Bb vlado def presentation 01 apr2011

Start-UpsF o r m a t i o n & V C

F i n a n c i n gA p r i l 2 0 1 1

Vladimir DefrančeskiPalo Alto CA

IntroBoundBreaker, Silicon Valley Advisor

Stanford JD, UCSD MA, UCLA BA, UCSD Biotechnology Mfg. prof. cert.

Sony Engineering and Manufacturing of America

Venture Law Group, Wilson Sonsini Goodrich & Rosati, Baker & Mckenzie

$250Mil+ in venture capital transactions and M&A exits

Start-ups:Rackable (NASDAQ: SGI)

FMS Corp.BlooSee, Inc. ($650K Series A in 4/2011)

b. Beograd, Wash. DC 1980’s, California 1988 -

Fund Management Companies: Sequoia, Benchmark, Kleiner, NEA, DFJ...

Venture Capital Funds:

I, II, III,..

0

$13Bn in 2010 into US VC Funds

EcosystemSOURCES OF VENTURE CAPITAL

Pension Funds, Endowments, Sovereign Funds, Corporations, Funds of Funds, Family Offices, High Net Worth Individuals...

10 years5

Investments Exits

Angels

Incubators

Friendsand Family

Only 2 1/2 ways to exit:

- Sell to the public- Sell to an acquirer

~ Private market

You

5%

>25% IRR

(less 20% carry)

Legal Environment

Corporate Law

Securities Law

Intellectual Property Law

Employment Law

Tax Law

[Immigration Law]

Corporate LawOnly one form of currency for Silicon Valley venture capital investing: shares of stock in a corporation

There are 50 state jurisdictions, but only 2 are used: Delaware or California

Key elements of a corporation:Liability of owners limited to the assets of the corporationOwned by stockholders - one share, one vote; each class and series of stock must be treated equallyDirected by directors - personal liabilityManaged by managers - appointed by directorsEquity or Debt -> investor <- Dividend or Compensation Stockholders are subordinate to Creditors

Corporate LawDocuments required to create and maintain a corporation:

Public CharterThe constitutional document with which the corporation receives its permission from the state to exist. Only stockholders can change.

Non-Public

Bylaws

Minutes

Bylaws are the rules for governing the corporation. Stockholders or Directors can change.

Minutes are the written record of Director actions, instructing the Officers to do things.

Securities LawOnly two classes of stock used for tax reasons:

Common Stock - for founders, employees and consultantsPreferred Stock - for investors

All stock must be registered unless there is an exemption from registration:

State and Federal exemptions for private sales of stockSecurities Act of 1933 Section 4(2)Regulation D: Accredited InvestorRegulation S

IP Law

Patents: preliminary, utility, design

Copyrights: automatic and registered

Trademarks: marking, use, Lanham Act

Trade Secrets: keep your secrets secret

Assignment

Intellectual Property is a Business Asset.

There are 5 main ways to protect it:

Employment Law

At-will employment

Notice and severance mechanisms

W-2s vs. independent contractors

Noncompetes are evil and illegal in SV, unless you get paid a lot of money

Vesting - not more than 5 years

Tax LawFair market value

Corporate income is double taxed

[Avoid worldwide income taxation]

Long term capital gains tax

83b

Options are taxed at exercise

Interest payments are taxed as ordinary income, so avoid interest*

*California Lender Law

The Start-Up

Delaware corporation: (1) Certificate of Incorporation, (2) Bylaws, (3) Minutes

Board of Directors: founders -> common + investor + independent

Appoint Officers: CEO, CFO and Secretary

Issue Stock: Restricted Stock Purchases Founders’ stake 85% -> 45% Common Stock :: Preferred Stock

The Venture RoundDelaware Corporation

Stockholders

Board of Directors

Officers

Employees

[Creditors]

Founders8,500,000

Option Pool1,500,000

85%

15%

Founders8,500,000

Option Pool1,500,000

45%

8%

Angels2,500,000

13%

VC6,500,00034%

10,000,000shares

19,000,000shares

Pre-Money

Post-Money

Com

mon S

tock

Com

mon S

tock

Preferred S

tock

Series B

Series A

Elements of the Deal

Investor Right Transaction Document(s)

Liquidation preference

Anti-dilution protection

Protective provisions

Voting rights

Registration Rights

ROFR & Co-Sale

Drag-along

Charter

Charter

Charter

Charter/Bylaws/Voting Agt

Investor Rights Agt (IRA)

IRA/ROFR & Co-Sale Agt

ROFR& Co-Sale Agt

How much money can you make?

90% of exits are M&A

90% of M&A exits are $50Mil - $100Mil

So, if you own __%, $50Mil - $100Mil x __%

$50Mil x 45% = $22Mil / 3 = $7.33Mil

{$500Mil x 10% = $50Mil / 3 = $16Mil}

But, to get there: listen and change

BATNAYou meet great VCs, angels, engineers and entrepreneurs

You learn a lot, fast, from the best

You get great new ideas

You go work for Google

You have no regrets

And, it’s iterated ∞ live and die many times

Silicon Valley Contact

Vladimir de Franceschi mobitel +1 (650) 391-4837vladimir@dfscounsel.comhttp://www.linkedin.com/in/vladodSkype: vlado.def@vladodef

De Franceschi ∞ ShefayeeAttorneys at Law228 Hamilton Avenue3rd FloorPalo Alto CA 94301www.dfscounsel.com

vlado@boundbreaker.org

http://www.dfscounsel.com/links has links to resources on start-ups, entrepreneurship and venture capital: sample deal docs, cap table simulators, deal database, video lectures, angel directory...