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

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

3. Cap Table Management

4. 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

5. 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)

6. Market Trends in Venture-Style Financing

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

8. 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

9. 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

10. 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.

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

12. 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?

13. 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.

14. 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

15. 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.

16. 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

17. 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

18. 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.

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

20. Governance Rights
Board seats
Board veto / approval rights

21. 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

22. 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

23. 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

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

25. 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

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

27. 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

28. 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)

29. 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)

30. 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

31. Q&A