GrowLab Spring 14 cohort mentorship session on seed financing with LaBarge Weinstein.

1. Seed Financing 101Seed Financing 101
March 10th
, 2014
Mark Longo, Partner – LaBarge Weinstein LLP
Open Doors.
Close Deals.

2. Today’s Agenda
1. Seed Financing Structures
2. Capitalization Tables
3. Valuation
4. BDC Convertible Note Terms
5. Q&A

3. About LaBarge Weinstein LLP
• A business law firm established in 1997
• Recognized as the leading national firm for technology
and knowledge-based companies
• 40+ professionals serving clients across Canada and
abroad from offices in Ottawa, Toronto, Waterloo and
Vancouver
• Full service business law practice, including:
 Corporate/Commercial
 Securities, Corporate Finance & Debt Financing
 Mergers & Acquisitions
 Intellectual Property and Licensing
 Taxation & Estate Planning
 Human Resources
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4. Some Select LW DealsSome Select LW Deals
4
Closed over $7 billion in M&A transactions and $6 billion in VC
and venture debt financings since founding in 1997

5. The Term Sheet
• Deal size
• Investor syndicate
• Type of financing
• Price: pre/post money valuation
• Closing date(s)
• Closing conditions
• No shop
• Expenses of transaction
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6. Term Sheet Crib Notes
Drag-Along: right of subset of shareholders to force exit
.
Right of First Refusal: right to buy portion of shares to be sold by
shareholder
.
Co-sale Rights: right to sell shares on same terms as shares to be
sold by shareholder
.
Pre-emptive Rights: right to buy portion of shares offered for sale
by company
.
Protective Provisions: shareholder approvals over certain
corporate matters
.
Information Rights: right to regular financial and other reporting
Observer Rights: right to attend board meetings in non-voting
capacity
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7. Seed Financing Structures
• Common Shares:
 Raising < $1 Mil.
 Pre-revenue company
 Friends, family, Angels, seed VCs
• Convertible Debt:
 Bridge to larger round
 Defer valuation until milestones hit
 F&F, Angels, seed VCs
• Class A Preferred Shares:
 Value add investor (VC, Super Angel)
 > $1 million round size
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8. Common Share Equity
• Common voting shares (same as founders)
• Dividends discretionary
• Share pro rata in proceeds of liquidation
• No redemption or retraction rights
• No conversion rights
• EBC eligible
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9. Convertible Debt
• Converts to equity at discount to next round
• Valuation cap
• Interest rate
• Maturity date
• Automatic conversion events
• Optional conversion
• Secured or unsecured
• Likely not EBC eligible
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10. Class A Preferred Shares
• Liquidation preference
• Conversion rights to common
• Dividends discretionary or automatic
• Voting rights
• Board representation
• Anti-dilution provisions
• Redemption right (or not)
• Pre-emptive right
• Can be EBC eligible
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11. Financing Due Diligence
• Due diligence can make or break a deal
• Proactively create virtual data room
• Deals have a finite time to close
• Don’t give investor reason to walk
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12. Cap Table: Founders
12
ROUND: Founders (Common Shares)
ISSUE PRICE: $0.0001
No. of Shares Amount Raised % Ownership
Founder A 1,000,000 $100 50%
Founder B 1,000,000 $100 50%
Total Shares in Round: 2,000,000 $200 100%
Total Shares Issued: 2,000,000
Pre-Money Valuation: Nominal
Post-Money Valuation: Nominal

13. Cap Table: Seed Round
13
ROUND: Seed Round (Common Shares)
ISSUE PRICE: $0.75
No. of Shares Amount Raised % Ownership
Founder A 1,000,000 37.5%
Founder B 1,000,000 37.5%
Seed Investors 266,667 $200,000 10%
Stock Option Plan 400,000 15%
Total Shares in Round: 266,667 $200,000 100%
Total Shares (fully diluted): 2, 666,667
Pre-Money Valuation: $1,500,000
Post-Money Valuation: $1,700,000

14. Cap Table: Convertible Note
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ROUND: Convertible Note - Discount : 10%
ISSUE PRICE: Tbd
No. of Shares Amount Raised % Ownership
Founder A 1,000,000 37.5%
Founder B 1,000,000 37.5%
Seed Investors 266,667 10%
Stock Option Plan 400,000 15%
Convertible Noteholders $500,000 N/A
Series A Investors
Total Shares in Round: N/A $500,000 100%
Total Shares (fully diluted): 2,666,667
Pre-Money Valuation: N/A
Post-Money Valuation: N/A

15. Cap Table: Series A Round
15
ROUND: Series A and Option Pool Top-Up
ISSUE PRICE: $1.72
No. of Shares Amount Raised % Ownership
Founder A 1,000,000 22.8%
Founder B 1,000,000 22.8%
Seed Investors 266,667 6.1%
Stock Option Plan 640,000 14.6%
Convertible Noteholders 322,963 7.4%
Series A Investors 1,162,667 $2,000,000 26.5%
Total Pref. Shares in Round: 1,485,630 $2,000,000 100%
Total Shares (fully diluted): 4,392,297
Pre-Money Valuation: $5,000,000
Post-Money Valuation: $7,500,000

16. Early Stage Valuation
•More art than science:
 What a willing buyer and seller agree upon
•Rule of thumb: 20 – 30% dilution per round
•Valuation is geography dependent
•Focus on how much $ you need
•Comparables are key:
 Stage of company
 Industry and business model
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17. AngelList Valuation Stats: Q2 2013
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Source:
https://angel.co/valuations

18. AngelList Valuation Stats: Q3 2013
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Source:
https://angel.co/valuations

19. AngelList Valuations: Silicon Valley
19
Source:
https://angel.co/valuations

20. AngelList Valuations: Seattle
20
Source:
https://angel.co/valuations

21. BDC Convertible Note TermsBDC Convertible Note Terms
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Terms Description
Amount of Financing $150,000
Term / Maturity 2 years
Interest 8% Simple interest accruing
Discount to next round 15% discount to the conversion price
Valuation cap $3.5M pre-money valuation
**This is not a valuation BDC assigns to your business; this is the maximum valuation
BDC accepts at conversion**
Conversion Two primary cases of conversion (both occurring at BDC’s discretion):
Standard conversion: Based on an external financing or change of control; any
conversion made in the case of a financing event will be on the same terms and conditions
(other than price) as the investors under the financing
Discretionary conversion: At any time, at BDC’s discretion, with conversion taking
place at the valuation cap

22. BDC Convertible Note TermsBDC Convertible Note Terms Con’t
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Terms Description
Use of proceeds General working capital, to develop the company’s principal technology, to hire the core team,
to develop an intellectual property strategy, for business development or for general corporate
development
Cannot be used to repay outstanding debts
Repayment Upon maturity, principal + accrued interest shall be due; failure to do so results in default
Prepayment Only with BDC’s written consent
Default Standard, reasonable restrictions on loan calls and events of default (minimized to keep
documentation simple)
Pre-emptive rights Upon conversion, pro-rata participation in future financing rounds
Information Rights Annual financial reporting and quarterly progress updates
Board Right to appoint an observer to the board or advisory committee (BDC rarely exercises this)
Security / Legal Unsecured note; Legal costs covered by the investee (typically very reasonable)
Background Checks Founders must consent to BDC performing background checks

23. BDC Convertible Note Terms Con’t
• Opt-in Conversion to Equity:
 On an equity financing, at a 15% discount to the
financing price, capped at a $3.5M valuation
 On a “change of control”, at a 15% discount to lower of:
(i) the price per share in the change of control event,
and (ii) the $3.5M valuation cap
 At any time at BDC’s discretion, into highest ranking
shares at a 15% discount to a $3.5M pre-money valuation
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24. BDC Convertible Note Terms Con’t
• Ensure representations and warranties are
accurate (section 6)
• Pay attention to Covenants (section 7)
• Events of default (section 9 and Schedule B):
 Interest rate increases to 20%
 Valuation cap decreases to 750K
 Discount increases to 25%
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25. Information Sources
• http://fullstack.ca/tools/
• http
://startupnorth.ca/2013/01/08/fundraising-valuation-and-accre
/
• http://shockwaveinnovations.com/2013/03/28/how-much-
should-you-raise/
• https://angel.co/valuations
• http://venturehacks.com/articles/seed-valuation
• http://gust.com/angel-investing/startup-
blogs/2012/10/16/2012-valuation-survey-angel-groups/
• http://www.marsdd.com/articles/co-founder-agreements/
• http://www.techvibes.com/blog/startup-equity-2013-11-13
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26. 26

27. Open Doors.
Close Deals.
Mark Longo
mlongo@lwlaw.com
604.484.1060 x101
@markjlongo
Thank You!