Startup Legal 101 – What’s the deal for startup financings?

Last Wednesday, Bootup and Contractually hosted a Startup Legal 101 session on the ins and outs of structuring financings for startups, with Mark Longo and Brock Smith from Clark, Wilson.

Here’s the slide deck that Mark and Brock presented:

 

Key points from the presentation included:

  • Getting your startup incorporated and organized properly, with advice from a lawyer with expertise working with tech startups, can smooth the path to a successful financing later (and save you time & money later).
  • In addition to raising money from investors, startups should look to other forms of funding, such as government programs like IRAP and SR&ED.
  • When raising money from investors, startups need to comply with securities law. For seed and angel financings, this means making sure that the shares are issued under an exemption from the requirement to file a prospectus.
  • For raising money from seed and angel investors, common financing structures are –

(1) ‘light’ preferred shares: the investor is issued shares that have certain preferences over the founders’ common shares — for example, on the sale of the company, the investor may have the option to get their money back, plus a minimum return and before the common shareholders get any sale proceeds, or to convert the preferred shares into common shares;

(2) convertible debt: the investor invests by lending money to the startup company, and that loan is convertible to shares at the time of the Series A financing (or when certain other events occur; and

(3) common shares.

  • Convertible debt has become more and more popular for early-stage financings in Vancouver, following the trend in the US.
  • Many other financing structures are possible depending on what the entrepreneur and the investor would like. However, opting for simpler, well-understood structures can facilitate later financings (it’s easier to explain the structure to later investors).

* * *

Big thanks to Mark and Brock for highlighting how startups can prepare for raising financing.

Got suggestions for future Startup Legal 101 sessions? Send them to Martin Ertl, at martin [at] contractual [dot] ly.

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