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Venture Capital: Forms and Analysis

by Daniel I. DeWolf, Jeremy Glaser

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“An excellent overview of the venture capital process from both the perspective of the investor and that of the company. ”
Legal Information Alert

A single venture capital transaction can involve legal issues relating to corporate, securities, intellectual property, information technology, and employment laws. It also demands that practitioners balance the competing interests of founders, venture capitalists, directors, management, and others.

Venture Capital: Forms and Analysis book and CD provides a step-by-step framework for structuring, drafting and closing a venture capital deal, with a complete annotated set of the documents needed. It also features in-depth analysis from the perspective of both the company and the investor, as well as the latest guidance on best practices in venture transactions.

Coverage includes discussion and examples of letters of intent for equity-based and debt-based financing; due diligence requests and checklists; articles of incorporation for the venture-backed enterprise; convertible securities and anti-dilution provisions; the stock purchase agreement; investor rights agreements; control provisions that give investors authority over company decisions; investors' rights of first refusal and co-sale agreements; warrants and other equity "sweeteners"; promissory notes; founders agreements; closing opinion letters; and more.

This comprehensive book will help both novice and experienced practitioners avoid common drafting mistakes, omissions and ambiguities that can harm the company or its investors.

Book #00690; looseleaf with a CD, one volume, 704 pages; published in 2007, updated as needed; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN 978-1-58852-148-4

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  • Availability: Available
  • Brand: Law Journal Press
  • Product Type: Books
  • Edition: 0
  • Page Count: 704
  • ISBN: 978-1-58852-148-4
  • Pub#/SKU#: 690
  • Volume(s): 1

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  • Daniel I. DeWolf
Daniel I. DeWolf is a founding member and Managing Director of Dawntreader Ventures, a New York based venture capital firm focused on early stage investments in Internet, software, and digital media companies. Mr. DeWolf is also Co-Chair of the Ventures and Emerging Companies practice group at thelaw firm of Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. and is an Adjunct Professor of Law at New York University Law School, where he teaches an interdisciplinary course for J.D. and LL.M. candidates on Venture Capital Law. Prior to establishing Dawntreader Ventures, Mr. DeWolf was Head of Venture Capital Funds at SoundView Technology Group, a publicly traded technology focused investment bank (acquired by The Charles Schwab Corporation). Mr. DeWolf was also a Partner and Of Counsel to the law firm of Camhy Karlinsky & Stein, where he established the Corporate and Securities Practice Group and headed the New Media and E-Law Group.

Mr. DeWolf has over twenty years of transactional experience and has been an advisor to many early stage companies. Currently, he is Chairman of HNW, Inc. and is a Director of iParty, Tutor.com, and Visible World. Mr. DeWolf is a regular speaker at venture capital conferences and media events and is the co-author, with Mr. Roth, of theExit Strategies chapter in Start-Up and Emerging Companies: Planning, Financing & Operating the Successful Business, edited by Gregory Smith, also published by Law Journal Press. Mr. DeWolf is admitted to practice law in New York, California, and New Jersey. He received his B.A. cum laude from the University of Pennsylvania (1979) and J.D. from the University of Pennsylvania School of Law (1982).



Author Image
  • Jeremy Glaser
Jeremy Glaser is a Member in the Corporate & Securities Section in the San Diego office of Mintz Levin, and serves as Co-chair of the Venture Capital & Emerging Companies Practice Group. He is also a Member of the firm's Energy & Clean Technology Practice, which serves more than 260 clients. Mr. Glaser's practice focuses on serving emerging growth companies and the companies that fund them. He has substantial experience in venture capital financings, securities offerings, mergers and acquisitions, SEC compliance, licensing arrangements, and other general corporate matters. He has represented venture capital firms, hedge funds, and their portfolio companies in venture capital and PIPE financings, as well as both issuers and underwriters in a wide variety of securities transactions, including IPOs, secondary offerings, and private placements. He has also represented buyers and sellers in acquisitions and dispositions of public and private companies. Mr. Glaser represents companies in a broad variety of industries, including Internet, software, wireless, semiconductors, computer hardware, medical devices, biotechnology, health care services, clean technology, and the investment management industry. He regularly advises management and boards of public companies on complex disclosure and insider trading issues, compliance with federal securities laws, and corporate governance requirements.

Mr. Glaser attended Harvard Law School, where he received his J.D., magna cum laude, in 1985, and Duke University, where he was awarded an A.B. in Economics and Public Policy studies, summa cum laude, in 1982, and was a member of Phi Beta Kappa. He is admitted to practice in California and is a member of the American Bar Association and the San Diego Bar Association's Business Law and Technology Sections. He currently serves as a member of the board of directors of the San Diego Venture Group and the CONNECT Springboard program, and he served as the president of the San Diego Venture Group in 2003.


CHAPTER 1
Introduction

§ 1.01 Introduction

CHAPTER 2
Letter of Intent—Equity Based Financing

§ 2.01 Letter of Intent or Term Sheet
§ 2.02 Basic Term Sheet
[1] Preamble
[2] Brief Summary of Transaction
[3] Outstanding Capitalization
[4] Closing Date
[5] Use of Proceeds
[6] Stock Option Plan
[7] Representation and Warranties
[8] Dividends
[9] Liquidation Preference
[10] Conversion Ratio; Anti-Dilution Adjustment
[11] Automatic or Mandatory Conversion
[12] Voting Rights
[13] Registration Rights
[14] Lockup
[15] Information and Reporting
[16] Participation in Future Offerings
[17] Transfer to Affiliates
[18] Board of Directors
[19] Protective Provisions
[20] Directors and Officers Insurance
[21] Employment Agreements; Key Man Insurance
[22] Stockholders Agreement
[23] Standstill
[24] Confidentiality
[25] Public Non-Disclosure
[26] Expenses
[27] Contingencies
§ 2.03 Letter of Intent—Participating Preferred
§ 2.04 Participating Preference with a Cap
§ 2.05 Issuance of Warrants
[1] In General
[2] Warrant Coverage
[3] Strategic Relationships
§ 2.06 Mandatory Redemption
§ 2.07 Pay to Play
§ 2.08 Form of Term Sheet for Equity Based Financing

CHAPTER 3
Letter of Intent—Debt Based Financing

§ 3.01 Debt Financing
§ 3.02 Basic Term Sheet
[1] Preamble
[2] Basic Description of the Offering
[3] Participation
[4] Closing Date
[5] Terms of the Notes
[6] Security
[7] Use of Proceeds
[8] Warrants
[9] Negative Covenants
[10] Information Rights
[11] Expenses
[12] Conditions to Closing
[13] Confidentiality and Public Non-Disclosure
[14] Exclusivity
[15] Binding Provisions
§ 3.03 Form of Term Sheet

CHAPTER 4
Due Diligence Request

§ 4.01 Due Diligence and Its Purpose
§ 4.02 The Due Diligence Scope and Process
§ 4.03 Due Diligence Request List
[1] Corporate Records
[2] Stock and Securities Issuances
[3] Material Agreements
[4] Related Party Transactions
[5] Intellectual Property Assets
[6] Confidentiality and Related Agreements
[7] Employment Matters
[8] Financial Statements and Tax Documentation
[9] Litigation
[10] Industry and Business of the Company
[11] Miscellaneous
§ 4.04 On-Site Visit
§ 4.05 Dealing with Negatives
§ 4.06 Focus on Intellectual Property Due Diligence
[1] Ownership and Status
[2] Scope
[3] Validity and Enforceability
§ 4.07 Form of Due Diligence Request List

CHAPTER 5
The Certificate of Incorporation of a Venture-Backed Corporation

§ 5.01 The Certificate
[1] In General
[2] Authorized Capital Stock
[3] Classes and Series of Stock
[4] Dividends
[5] Liquidation Preference; Deemed Liquidation
[6] Redemption
[7] Conversion
[8] Voting Rights
[9] Designation of Directors
§ 5.02 Form of Certificate of Incorporation

CHAPTER 6
Conversion: Anti-Dilution Provisions

§ 6.01 Introduction
§ 6.02 Convertible Preferred Stock
§ 6.03 Convertible Notes
§ 6.04 Warrants
§ 6.05 Conversion Generally: Preferred Stock
§ 6.06 General Adjustments to the Conversion Price
[1] Structural Changes: Stock Splits, Combinations and Dividends
[2] Structural Changes: Merger or Reorganization, etc.
[3] Price Protection: Anti-Dilution Adjustments
§ 6.07 Special Considerations
§ 6.08 Pay-to-Play Provisions
§ 6.09 Warrant Provisions
§ 6.10 Convertible Note Provisions
§ 6.11 Conclusion

CHAPTER 7
The Purchase Agreement

§ 7.01 Introduction
§ 7.02 General Drafting and Negotiating Considerations
§ 7.03 Key Sections
[1] Sale and Issuance
[2] Company Representations and Warranties: Generally
[3] Disclosure Schedules
[4] Materiality Qualifications
[5] Ordinary Course
[6] Dollar Thresholds
[7] Knowledge
[8] Investor Representations and Warranties
[9] Special ERISA Considerations
§ 7.04 Conditions Precedent to Closing
[1] Purpose
[2] Key Closing Conditions
§ 7.05 Indemnification
[1] Purpose
[2] Limitations
§ 7.06 Governing Law and Dispute Resolution
[1] Purpose
[2] Governing Law
[3] Dispute Resolution
§ 7.07 Form of Purchase Agreement

CHAPTER 8
Investor Rights Agreements

§ 8.01 Introduction
§ 8.02 Registration Rights
[1] What Shares are Registrable?
[2] Types of Registration Rights
[3] The SEC Approval Process
[4] Registration Expenses
[5] Indemnification
[6] Market “Stand-Off” Agreement
[7] Amendment and Termination of Registration Rights
§ 8.03 Pre-Emptive Rights
§ 8.04 Information and Observer Rights
[1] Information Rights
[2] Inspection Rights
[3] Observer Rights
[4] Termination of Information [and Observer]  Rights
[5] Confidentiality
§ 8.05 Additional Post-Closing Covenants
[1] Affirmative Covenants
§ 8.06 Modification and Termination of the Investor Rights Agreement
§ 8.07 Form of Investor Rights Agreement

CHAPTER 9
Control Provisions

§ 9.01 Managing and Limiting Risk
§ 9.02 Initial Financing Risk
§ 9.03 Operational Risk
[1] Board of Directors Participation
[2] Protecting Voting Rights
§ 9.04 Exit Risk
§ 9.05 Conclusion

CHAPTER 10
Right of First Refusal and Co-Sale Agreement

§ 10.01 Introduction
§ 10.02 Basic Terms of a Right of First Refusal and Co-Sale Agreement
[1] Recitals
[2] Definitions
[3] Right of First Refusal
[4] Right of Co-Sale
[5] Drag Along
[6] Employee-Held Securities
[7] Legend
[8] Termination
[9] Conclusion
§ 10.03 Form of Right of First Refusal and Co-Sale Agreement

CHAPTER 11
Warrants

§ 11.01 Background
§ 11.02 Warrant
[1] Legend
[2] Introductory Paragraph
[3] Exercise
[4] Reservation of Shares
[5] Adjustment to Number of Issuable Shares
[6] Other Provisions
[7] Appendixes
§ 11.03 Form of Warrant

CHAPTER 12
Promissory Notes

§ 12.01 In General
§ 12.02 Bridge Financing
§ 12.03 Deal Documents
[1] Securities Act Legend
[2] Who Owes What to Whom and When?
[3] Usury
[4] Security
[5] Ranking
[6] Interest; Payments
[7] Conversion
[8] Representations and Warranties
[9] Covenants
[10] Events of Default
[11] Miscellaneous Provisions
§ 12.04 Form of Promissory Note
§ 12.05 Form of Demand Note

CHAPTER 13
Founder's Agreements

§ 13.01 Introduction
§ 13.02 Employment Arrangements
[1] Introduction
[2] Offer Letters versus Employment Agreements
§ 13.03 Provisions of an Employment Agreement
[1] Preamble/Whereas Clauses
[2] Duties/Scope of Employment
[3] Employment Term
[4] Compensation
[5] Termination of Employment
[6] Consequences of Termination
[7] Non-Competition Provisions
[8] Change in Control Agreement
[9] Excess Parachute Payments
[10] Miscellaneous
§ 13.04 Form of Employment Agreement and Offer Letter
[1] Form of Employment Agreement
[2] Form of Offer Letter
§ 13.05 Confidentiality and Assignment of Intellectual Property Arrangements
[1] Introduction
[2] Consultants
[3] Preamble/Whereas Clause
[4] Restricted Information
[5] Confidential Information
[6] Assignment of Intellectual Property
[7] Remedies
[8] Miscellaneous
§ 13.06 Form of Confidential Information and Invention Assignment Agreement

CHAPTER 14
Opinion Letters

§ 14.01 Closing Opinion
§ 14.02 Basic Closing Opinions
[1] Corporate Status
[2] Corporate Power and Enforceability
[3] Capitalization
[4] No Conflict
[5] Consents, Approvals, and Filings
[6] Securities Exemption
[7] No Litigation
§ 14.03 Form of Closing Opinion for Issuance of Series B Preferred Stock
§ 14.04 Conclusion

CHAPTER 15
Exit Strategies

§ 15.01 Overview
[1] Why Exit Strategies Are Important
[2] Types of Liquidity Events
§ 15.02 IPOs
[1] Introduction
[2] Advantages of Going Public
[3] Disadvantages of Going Public
§ 15.03 Preparing for a Public Offering
[1] Selecting the Listing Entity
[2] Board Composition
[3] Audit Committee
[4] Compliance with Sarbanes-Oxley
§ 15.04 Selecting an Underwriter
[1] Types of Offering
§ 15.05 Liquidating Shares After the IPO
[1] Registration Statements
[2] Role of the Analyst
[3] Rule 144
[4] Restrictive Legends
§ 15.06 Reverse Mergers
§ 15.07 Sales and Mergers
[1] Sales of Portfolio Companies
[2] Consideration Received on the Sale
[3] Compliance with GAAP, the Sarbanes-Oxley Act and Other Regulations
[4] Issues with Affiliates
[5] Indemnification
[6] Section 3(A)(10) Hearings
§ 15.08 Conclusion

CHAPTER 16
Down Round Financings

§ 16.01 Introduction
§ 16.02 Responsibilities of the Board of Directors with Regard to Dilutive or Down Round Financing

CHAPTER 17
Checklist of Initial Issues for Representing Start-Up Companies

§ 17.01 Introduction
§ 17.02 Checklist

CHAPTER 18
Choice of Entity for a Start-Up Business

§ 18.01 Introduction
§ 18.02 Types of Entities
[1] “C” Corporations
[2] Limited Liability Companies
[3] “S” Corporations
[4] Limited Partnerships
[5] General Partnerships
[6] Sole Proprietorships
§ 18.03 Form of Memorandum to Entrepreneurs on Choice of Entity

CHAPTER 19
Non-Disclosure Agreement

§ 19.01 Overview
§ 19.02 Venture Capital Perspective
§ 19.03 Non-Disclosure and Confidentiality Agreement
[1] Preamble
[2] Confidential Material
[3] Limitations on Duty of Confidentiality
[4] Public Disclosure
[5] Indemnity
[6] Return of Evaluation Materials
[7] Injunctive Relief
[8] Miscellaneous
§ 19.04 Form of Non-Disclosure and Confidentiality Agreement

CHAPTER 20
Setting Up a Corporate Venture Capital Fund

§ 20.01 Introduction
§ 20.02 Memorandum to Legal Department About Corporate Venture Capital Funds

CHAPTER 21
Pay-to-Play

§ 21.01 Overview
§ 21.02 Implementation
§ 21.03 Additional Features
§ 21.04 Enforceability
§ 21.05 Examples of Pay-to-Play Provisions
[1] Special Mandatory Conversion
[2] Pull-Up Pay-to-Play

CHAPTER 22
Management Incentive Plans in Connection with a Sale of a Company

§ 22.01 Management Carve-Out
§ 22.02 Size and Structure
§ 22.03 Participants and Allocations
§ 22.04 Other Considerations
§ 22.05 Form of Management Incentive Plan

INDEX