Introduction to Venture Capital:

The Venture Capital industry pools resources from institutional and private investors and professionally selects investments in early-stage and growth-oriented companies prior to public offerings. Institutional and private investors include public and private pension funds, insurance companies, major corporate funds and high net-worth individuals. A Venture Capital fund may specialize in its investments by industry (biomedical, computer software, etc.), by geography (Southern California, Southeast, New England, etc.), by size (only over $10 million, only under $3 million, etc.), by stage of company development (early-stage or seed capital, third round financing, pre-IPO funding, etc.) and by any means designed to distinguish itself from its peers both to attract its own funding and to attract companies looking for funding.

• Company Valuation and Business Due Diligence
• Term Sheet
• Legal Due Diligence.
• Definitive Documentation.
• Closing.

• Valuation of Company.
• Pre-Money.
• Post-Money.
• Determination of Price Per Share.
• Concept of "Fully Diluted" Common Stock Outstanding.
• Convertible Securities.

• Cumulative vs. Non-Cumulative.

• Prohibition on Common Stock Dividends.

• Priority.

• Participating vs. Non-Participating Preferred.

• Definition of "Liquidation":
• Bankruptcy/Insolvency
• Changes of Control
• Priority.

• Alternative Formulas.

• Purchase Price Multiples.
• Treatment of Dividends.
• Participation and Caps.

• "Exit" Strategy for Investors.
• Redemption Price.
• Redemption Period.
• Election to Redeem.
• Vote by Preferred Holders.
• Individual Holder Election.
• State Law Constraints.
• Contractual Constraints.

6 -  Venture Capital Terms: Conversion Rights

• Optional Conversion.

• Automatic Conversion.

• "Qualified" IPO.
• Supermajority Vote.

• Purpose of Antidilution.
• Basic Antidulution Formulas.
• Full Ratchet.
• Broad-based Weighted Average.
• Narrow-based Weighted Average.

• Common Exceptions.

• Existing Convertible Securities.
• Options.
• Strategic Warrants.
• Acquisitions.

• Limitations.

• Caps (Absolute/Percentage).
• Board Approval.

• Voting on an "As Converted" Basis.
• Protective Provisions.
• Percentage Vote.
• All Outstanding Preferred vs. Series Vote.
• Actions Requiring Approval.

• Board Representatives for Series.

• Board Representatives for Individual Investors.

• Board Observer Rights.

• Gives Investors Ability to Maintain Percentage Ownership in Company.

• Simple Right of First Offer vs. Right to Purchase Any Shares Not Subscribed for by Other Investors.

• ROFR Gives Investors Initial Right to Purchase Shares to be Sold by Founders.
• Co-Sale Gives Investors Ability to Sell When Company Founders Sell.
• Founders May Also Request ROFR or Co-Sale Right With Respect to Sales by Major Investors.

• Registerable Securities
• Demand Rights
• Time Period
• Dollar Amounts
• Number
• "Piggyback" Rights.
• S-3 Registrations.
• Cut-Back Provisions.
• Expenses.
• Termination.
• Covenant re: Additional Registration Rights.
• Market Stand-Off.

14 - Venture Capital Final Documentation

• Stock Purchase Agreement.
• Economics.
• Representations and Warranties.
• Closing Conditions.
• Legal Opinions.
• Other Document Deliveries.
• Covenants.
• Indemnities.
• Other Provisions.
• Registration Rights Agreement.
• Amended Certificate of Incorporation or Certificate of Determination.
• Investor's Rights Agreement.
• Voting Agreement.
• Shareholders Agreement, ROFR/Co-Sale Agreement.