1. November 2015 7645259 v.4 Early Stage Financings for Start-ups Asaf Kharal

2. WSGR  Advise more than 300 public and 3,000 private enterprises  Advise more U.S. technology companies on their initial public offerings than any other law firm (Capital IQ)  Advise more technology companies on their M&A transactions than any other law firm (Bloomberg)  Represent more companies that receive venture financing than any other law firm (Dow Jones VentureSource/ PitchBook)  Most frequently hired securities litigation firm in the country (Securities Law360)  Selected for inclusion in the Intellectual Property Hot List (The National Law Journal) 2

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4. High Level Trends in Early Stage Financings  Pre-Seed is the new Seed; Seed is the new Series A; Series A is the new Series B  Massive late stage rounds  New sources of money (China, Russia, Middle East, India)  More international startups  Investors care more about pro rata rights  SAFEs gaining ground 4

5. The New Start-up Financing Ecosystem 5 Incubation (under $100K) Pre-Seed (Under $500K) Seed ($1M- $5M) Series A ($5M to $15M) Series B (Over $15M) Large Venture Funds Small Venture Funds Super Angels & Micro-VCs Angels, Incubators & Accelerators Pre-Seed is the new Seed Seed is the new Series A

6. Preparing for Financing  Organization of the company  Founder and team equity  IP protection –Intellectual property is an important corporate asset, so taking steps to ensure that it is properly assigned to the company is essential. –Assignment of IP by founders –Confidentiality and Invention Assignment Agreements with employees and contractors –Data privacy and protection –Trademarks, copyrights, trade secrets, patents and other registrations  Record keeping 6

7. Types of Early Stage Investment Key Elements of a Financing Size – how much money should be raised Source – where is the money coming from Type of Security Valuation required – does the investment require a valuation of the company? Debt based/interest – does the investment mean a growing debt load? Impact on control rights Liquidation preferences 7

8. Types of Early Stage Financings 8 Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round

9. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 9 Founder funding and self funding Varies in size based on company’s means and needs Type – common stock or promissory notes Important to document capital contributions and the expectations for equity, repayment or conversion Expectations of repayment upon a future financing may not be met Valuation must be handled carefully

10. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 10 Converts into later round preferred stock if sold to investors in connection with later financing Intended to solve founder sale of common at preferred price affecting common FMV Must be fully vested (or potentially considered compensation income) Typically, not more than 25% of founders equity is Series FF Cannot be subject to board discretion to allow conversion

11. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 11 Highly dependent on facts and circumstances Varies in size though usually less than $50,000 Type – common stock, promissory notes (convertible or non-convertible), contributions to capital A valuation may be required Equity or debt Usually no impact on control rights Typically no liquidation preference Potential downsides Risks to personal relationships Investors usually have no experience to bring to the table These investments are usually not sources of a large amount of money Familiarity with investors can lead entrepreneurs into the trap of inadequate documentation

12. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 12 Contracts with lead customers/early adopters for funding in exchange for early access to the developed product or service. Varies in size No valuation, typically no debt or equity issued Later strategic deals may involve ROFR or ROFN No liquidation preference Contracts can raise important issues including: Commercial rights and restrictions Ownership and rights in intellectual property Confidentiality Early strategic agreements can make or break a company

13. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 13 A promissory note for the full investment amount with an interest rate and a maturity date Typical maturities are one year Automatic conversion on a “qualified financing” Optional conversion on other financings Discount and/or warrants on conversion Premium on a change of control Valuation caps for conversion The larger the convertible debt financing, the less likely it is to be combined with the new money in a preferred stock financing

14. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 14 Essentially a convertible note that lacks and interest rate provision or maturity date Not debt, the instrument is best conceptualized as a placeholder for which the investor pays full value up front in exchange for a future security at a later date Perceived to be founder friendly

15. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 15 SAFE: Simple Agreement for Future Equity Another form of convertible equity Like convertible security it strips the debt like attributes from the convertible note Drafted to be layperson friendly as accessibility is prioritized over comprehensiveness - only 6 pages long It has the backing of Y Combinator and its partners

16. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 16 Size – varies Source – angel investors; accelerators Valuation – no Debt based – no Control rights given up – typically no Liquidation preference – yes

17. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 17 Common stock at founder price Plus convertible equity for $15-$100K YC, AngelPad, TechStars Avoid creating a high common stock FMV Additional “blind pool” financing

18. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 18 Size – $50,000 to $1M Source –a single investor or a group of affiliated investors Type – common stock, convertible debt, promissory notes Valuation – depends on if debt or equity based Control rights – depends on the size of the round, may include a board seat, protective provisions and participation rights Liquidation preferences – yes if preferred stock

19. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 19 Simplified series A financing documents available at http://www.seriesseed.com/http://www.seriesseed.com/ Designed to save time and money relative to traditional equity based financing documents, they omit specific provisions in an effort to simplify What they’re missing relative to traditional series A documents Dividend preference Registration rights Anti-dilution protection and other protective provisions Voting agreements Comprehensive representations and warranties

20. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 20 Size – roughly $500,000, typically not larger because of investors’ desire for protective provisions Source – Angels, Friends and Family Type - preferred stock Valuation required – yes Debt based/interest concerns – no Control rights given up – often include a board seat, participation rights and protective provisions Liquidation preference – yes 1x non- participating typical

21. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 21 Lots of groups call their own documents “series seed” and these can differ from the standardized documents. Be wary. The provisions are relatively inelastic and cannot be easily customized They contain fewer investor protections by default New documents often have to be drafted for later rounds and things like the certificate of incorporation must be amended

22. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 22 The practice of funding a project or venture by raising money from large numbers of people, typically over the internet It can be conceptualized in two different contexts Preselling a product – pebble smartwatch, Shenmue III Selling equity in a company This is an evolving area of the law. The passage of the Jumpstart Our Business Startups Act (JOBS Act) in 2012 created opportunities for funding based on the sale of equity or debt through the internet, but details and a clear regulatory structure have been slow to emerge.

23. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 23 SEC Guidance Companies will be allowed to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period. Companies must disclose: The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount The company’s financial condition Reviewed or audited financial statements A description of the business and the use of proceeds from the offering Information about officers and directors as well as owners of 20% or more of the company Certain related party transactions

24. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 24 Dangers of Crowdfunding: Securities laws are complicated and securities offerings are subject to strict reporting requirements. Failure to comply with securities laws can lead to penalties and problems down the road with future offerings Be cautious with Crowdfunding websites. Some websites allow the dissemination of investment information to anyone browsing the internet. This can constitute a securities law violation. It’s best to know the website you are dealing with and know who your information is being disseminated to Since it involves disclosing your company and idea, this funding is more appropriate for some types of start-ups than others Established sites that limit access are preferred

25. Types of Early Stage Financings 25 Size – varies. Typically $2-10 million Source – venture capital investors, often several Type – preferred stock Valuation – Yes Debt based – Not typically Control rights given up – Yes, at least a board seat Liquidation preference – Yes Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round

26. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 26 Choosing the right VC Partner What network does the specific partner you are working with bring to bear? What past experience does that partner have that might be helpful if on your board? Speak to members of that partners current and past portfolio or her? How involved will the VC Partner want to be in your company

27. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 27 Key Parts of a Series A Term Sheet: Valuation Pre and Post Money Valuations Option Pool Dividends – Non-Cumulative Liquidation Preference Initial Preference Participating or non-participating Participation caps Non-cumulative Antidilution – broad-based weighted average Board Composition CEO seat Founder Vesting Drag Along Protective Provisions

28. Types of Early Stage Financings Bootstrapping Founder Preferred Friends and Family Customer Funding Convertible Debt Convertible Equity SAFE Instruments Incubators Angels Seed Rounds Crowdfunding Series A Venture Round 28 Valuation Jargon “3 on 3” means $3M pre-money with $3M round With a $6M post-money ($3+$3) VCs will own 50% of the company Let’s assume the required option pool is 15% This is what the cap table will look like: Investors50% Founders35% Option Pool 15%

29. ASAF KHARAL Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road, Palo Alto CA 94304 Direct: 650-320-4557 akharal@wsgr.com Thank You

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