Category: Seed Rounds
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Convertible Note Transaction Documents
It’s a common misconception that the ‘convertible note’ is the only legal document used in a convertible debt financing. I often receive emails from entrepreneurs asking for a ‘sample convertible note’ which I assume they are planning to use on their own. In addition to the convertible note, a startup will also need to draft…
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Convertible Note Interest: What is the Range?
While most startups and investors focus on convertible note terms like the discount and price cap, one important but overlooked term is convertible note interest. Since a convertible note is in fact a debt interest, it follows that the convertible note investment should accrue interest. However, startups should be mindful that but the rate of…
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Avoid Offensive Liquidation Preferences
In most equity financing rounds, an investor will ask for (and get) a term called a liquidation preference. A liquidation preference is the amount that must be paid to a preferred stock holder before any sale proceeds may be paid to the holders of common stock (i.e., founders, option holders, etc.). The amount of the…
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Top 5 Worst Seed Round Terms For Startups
Here’s a list of the top 5 worst seed round terms that cause harm to startups at the seed financing stage and therefore should be avoided: 5. Control “Control” of a startup can manifest itself in various forms such as equal (or investor-favorable) representation on the board of directors or a requirement of obtaining seed…
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X Does Not Always Equal X
I’ve done quite a few recent seed deals using various ‘standard’ seed financing docs (Series Seed, TechStars Series AA, etc.). While using these document sets can help reduce transaction costs and the time to close, a startup can run into trouble by trusting deal documents without verification. For example, a startup requested I review a…
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Non-Dilution Rights are Wrong
I hate non-dilution rights and if you are an entrepreneur you should, too. I’m not talking about price-based anti-dilution protection that is typical in an angel or VC round. What I’m referring to is a right given to a particular stockholder so that such stockholder’s equity in the company is not diluted by any future…
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Why a Finder is a Loser
When a startup considers paying a “finder” for investor introductions, I usually have the same conversation with founders. It goes something like this. A typical conversation about a finder Startup: A finder knows a lot of investors and will introduce us if we pay 6% of any capital we raise through those introductions. Me: Is…
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Convertible Note Term Sheets
Just like the preferred equity financing process, the convertible debt financing process can start with a term sheet, rather than a full set of financing documents. A convertible note term sheet is beneficial because it postpones a lawyer from cranking out a full set of docs until consensus is reached regarding the convertible debt offering’s…
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Keeping a Seed Financing Round Open
Startups don’t want to wait until every investor is ready before closing on a seed financing round. First, the roster of investors will not be identified and/or cutting checks on the same day. Second, what startup wants to wait on cash? Therefore, most seed financings allow for an initial close (i.e., that first investor check)…
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Update to Accredited Investor Definition
The Dodd-Frank Wall Street Reform and Consumer Protection Act and later SEC rulemaking changed how the accredited investor definition works in a few important ways. Two updates that commonly show up in startup fundraising paperwork are the exclusion of primary residence from the net worth test and the SEC’s 2020 expansion of additional accredited investor…