Angel Investment Securities
Post on 06-Sep-2014
1775 Views
Preview:
DESCRIPTION
Transcript
Pillsbury Winthrop Shaw Pittman LLP
Angel Investment SecuritiesPillsbury Winthrop Shaw Pittman LLP
October 15, 2008
2 |
Introduction
Steven L. Meltzer, Esq. Striking Resemblance to Fred Flintstone
3 |
Introduction
Kevin R. Learned, Esq. Always wins office Halloween costume contest
4 |
Types of Securities
Common Stock
Convertible Notes
Preferred Stock
5 |
Common Stock
Typical security issued to Founders and family/friend Investors
No inherent economic advantage for the Investors over the FoundersInvestors can be protected through contractual arrangements
Stockholders Agreement Voting Agreement (giving the Investors a Board seat) Right of First Refusal and Co-Sale Agreement
6 |
Example (Common Stock)
Investment of $1 million
Founders: Bill Gatesly and Steve Casey each own 150,000 shares of Common Stock of Slushy Software, Inc., valued at $3 million
Investors: Warren Buffer and Donald Trumpet each purchase 50,000 shares of Common Stock for $10 per share, for a total investment of $1 million
7 |
Example (Common Stock)
Post-closing capitalization
Slushy Software, Inc., valued at $4 million Warren and Donald own 100,000 shares of Common
Stock (25%) Bill and Steve own 300,000 shares of Common Stock
(75%)
8 |
Example (Common Stock)
Sale for $20 million Warren and Donald receive $5 million Bill and Steve receive $15 million
Sale for $2 million Warren and Donald receive $500,000 Bill and Steve receive $1.5 million
9 |
Convertible Notes
Typical security offered to sophisticated Investors prior to a Series A Preferred Stock round
Hopeful bridge to a Series A financing
Avoids setting valuation of the Company
Allows Investors to piggy-back
10 |
Convertible Notes
Debt security rather than an equity interest Senior to Founders and other equity holders Generally unsecured Interest rate typically at 8% per annum, non-compounding No voting rights or control over the Company Mandatory Conversion
Automatically converts into subsequently issued equity securities Conversion price at a discount to price paid by new investors - 10% is a typical discount
Automatically converts into subsequently issued equity securities Conversion price at a discount to price paid by new investors -
10% is a typical discount Investor may convert to Common Stock at any time Conversion price at an agreed future valuation of the Company
11 |
Example (Convertible Notes)
Investment of $1 million Founders: Bill Gatesly and Steve Casey each own
150,000 shares of Common Stock of Slushy Software, Inc.
Investors: Warren Buffer and Donald Trumpet each invest $500,000 into Slushy Software, Inc. Purchase convertible notes at 8% per annum, non-compounding, with an optional conversion price based on a Company valuation of $10 million
12 |
Example (Convertible Notes)
Post-closing capitalization Warren and Donald together hold convertible notes in
the aggregate principal amount of $1 million Bill and Steve together own 300,000 shares of
Common Stock (100%) The sale of Convertible Notes does not establish a
valuation for Slushy Software, Inc.
13 |
Example (Convertible Notes – Successful Exit)
Sale for $20 million after two years Warren and Donald elect to convert their notes into
39,366 shares of Common Stock (outstanding principal and interest / per share conversion price) OR ($1,160,000 / ($10,000,000 / # shares of Common Stock following conversion))
Warren and Donald receive approximately $2.32 million ($20,000,000 x (39,366 shares of Common Stock / 339,366 shares of Common Stock))
Bill and Steve receive $17.68 million
14 |
Example (Convertible Notes – Unsuccessful Exit)
Sale for $2 million after two years
Warren and Donald do not convert their notes Warren and Donald receive $1.16 million in principal
and interest Bill and Steve receive $0.84 million
15 |
Common Stock vs. Convertible Notes
Sale for $20 million after two years
$15,000,000
$5,000,000
$17,680,000
$2,320,000
$0
$4,000,000
$8,000,000
$12,000,000
$16,000,000
$20,000,000
Common Stock Convertible Notes
Security Purchased
Founders
Investors
16 |
Common Stock vs. Convertible Notes
Sale for $2 million after two years$1,500,000
$500,000
$840,000
$1,160,000
$0
$400,000
$800,000
$1,200,000
$1,600,000
Common Stock Convertible Notes
Security Purchased
Founders
Investors
17 |
Preferred Stock
Typical security offered to Angel Groups, Venture Capitalists and other sophisticated Investors
Dividends at 8% per annum, non-compounding
Convertible into Common Stock Automatic Conversion
Consent of the holders of Preferred Stock IPO
Optional Conversion
Liquidation preference over Founders set forth in charter documents
Double Dip Double Dip, subject to a cap Single Dip
18 |
Example (Preferred Stock)
Investment of $1 million
Founders: Bill Gatesly and Steve Casey each own 150,000 shares of Common Stock of Slushy Software, Inc.
Investors: Warren Buffer and Donald Trumpet each purchase 50,000 shares of Series A Preferred Stock for $10 per share, for a total investment of $1 million
19 |
Example (Preferred Stock)
Post-closing capitalization
Warren and Donald own 100,000 shares of Series A Preferred Stock (25%)
Bill and Steve own 300,000 shares of Common Stock (75%)
20 |
Example (Preferred Stock – Double Dip – Successful Exit)
Sale for $20 million after two years Warren and Donald receive $1.16 million in liquidation
preference, including dividends Warren and Donald receive an additional $4.71 million
in pro rata distribution (25% x ($20 million - $1.16 million))
Warren’s and Donald’s total proceeds equal $5.87 million
Bill and Steve receive $14.13 million in pro rata distribution (75% x ($20 million - $1.16 million))
21 |
Example (Preferred Stock – Single Dip – Successful Exit)
Sale for $20 million after two years
Warren and Donald convert their Preferred Stock to Common Stock 1:1
Warren and Donald receive $5 million Bill and Steve receive $15 million
22 |
Comparison of Securities – Successful Exit
Sale for $20 million after two years
$15,000,000
$5,000,000
$17,680,000
$2,320,000
$14,130,000
$5,870,000
$15,000,000
$5,000,000
$0
$4,000,000
$8,000,000
$12,000,000
$16,000,000
$20,000,000
CommonStock
ConvertibleNotes
PreferredStock (Double
Dip)
PreferredStock (Single
Dip)
Security Purchased
Founders
Investors
23 |
Example (Preferred Stock – Double Dip – Unsuccessful Exit)
Sale for $2 million after two years Warren and Donald receive $1.16 million in liquidation
preference, including dividends Warren and Donald receive an additional $0.21 million
in pro rata distribution (25% x ($2 million - $1.16 million))
Warren’s and Donald’s total proceeds equal $1.37 million
Bill and Steve receive $630,000 (75% x ($2 million - $1.16 million))
24 |
Example (Preferred Stock – Single Dip – Unsuccessful Exit)
Sale for $2 million after two years
Warren and Donald do not convert their Series A Preferred Stock
Warren and Donald receive $1.16 million in liquidation preference, including dividends
Bill and Steve receive $840,000 ($2 million - $1.16 million)
25 |
Comparison of Securities - Unsuccessful Exit
Sale for $2 million after two years$1,500,000
$500,000
$840,000
$1,160,000
$630,000
$1,370,000
$840,000
$1,160,000
$0
$400,000
$800,000
$1,200,000
$1,600,000
CommonStock
ConvertibleNotes
PreferredStock (Double
Dip)
PreferredStock (Single
Dip)
Securities Purchased
Founders
Investors
26 |
Additional Terms for Series A Preferred Stock
There are many more protections available to holders of Preferred Stock than for holders of Common Stock
27 |
Additional Terms for Series A Preferred Stock
Anti-dilution protection Stock splits, stock dividends and recapitalizations Dilutive issuances
Redemption rights
Election of Board Members
Voting rights Voting on an as-converted basis
Separate statutory voting rights
Separate vote for significant actions (negative covenants)
28 |
Additional Terms for Series A Preferred Stock
Information rights
Registration rights
Rights of First Refusal
Co-Sale Rights
Drag Along Rights
29 |
Additional Terms for Series A Preferred Stock
Many of these rights usually appear in contracts separate from the Company’s organizational documents
Investor Rights Agreement Registration Rights Agreement Voting Agreement Right of First Refusal and Co-Sale Agreement
30 |
Founder and Employee Matters
Option Pool and Restricted Stock New option grants for employees, directors and
consultants subject to vesting Previously issued Founder stock subject to vesting Acceleration of Vesting
Proprietary Information and Inventions Agreement
Restrictions on Founder Stock Sales
Key-Man Insurance
31 |
Other Matters
No Shop Agreements
Indemnification protection for directors and officers
Assignment by Investors
Investors’ legal fees and expenses
Due diligence
Budget
Finder fees
Confidentiality
32 |
Conclusion
Any Questions?
top related