Pro Forma Cap Tables – Critical in all Financing Rounds

For early-stage startups looking to raise a pre-seed financing round (usually from either friends and family, angel investors or Micro VCs), the Simple Agreement for Future Equity, or SAFE, has become a mainstream, company-friendly mechanism to complete the financing. (See goodcounsel’s original post about SAFEs, here.)

goodcounsel often proposes or supports the use of the SAFE for pre-seed rounds, which cuts out some of the “convertible note fat,” i.e., it reduces transaction costs and simplifies the deal terms in a more company-friendly vehicle. And, it is still fair to the investors, because it honors the primary reasons investors should be betting on a pre-seed startup: a home run equity play, with a conversion upon an equity round at a discount to the future price per share, but without the accumulation of interest or the hammer of a looming maturity date, not to mention some heavy-handed control terms we’ve seen in investor-friendly convertible notes).

Our purpose here, however, is not to be the 1,001st blog post arguing the merits of the SAFE. Rather, we came across an article entitled “Why SAFE Notes are not safe for entrepreneurs,” and want to emphasize a critical point that the authors make about the danger to entrepreneurs who don’t understand the future dilution and associated difficulty with raising future rounds. As they put it: “It is critically important that VCs understand cap table math; unfortunately, many do not. Similarly, many CEOs don’t realize the impact that multiple SAFE notes at various valuation caps have on the capitalization table and how these notes can negatively impact the financial viability of the company moving forward.”

We would take this a step further: entrepreneurs and VCs who “do the math” without experience in multiple financings often fail to properly tie “the business deal” with the technical legal terms or understand how those terms affect the cap table as future events unfold. Therefore, it is absolutely critical either to (1) have your law firm prepare a pro forma cap table as early in the term-sheet process as possible, or (2) at minimum, ask the law firm to review and provide comments on the pro forma that has been prepared by the principals – before it is agreed upon.

At goodcounsel, we have a keen understanding of the documentation, the pro forma cap table, and the relationship between the two. We can give clients the benefit of our knowledge in a quick and cost-efficient manner, save them future headaches and legal costs, and most importantly, prevent unexpected dilution in the future.


Categorised as: Fundraising, Seed Financing

Jack White wants to form a corporation! [Updated]

As a corporate attorney, I don’t often find references to the kind of work I do in popular culture. I was pretty surprised, therefore, when I was listening to Boardinghouse Reach, the newly released album by Jack White, one of my favorite artists (who is rightly viewed as one of the great musical talents in rock). The album features a catchy track called “Corporation” (Spotify, Apple Music), in which White sings:

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Categorised as: News and Views

SXSW – Recap

SXSW lived up to my expectations. Sure, it took time to figure out the best strategies for getting around the convention venues, for getting in to the most interesting sessions, and most of all, for avoiding lines (it felt like the former Soviet Union at times). But I learned a great deal about trends in technology and beyond, met some cool people, and was even able to pick up and share some relevant industry developments with clients.

Austin, Texas

Also, Austin is quite a lovely city.

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Categorised as: News and Views, SXSW 2018

SXSW March 13 – Teen chefs, quantum particles, airborne transit, and wasted food

How can you go to SXSW and not attend some films (or what people outside of film festivals call “movies”)?

Chef Flynn

After visiting WeWork Austin to catch up on client work, I headed over to the Stateside Theatre on Austin’s main strip, Congress Avenue, to view Chef Flynn. It’s a wonderful documentary about a boy who develops a passion for cooking and some incredible kitchen skills, and thereafter enlists his elementary school classmates to be his line cooks and servers at an in-home “restaurant.”

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Categorised as: News and Views, SXSW 2018

SXSW March 11 – Optimistic professors, disruptive mayors, and $330,000 hamburgers

Steven Pinker @SXSW 2018

Steven Pinker

Enlightenment now

In “Enlightenment Now,” a presentation packed with graphs showing data from the Middle Ages to the present day, Harvard psychology professor Steven Pinker persuasively argued that the world is doing better than ever before by every important measure: decreases in disease, poverty, pollution, inequality, infant mortality, war and wartime fatalities, authoritarianism; and increases in health, happiness, life expectancy, and democracy.

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Categorised as: News and Views, SXSW 2018

Paying attention to the dispute resolution clause

goodcounsel, in its typical role of general counsel to our early-stage clients, is heavily involved in contract drafting and negotiation. In this post we’d like to address the sometimes neglected “dispute resolution” provision that is often in the boilerplate at the end of contracts. (You know, that legal mumbo-jumbo you have always ignored.) No one wants to think too much about dispute resolution, because no one wants to think there will be disputes. And, anyway, who even knows what a dispute will be about? All true, but there are important choices to be made about how disputes are handled, and they can make a big difference when parties cannot resolve their issues on their own.

The major decision is this: litigation or arbitration.

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Categorised as: Dispute Resolution

Avoiding the e-valanche

Just about everyone can relate to the challenge of trying to get work done in the face of an endless torrent of emails and the expectations of constant availability and immediate response. Yet the reality is that this situation is incompatible with completing work that requires extended focus (which is to say, most work).

We realized that we had to try something. Thus, from time to time, you might email someone at goodcounsel and receive an automatic response like this:

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Categorised as: Lawyering