LaunchBox Blog

On 7/2, Mike Lincoln of Cooley, Godward & Kronish stopped by the LaunchBoxDigital offices to offer his advice about preparing to raise venture capital and avoiding costly legal situations.

Five things that matter when you raise money

- Valuation: Valuation is the overall bottom line about the estimated worth of your company before and after raising a round of financing. This number is important, of course, but entrepreneurs often look at the figure with tunnel vision and forget about other important values that can have a big impact. For this reason, Mike recommends that chemistry between investors and founders should be something that is a high priority issue.

- Vesting: The subject of vesting matters – and it is negotiable. Mike encourages founders to take a look at the IRS Form 83b election, which can prevent a "double-dipping" tax on stocks vesting when dividends are issued to founders. Almost all Series A termsheets allow the venture capital firm to retain founders' stock in the event that they bail out.

- Liquidity preference: The liquidation preference provision basically sets out the hierarchy of who gets paid first. The venture capital firm's stock will be higher on the food chain than the founders, and the amount will typically be the amount invested by the firm. Several components of this provision are generally negotiable, such as the participation right, blocking rights, and board composition.

- Drag-along provision: This contract provision requires the forced sale of a company if a certain threshold amount of stockholders votes in favor of the sale. Some key points that are usually negotiable include what parties can participate, what the threshold amount is (e.g. 50% of preferred, etc), and the minimum acceptable price.