Learn about incorporating your business, non-competes, licensing your IP and decision-making processes
Explore topics related to allocating equity, vesting terms, tax implications, IP ownership, compensation and employment agreements
Dive into employee compensation, hiring foreign employees and hiring before securing funding
Find out about board membership and roles, and advisory board setup and compensation
Understand vesting restrictions and terms, options and restricted stock, and tax differences between ISOs and NSOs
Position your company for success with information on how to raise capital and secure funding from banks, VCs, friends and family
Learn about the differences between bank loans, foreign investors, crowdsourcing, crowdfunding, angels and VCs
Explore information related convertible debt, preferred stock term sheets and valuation caps on convertible notes
Expand your understanding of IP ownership, terms of service and privacy policies, open source software and more
Dig deep into information related to if and when to file, to the difference between provisional and utility patents
Explore the best way to obtain a trademark and the difference between a domain name and a trademark
Uncover little-known information related to NDAs and patent filings
Read about copyright protection and how to register a copyright
Get up to speed on how to grant exclusivity to a reseller, OEM or distributer, license agreement terms, and licensing IP from a university or hospital
Time to grow? Learn about taking funds from a strategic investor and international expansion
Explore how to prepare for due diligence, guidance on selling your business and hiring an investment banker
Time to take your company public? Prepare your company properly
You generally have four different options for how to structure your seed financing: common stock, debt, convertible debt and preferred stock. For business, tax and other legal considerations, however, using convertible debt or preferred stock are typically the two best options for an early-stage company.
Seed-stage investments are often structured as convertible loans. Investors loan money to the company. In exchange, the investors receive convertible promissory notes. When the company later sells preferred stock in its next financing, the loan will automatically convert into shares of that same series of preferred stock. The notes would typically convert at a discount (generally between 10% to 20%), so the seed investors would receive their shares of preferred stock at a better price in recognition of the fact that they took an earlier and bigger risk on the company as compared to the new investors in the preferred stock financing.
Common stock is so named because it is just that—common. Common stock isn’t generally accompanied by any special rights, preferences or privileges; it lacks the bells and whistles that are usually attached to preferred stock that give it the “preferred” status. Shares of common stock typically give the holder the right to vote on matters presented to the shareholders of the company and the right to receive proceeds upon the dissolution or sale of the company after the holders of preferred stock are paid any “preferential” or senior amounts. Common stock is typically issued to the founders of the company and to other employees, consultants, advisors and directors who receive grants of common stock or options to purchase shares of common stock.
The “liquidation preference” is the amount of proceeds from a sale or liquidation of the company that the preferred shareholders will receive before the common shareholders are entitled to receive anything.
Term sheets for venture capital financings include detailed provisions describing the terms of the preferred stock being issued to investors. Some terms are more important than others. The following brief description of certain material terms divides them into two categories: economic terms and control rights.
Whether a company should agree to a valuation cap in a convertible note will depend on its particular circumstances. From the company’s perspective, it is better to exclude a valuation cap, because it offers the investor down-side protection but has no benefit to the company. However, it may not be possible to exclude the cap if the investors condition their investment on including a cap and the company needs the money to fund its operations. Before making a decision, a company should consider the pros and cons of agreeing to a valuation cap.
Let our Knowledge Navigator direct you to content specific to where you are on your journey.
In the next QuickLaunch University Webinar on May 10, we will explore the fundamental concepts around founder equity and founder agreements.
Partner Mick Bain explores the idea of whether startups should take the B Corp route
Park Square and WilmerHale Release 17th Annual Technology and Life Sciences Compensation and Entrepreneurship Study
Thank you for your interest in WilmerHale.