The Anatomy of a Unicorn – part 2

Previously, we discussed the main ways of handling founder and investor preferences when structuring a company, as seen in some of the world’s leading unicorns. For your convenience, we have put together a table comparing the key similarities and differences in various provisions of the COIs of Uber, Facebook prior to its IPO, Snapchat, AirBnB and Palantir.   Uber Facebook Snapchat AirBnB Palantir Two Classes of Common Stock for Founders Yes Yes Yes Yes Yes Liquidation preference Non-participating preferred Non-participating preferred Non-participating preferred (for Series A, A-1, B, C) Non-participating preferred Non-participating preferred Multiple in liquidation preference 1.25x for Series C-2 and C-3 Preferred 1x 1x 1x 1x Investor relations in liquidation preference Pro rata Pro rata Pro rata Pro…

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The Anatomy of a Unicorn – part 1

Everyone is aware of the dramatic growth and success attributed to companies such as Uber and Snapchat. However, not everyone may be aware of the structures used by those companies that allow for such development and progress. We did the heavy lifting for you and compared certificates of incorporation of five leading unicorns: Facebook, prior to its IPO, Palantir, Snapchat, Uber, and AirBnB. Our findings have revealed that key to the anatomy of the unicorns lay in similar founder preferences and down road economic protections for the companies’ investors. We will briefly discuss these founder and investor preferences, as found in the certificates of incorporation. Founder Preferences A unicorn tends to have a founder-friendly anatomy. This is accomplished by giving founders…

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DOWN-ROUND FINANCING

Why Down-Round Financing? Down-round financing occurs when stock of a company is sold at a lower price per share than it was sold during a previous financing. Although having to choose to do a down-round may not be an ideal outcome for a company, it is a tool that comes in handy when a company is seeking new investors in times of necessity, economic uncertainty or in a chilled fundraising environment. The legal aspects of a down-round can be challenging tactically and strategically for founders and investors. Structuring a Down-Round Regardless of a company’s reason for opting to sell stock at a lower price than in its previous financing rounds, once such a decision has been made, there are various…

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Financing in the Valley and Europe – Big Differences

We keep running into clients asking what the big differences are between financing a startup in Silicon Valley and Europe. In this post we wanted to highlight a couple of these differences. Tranche You should be aware that many seed financings in Europe are structured as tranche deals. This means the VC releases money only if certain milestones or KPIs are satisfied, indicating that a seed round is essentially similar to multiple different financings. The VC exclusively determines whether the startup hit the milestone. European style tranche deals have a negative impact on company valuations and the dynamic between entrepreneur and VC. For example, tranche financing locks in previous valuations in a changing world. Practically speaking, each tranche is a…

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Watch out for venture capital syndicate SPV. Devil is in the details.

Problem Due to exploding valuations of tech companies, many venture capital investors are priced out of venture deals and cannot exercise their pro rata rights to participate in hot financing rounds. A recent solution to this problem has been syndication, among existing VC fund limited partners and new investors, via special purpose vehicle (SPV) structures. The SPV is created for just one purpose: pooling capital and taking a direct stake in a company by participating in a specified financing at a specific point of time. Pooling the VC’s resources with funds from other investors, both from inside and outside of the fund, allows VCs to maintain control and expand its financial interest. However, SPVs also pose certain business and legal…

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 Regulation A+ and start-up financing

The change. Loud pops were audible across the globe as countless bottles of champagne were uncorked in reaction to the announcement of the latest version of the Regulation A+. Adoption of the final rule by the SEC will provide emerging companies with a new, convenient path to raise substantial capital by offering their stock to large audiences. The Regulation A+ sets forth two tiers of offering processes: The “Tier 1” path, available to all companies conducting offerings of up to $20 million in a 12-month period, with not more than 30% in offers by selling security-holders that are affiliated with the company ($6 million in the case of a $20 million offering). The “Tier 2”, available in turn to all…

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Planned Pregnancy with Strangers

Dear Cytowski LLC, I’ve been a single startup for months and I am desperate to set up a traditional family with a venture capitalist I’ve been hoping for. If I were to take a vacation, go to the Valley and have unprotected investments with 5-7 VC strangers in order to get pregnant with funding, whose consent should I be asking for? Do the VCs have a right to know what I’m trying to do? I’m not looking for child support (aka Series-A, Series-B), an involved father (Marc Andreessen), or even to know whose investment, exactly, lands inside me. I just need to kickstart my startup to make this happen. — Anonymous Startup Dear AS, The investors out there who will…

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Capital agreements in the U.S. and Poland, treating people like people – Cytowski and Snazyk

Tytus Cytowski and Tomasz Snazyk, lawyers and founders of the law firm Cytowski LLC, which specializes in the field of venture capital / start-up in Poland and USA; talk about the differences between foreign investor financing agreements and their Polish counterparts. What are the usual differences between American and Polish venture capital agreements? Tomek Snazyk (TS): First of all, it is extremely rare for a foreign fund to invest in a company registered in Poland. Foreign investors, especially those from the U.S, prefer to invest in entities registered over there. As to the venture capital agreements themselves, apart from the things typically associated with U.S. laws that do not exist in the Polish law, the differences are small. Part of…

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“Venture Capital Investment Agreements and Founder Mistakes” at COLAB

Tomasz Snazyk managing partner of the Warsaw spoke on “Venture Capital Investment Agreements and Founder Mistakes” at COLAB, in Cracow, Poland on July 23, 2013. The presentation provided an overview of key legal provisions of investment agreement in the area of venture capital in Poland and how tech founders can avoid various mistakes when dealing with VC. COLAB is the leading technology, start-up and innovation hub for emerging companies in Cracow.

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