bb vlado def presentation 01 apr2011
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TRANSCRIPT
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) [email protected]://www.linkedin.com/in/vladodSkype: vlado.def@vladodef
De Franceschi ∞ ShefayeeAttorneys at Law228 Hamilton Avenue3rd FloorPalo Alto CA 94301www.dfscounsel.com
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...