s Fees: Harder to raise money means higher fees a. Lehman’s Formula outdated b. Range: 5% fixed up to 10% fixed, plus warrant coverage c. Exclusive vs. Non-Exclusive arrangements i. Exclusive can be more effective, but tie fees to performance only (no up-front fees) ii. Set firm time limit on exclusivity iii. Get references from Finder iv. Limit exclusivity to funds found by Finder, not by Company sources – Ideally, list.

11. Legal Fees Legal Fees: Equity to Attorneys a. Historically, 2% or more was standard b. Now, with market correction 1% is standard i. Vest it over a reasonable term (e.g., 12 months) ii. Negotiate discount in fees for stock iii. Grant in exchange for deferred fees

12. FORMATION ISSUES 1.Incorporate in Delaware 2.Protect Intellectual Property 3.Address Acceleration Issues 4.Keep Capital Structure Clean

13. Incorporate in DE rather than CA Much easier to get filings done (e.g., fax signatures) Much quicker response time (e.g., same day service for amendment to Charter) Cheaper – expedited service in CA = $300 Pre-approved filings: 4 hours, but cost $350 More flexible and “corporation friendly” (e.g., unwind merger – CA: court proceeding; DE: simple filing) Likely to end up in Delaware if acquired by a public company, or if IPO

14. Protect Intellectual Property Proprietary Information Assignment Agreements for EVERYONE, even founders Patent, trademark and copyright protection – Steve Weinberg will discuss

15. Address Acceleration Issues Up Front Carefully define “without cause” Clarify “double trigger” Balance protection from outside ousting (e.g., investors) vs. inside ousting (e.g., management team) Don’t jeopardize acquisition opportunities by permitting across-the-board acceleration

16. Keep Capital Structure Clean Initially, permit attorneys to keep cap. table – work with one in-house designee Hold board meetings regularly (at least 4x per year) and insist on capitalization being clean for each board meeting File form 25102(o) for option plan – and each increase – to save cost of permit application and rescission offer Make sure founders pay for stock to avoid issues if depart Make sure 83(b) elections filed, because can’t cure