The attorneys at Fellows & Quenzer LLC have experience in participating in the negations for corporate financing and the drafting of financing agreements. We have represented both the side of companies as well the side of investors in such transactions. We have a deep depth of understanding of this vital requirement of obtaining capital for growing companies and Start-Ups. Each financing situation is different depending upon the client and the circumstances of the company to receive funds, the founders, the current investors and the future investors. There is a wide range of options for financing agreements. If you have questions on financing issues, please call us at 303-376-6366 for a complimentary consultation to explore your unique situation. Below is a quick glossary of terms often used in financing deals that may be of use as an introduction to basic financing issues.
Is the ownership interest of the company that is held by various investors. Generally, when the company is first formed, the founders of the company own 100 percent of the company. Often when outside investors are brought in, the investor(s) will usually want 40 to 60 percent of the total equity of the company, though the percentages generally trend downward for subsequent rounds of financing.
Is a concept of protection for existing equity percentages against being lowered by future financing rounds. Additionally, such an anti-Dilution provision in a financing agreement can protect the value of current equity assuming the total value of the company decreases in the future. Such situation is commonly labeled a "down-round" for financing. Anti-dilution provisions can guarantee that certain equity stakes of all or select investors do not fall below a given percentage. A frequent version of an Anti-Dilution provision is "weighted average anti-dilution".
As a general rule, the equity investors are in control of the company. Depending upon the corporate organization documents, provisions in the investment documents usually give the investors authority over certain decisions, such as whether to sell the company. The percentage of total equity to make certain decisions will vary depending upon the companies' operating agreement. It is very important to craft the operating agreement with the goals of the founders in mind. Typically, after the first round of financing, the founders' total equity is diluted to less than 50 percent which is a usual benchmark for control of the company.
Depending upon the anticipated total of employees required to successfully run the company, it may be wise to set aside part of the initial overall equity for stock options for key employees. It is notable that many professional investors insist that 20 percent of the total equity be reserved to attract and keep key employees.
Is a loan to the company that can be converted into shares at a later date. This can be a useful tool for the founders to attempt to maintain a larger percentage of overall equity.
Professional investors likely will insist on preferred shares for themselves, with the founders and employees to hold common shares of stock in the company. Generally, preferred shareholders will have additional and superior rights to those of common shares. Sometimes, preferred shareholders hold the right to receive a multiple of their investments back upon the sale of the company. Customarily the multiplier is one times the amount of their investment, thus hedging against a loss. Preferred shareholders will receive the amount of their multiplier plus their equity percentage of the remainder of the sale proceeds before the common shareholders receive proceeds from the sale of the company in the ratio of their own equity positions.
A company's pre-money valuation is its total value before an investment is made into the company. It can be a difficult calculation and needs to be reasonable to attract investors. Post-money valuation is the pre-money valuation combined with the actual dollar amount invested, plus on occasion the goodwill or reputation of the individual investor. Depending upon the reputation of the investor, the company may be more desirable for future financing rounds and have in effect raised the overall value of the company.