EARLY STAGE FINANCING TERM SHEETS APRIL 27, 2021 KAREN DESCHAINE: COOLEY, PARTNER REBECCA JONES: NUVASIVE, DIRECTOR, LEGAL AFFAIRS

Early Stage Financing
 Term Sheets

 April 27, 2021

 Karen Deschaine: Cooley, Partner

Rebecca Jones: NuVasive, Director, Legal Affairs

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Today’s Topics

• Strategic Financings
 • Valuation of private companies
 • Key points of negotiation and market standard terms
 • Common strategic “features”, differences and considerations

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Let’s talk about “Valuation”

“Pre-Money Valuation”

• Pre-money Valuation is used to determine the per share purchase price for an equity financing

• The per share price for the financing =
 ℎ ( ℎ )
 • Shares outstanding is typically “fully diluted”
 • “Fully diluted” usually includes
 (1) outstanding shares, as converted to common stock after accounting for any conversion rate
 adjustment that results from the financing (e.g. anti-dilution protection);
 (2) shares reserved for exercise of outstanding equity awards (e.g. options);
 (3) shares reserved for future equity awards (e.g. the available “pool”) – including any increase to the
 pool that will occur in connection with the financing; and
 (4) shares reserved for the exercise/conversion of other outstanding securities, including SAFEs,
 convertible notes, and warrants

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“Post-Money Valuation”

• Post-money valuation = ℎ × ℎ 
 • Shares outstanding is typically “fully diluted”
 • Post-money valuation may not equal Pre-money valuation + Amount invested in financing if:
 • Convertible/exercisable securities were issued in the financing for no additional consideration
 • e.g. issuing warrants will increase post-money valuation before being exercised
 • All of items (1)-(4) on prior slide were not included in the pre-money valuation
 • e.g. option pool was increased in connection with financing but not included in pre-money
 valuation

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Example Pro-Forma for Valuation Calculations
(Converting SAFE/Notes; Warrants; Increase in Option Pool)

 Example Company
 Capitalization Table
 Series A Financing Pro Forma

 Pre-Financing Post-Financing
 Shares Outstanding/ Shares Outstanding/
 % Fully Diluted % Fully Diluted
 Reserved Reserved
 Common Stock Outstanding 7,000,000 87.50% 7,000,000 60.87%
 Options Outstanding 500,000 6.25% 500,000 4.35%
 Available Option Pool 500,000 6.25% 1,500,000 13.04%
 Total Common Stock 8,000,000 100.00% 9,000,000 78.26%
 Series A Issued Upon Note/SAFE Conversion (no
 1,000,000
 discount) 8.70%
 Series A Issued for New Money 1,000,000 8.70%
 Series A Warrants Issued in Financing 500,000 4.35%
 Total Preferred Stock 0 0.00% 2,500,000 21.74%
 Total Fully Diluted Capitalization 8,000,000 100.00% 11,500,000 100.00%

 Series A Share Price $ 1.00
 Pre-Money Valuation $10,000,000.00
 Total Series A Investment Amount (new money) $1,000,000.00
 Post-Money Valuation $11,500,000.00
 Converting Principal and Interest $1,000,000.00
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Example Pro-Forma for Valuation Calculations
(Previous Example but Conversion Shares are Not “in” the Pre-Money)

 Example Company
 Capitalization Table
 Series A Financing Pro Forma

 Pre-Financing Post-Financing
 Shares Outstanding/ Shares Outstanding/
 % Fully Diluted % Fully Diluted
 Reserved Reserved
 Common Stock Outstanding 7,000,000 87.50% 7,000,000 57.38%
 Options Outstanding 500,000 6.25% 500,000 4.10%
 Available Option Pool 500,000 6.25% 1,500,000 12.30%
 Total Common Stock 8,000,000 100.00% 9,000,000 73.77%
 Series A Issued Upon Note/SAFE Conversion (no
 1,800,000
 discount) 14.75%
 Series A Issued for New Money 900,000 7.38%
 Series A Warrants Issued in Financing 500,000 4.10%
 Total Preferred Stock 0 0.00% 3,200,000 26.23%
 Total Fully Diluted Capitalization 8,000,000 100.00% 12,200,000 100.00%

 Series A Share Price $ 1.11
 Pre-Money Valuation $10,000,000.00
 Total Series A Investment Amount (new money) $1,000,000.00
 Post-Money Valuation $13,555,555.56
 Converting Principal and Interest $1,000,000.00
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Equity Financing Terms
 (Series A/Series Seed)

Series Seed or Series A Terms

• Valuation (i.e. share price)
• Timing of Funding
 • All at once?
 • Milestones? Time based or event based?
 • Investors’ option or Company option?
• Other Key Issues
 • Board of Directors
 • Liquidation Preferences
 • Future Participation Rights
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Liquidation Preferences
• Non-Participating – Investors must choose between Common and Preferred
 • This has become the predominant form of preference
• “Fully” Participating - 1X plus share of what is distributed to Common Stock
 • Now more common in later rounds (C+)
 • The investors do not need to choose to convert in order to get preference and participation
• Capped-Participation – 1X plus share of what is distributed to Common Stock,
 unless a cap is reached (e.g. 3X total); investors must choose to convert to avoid
 being capped
• What do you mean more than 1X!
 • Rare on West Coast; Utilized in late or down rounds

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Liquidation Preferences

$3MM financing on a $7MM pre-money that included the 20% pool.

 “Pre-Money” Valuation: $7,000,000

 Option Pool: 20.00%

 Total Financing of: $3,000,000 $0.7140 per share
 $7M "pre-money including options" Before Money After Money After Options

 New Investors: 4,200,000 0.00% 37.50% 30.00%

 Option Pool: 2,800,000 0.00% 0.00% 20.00%
 Founders: 7,000,000 100.00% 62.50% 50.00%
 14,000,000 100.00% 100.00% 100.00%

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Liquidation Preferences

• Sale without Participating Liquidation Preference
Sale in 13 months $7M "pre-money including options"

Total Sales Price $20,000,000

$7M "pre-money including options" After Options Effective Proceeds

New Investors: 4,200,000 30.00% $6,000,000

Option Pool: 2,800,000 20.00% $4,000,000
Founders: 7,000,000 50.00% $10,000,000
 14,000,000 100.00% $20,000,000

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Liquidation Preferences

• Sale with Participating Liquidation Preference
Sale in 13 months $7M "pre-money including options"

Total Sales Price $20,000,000
 Liquidation Preference Remaining Balance Effective Proceeds

New Investors: $3,000,000 $5,100,000 $8,100,000

Option Pool: $0 $3,400,000 $3,400,000
Founders: $0 $8,500,000 $8,500,000
 $3,000,000 $17,000,000 $20,000,000
• Investors get their original amount first
 • Remaining Balance split among all stockholders
 • Net is investors get 2.7X return on 2X deal. 16

Other Key Points to Negotiate

 Information
 No Shop
 Rights
(2x ways)
 (2x ways)

 Option Pool;
Preemptive
 Founder
 Rights
 Stock Vesting
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Additional Preferred Stock Features

Protective Redemption Drag -along
provisions rights rights

Registration Dividend Co-Sale
 Rights Rights Rights
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Common Strategic
 Features/Differences/Considerations

Linked commercial arrangement

Future participation rights/expectations

Consolidated financials?

Avoiding limits on freedoms to operate

Is your company a competitor and, if so, does that limit your stockholder rights, or should it?

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Quick Note about: Convertible Notes/SAFEs

• Key items of negotiation
 • Interest Rates (4-8%)

 • Maturity Date (12 to 24 months)

 • Conversion Discount or warrants (20-25%)

 • Valuation Cap on Conversion

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Practice Tips

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Post-Presentation Questions?

Karen Deschaine, Cooley
kdeschaine@cooley.com

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