On July 10, the SEC adopted final rules pursuant to Title II of the Jumpstart Our Business Startups Act of 2012 (JOBS Act) that lift the long-standing ban on general solicitation and advertising for private securities offerings under Rule 506 and Rule 144A.
Whether a financing, merger or other acquisition, or other major transaction, parties often outline the major provisions in a non-binding term sheet or letter of intent. A principal benefit of this approach it to help the parties identify major areas of disagreement early to avoid wasted expense on additional diligence and drafting of the definitive agreements.
Dilution is a term that is frequently discussed in the context of preferred stock financings. However, it is important to understand that there is a difference between dilution in the general sense and the type of dilution with respect to which preferred stockholders receive protection.
“Pre-money” or “pre-money valuation” is a term that entrepreneurs will hear and use a lot in the context of securing equity financing, so I thought it would be a good idea to make sure entrepreneurs have a clear understanding of it.
I recently participated in a panel discussion on crowdfunding for biosciences, and I wanted to share some of the ideas we discussed. Although focused on life sciences companies, many of the issues are applicable to tech companies too.
A commonplace among emerging companies is the need to promise investors seats on the board of directors. For a lot of different reasons, it makes sense to make this promise. It is usually a condition to receiving the investor’s capital, so there’s that.
Many entrepreneurs are wondering when they will get to take advantage of those parts of the JOBS Act that were heralded as new catalysts for start-up equity financing, particularly those sections of the Act engineered to permit crowdfunding and the advertising of certain private equity offerings under the SEC’s Rule 506.
We have covered in past FTTWs how to value your startup and how much capital to raise. Once your startup decides to pursue equity financing, you should start to prepare for the investor due diligence process. On the business side, you will need to prepare a business plan and should take steps such as obtaining management references, interviews and background reviews, customer/user references, technical/product reviews, financial statements and business model reviews.
“Vesting” is a term of art that is often glossed over by new entrepreneurs as they grapple with other newer and scarier terms to which they are being introduced as they start their companies, like “pre-money valuation,” “fully-diluted capitalization” and “broad-based weighted average antidilution adjustments.” However, I think it is good for entrepreneurs to have a thorough understanding of what vesting means.
Convertible notes are a common structure for private company financings, most often for early stage companies trying to raise $1 million or less (see “Your First Vehicle for Fund Raising: Convertible Notes or Preferred Stock”). Here is a summary of the types of terms for such financings, and a quick primer on what to look out for if you’re considering this type of funding.