BEIJING BOSTON BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.

Cleantech Open Webinar –pCapitalization and Related Topics

Presented by

Sidley Austin’sSidley Austin s Emerging Companies and Venture Capital Group

Palo Alto, CADeborah Marshall Ilan HornsteinPartner AssociateEmail: dmarshall@sidley.com Email: ihornstein@sidley.comPhone: 650.565.7004 Phone: 650.565.7049

AgendaAgenda• Cap Table Basics

– What is it? What does it mean?• Actual vs. Pro Forma Cap Tables• Simple Cap Table• Simple Cap Table• Overview of Types of Securities• Who is on the Cap Tablep• Simple Cap Table• Vesting – Looking Behind the Cap Table Numbers• Anti-Dilution Protection• Series A Term Sheet & Pro Forma Capitalization Table• Questions• Questions

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Actual and Pro Formai li iCapitalization

• Cap Tablep– Shares Authorized (Theoretical Limit)– Shares Reserved for Issuance (Planned-for Future Dilution)

Sh O t t di– Shares Outstanding (Actual Current State)– Fully-Diluted “Outstanding” (Theoretical Current State)– Convertible Debto e b e eb

• Pro Forma Cap Table– “As-if” cap table– Shows impact of a future event, e.g. financing round

or liquidity eventor liquidity event

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Authorized vs. Outstanding F ll Dil dvs. Fully Diluted

Outstanding Fully Diluted AuthorizedActual outstanding shares only. Represents the true current state of the Company

Assumes exercise of certain issued and issuable convertible equity securities and includes all

Maximum authorizedamount fixed in Certificate of Incorporation Can be

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current state of the Company. equity securities and includes all outstanding and all reserved shares.

Incorporation. Can be increased by amendment of the Certificate.

All Securities (and Rights to Acquire Securities) ( g q )

are on the Cap Table

• Shares– Ownership of an economic and voting interest (both are very

important and are reflected in the cap table and the charter –must read both to understand the full picture)O h t ( t d h )– One share, one vote (even unvested shares)

• Options– A right to buy shares at a given price (“upside”)– Then what’s a warrant?– No voting rights (until buying shares)

• Convertible Debt– A loan to the company that is convertible into shares and may

have special economic rights on liquidation prior to conversion– No voting rights (until converted into shares)

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Who is on the Cap Table?Initial Team Directors EmployeesInitial Team, Directors, Employees,

Consultants, Etc.

• Founder Shares• Equity Plan (reserved and outstanding

reflected in the cap table)p )• Spousal rights (not on the cap table but critical

to address))• Vesting (important but generally not reflected

in the cap table)p )

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Who is on the Cap Table?lAngel Investors

• Debt vs EquityDebt vs Equity• Valuation

P t ti C t l• Protection vs Control• Convert in Equity Round• Cap on conversion price• Cap on conversion price

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Who is on the Cap Table?Venture Investors

• Control and ProtectionControl and Protection• Valuation

i dil i i• Anti-dilution protection• Follow-on Investment (and “Pay to Play”)• Voting Protections on Key Events (not

generally reflected on the cap table)g y p )• Intra-Investor Issues (voting blocks and

balance maybe only partially revealed – seebalance maybe only partially revealed see voting agreements and charter)

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Simple Cap TableSimple Cap TableShares/Units % of F/D

Founder 1 400,000 40.0%Founder 1 400,000 40.0%Founder 2 200,000 20.0%Founder 3 200,000 20.0%College Roommate (Consultant) 10,000 1.0%N i hb (Ad i ) 10 000 1 0%Neighbor (Advisor) 10,000 1.0%

Total Common Outstanding: 820,000 82.0%

OptionsCommon Reserved for Pool 200,000 Shares Issued 20,000 Options Outstanding 120 000 12 0%Options Outstanding 120,000 12.0%Remaining Available for Issuance 60,000 6.0%

Equity Incentive Pool Impact: 180,000 18.0%

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q y p ,

Total Fully Diluted: 1,000,000 100.0%

Simple Cap Table VOTING POWER

Shares/Units % of F/D% of

OutstandinggFounder 1 400,000 40.0% 48.8%Founder 2 200,000 20.0% 24.4%Founder 3 200,000 20.0% 24.4%College Roommate (Consultant) 10 000 1 0% 1 2%College Roommate (Consultant) 10,000 1.0% 1.2%Neighbor (Advisor) 10,000 1.0% 1.2%

Total Common Outstanding: 820,000 82.0% 100.0%

• Founder 1 can reach majority without needing another F dFounder.

• Roommate and Neighbor are critical swing-votes

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critical swing-votes

Vesting Impacts Distributions on dLiquidity Events

• Vesting FormulaVesting Formula– Silicon Valley Standard = 4/1 – Vesting for Founders Sharesg– Time– Milestones

• Vesting Commencement Date & Acceleration– Employeesp y– Consultants– Advisors

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Anti-Dilution Protection

• Goal: Protect economic and voting interest• Triggered by economically dilutive issuances and deemed

issuances – Exceptions for issuances other than for financing purposesp g p p

• Formula– Broad-based weighted average– Full ratchet (rare on west coast)Full ratchet (rare on west coast) – Strength of protection driven by investor’s view of risk of

investment• Reflected in the cap table: “as converted to common”Reflected in the cap table: as converted to common

– Impacts voting balance and distribution on liquidity events

Who is diluted by the adjustment?Who is diluted by the adjustment?

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Anti-Dilution Protection: d b d h dBroad-based Weighted Average

( )BA +( )C) +(A B A CP1=CP2 +∗

• CP2 = New Conversion Price• CP2 = New Conversion Price • CP1 = Conversion Price before adjustment • A = Fully-diluted number of sharesA = Fully diluted number of shares • B = $ received by Company divided by CP1 (i.e. number

of shares of Common Stock that would have been issued if issued at a price per share equal to CP1)

• C = Number of shares issued in dilutive issuance

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Anti-Dilution Protection: ll hFull Ratchet

issuancedilutivein shareper Price = CP2

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Anti-Dilution Protection:l f ffExample of Effect

Series A Price (CP1) 1.00$ Se es ce ( ) 00$Series B Price (Down Round) 0.50$ Series B Pre-Money Value 4,000,000.00$ F/D Number of Shares Pre 8,000,000 Series B $ Invested 4,000,000.00$ Series B Shares Issued 8,000,000 Series B Post-Money Value 8,000,000.00$ F/D Number of Shares Post 16 000 000F/D Number of Shares Post 16,000,000

Ownership, Post(as converted)

Percent(F/D)

Liquidation Preference CP2

S i A I P M 3 200 000 40% 1 600 000 00$Series A Investors Pre-Money 3,200,000 40% 1,600,000.00$ Series A Investors Post-Money(without anti-dilution adjustment)

3,200,000 20% 1,600,000.00$ 1.00$

Series A Investors Post-Money 4 266 667 27% 2 133 333 33$ 0 75$

(broad-based adjustment)4,266,667 27% 2,133,333.33$ 0.75$

Series A Investors Post-Money(full ratchet adjustment)

6,400,000 40% 3,200,000.00$ 0.50$

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Series A Investors Post-Money(if Series B price was CP1- $1.00)

3,200,000 27% 2,133,333.33$ 1.00$

Series A Term SheetSeries A Term SheetTERM SHEET - SERIES A FINANCING FOR STARTUP, INC.

AmountInvestment Amazing Capital $4,000,000 Wealthy Uncle $ 600,000* Buddy Who Sold Startup to Tech Giant $ 400,000* Total Series A Round $5,000,000 Valuation Pre-money valuation of $7 million, with a post of $12 million Price Per Share $0.5506 – Pro-Forma Cap Table attached B id N t * W lth U l ’ d B dd ’ tibl d bt ( i i l l i t t) t b t dBridge Notes * Wealthy Uncle’s and Buddy’s convertible debt (principal plus interest) to be converted

into Series A per terms and conditions of the notes (20% discount) and their investment amount above shall be reduced by such amount.

Board 5 Directors: 2 nominated by Common Stock (initially, the Company’s CEO and CTO), 2

C ( )nominated by Amazing Capital (initially, John Doe and Jane Amazing), and 1 independent director jointly elected (initially left vacant)

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Series A Term Sheetd- continued -

V ti & F d 30% f h t d t bj t t ti h d l t b dVesting & - Founders: 30% of shares vested, rest subject to vesting per schedule to be agreed Incentive Pool upon prior to closing. At change of control, double trigger acceleration on

50% of remaining unvested shares and options held by Founders - Non-Founders: four year monthly vesting with one year cliff

- Option Pool to be increased so 15% post-money available for grant Conversion At holder’s option, compulsory on majority vote of Preferred Stock (voting together as a

single class), and automatically upon IPO at 5X original price ($2.75+/share) Dividends 6% non-cumulative, if and when declared by Board Liquidation Pref. Non-participating; 1X original purchase price plus declared dividends Anti-dilution Standard; Broad-based weighted averageAnti dilution Standard; Broad based weighted average Voting Rights Approval of majority of the Preferred Stock on customary protective provisions

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Series A Term Sheetd- continued -

ROFR & Co-Sale Company ROFR on all shares of capital stock held by Founders and Key Employees, assignable to the investors if not exercised by the Company. Co-sale rights for investors on any shares not purchased pursuant to the ROFR.

Closing - Closing to occur on or before August 31 2013Closing Closing to occur on or before August 31, 2013 Conditions - Employees and Founders sign proprietary information agreement - Completion of legal and financial due diligence and founder references - Opinion of counsel Documentation Definitive documentation will contain other standard and customary rights, preferencesDocumentation Definitive documentation will contain other standard and customary rights, preferences

and privileges. Documents to be drafted by counsel for _______________. Fees & Expenses Company will reimburse legal fees of Amazing Capital up to $______________.

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Series A Pro Forma Cap TablePost-Money CapitalizationPre-Money Capitalization

(i.e. Post 10:1 Split & Pool Increase)Prior Capitalization

Series A Preferred Stock:New Money

SharesNote Conv.

Shares Total Shares% of F/D

% of Preferred

Amazing Capital 7,264,802 - 7,264,802 32.8% 76.9%Wealthy Uncle 127,134 1,203,178 1,330,312 6.0% 14.1%Buddy Who Sold Startup 245,187 601,589 846,776 3.8% 9.0%

Total Series A Outstanding: 7,637,123 1,804,767 9,441,890 42.6% 100.0%

Common Stock: Total Common% of F/D

Total Common

% of F/D Total Common

% of F/D

Founder 1 400,000 40.0% 4,000,000 31.5% 4,000,000 18.1%Founder 2 200,000 20.0% 2,000,000 15.7% 2,000,000 9.0%Founder 3 200,000 20.0% 2,000,000 15.7% 2,000,000 9.0%College Roommate 10,000 1.0% 100,000 0.8% 100,000 0.5%Neighbor 10,000 1.0% 100,000 0.8% 100,000 0.5%

Total Common Outstanding: 820 000 82 0% 8 200 000 64 5% 8 200 000 37 0%Total Common Outstanding: 820,000 82.0% 8,200,000 64.5% 8,200,000 37.0%

Equity Incentive Plan:Common Reserved for Pool 180,000 1,800,000 4,512,650 Increase in Pool - 2,712,650 Options Outstanding 120,000 12.0% 1,200,000 9.4% 1,200,000 5.4%Remaining Available for Issuance 60,000 6.0% 3,312,650 26.1% 3,312,650 15.0%

Common + Pool: 1,000,000 100.0% 12,712,650 100.0% 12,712,650 57.4%

Total Fully Diluted: 1,000,000 100.0% 12,712,650 100.0% 22,154,540 100.0%

Convertible Notes: PrincipalPrincipal +

Interest DiscountConversion

PriceW lth U l 500 000 00$ 530 000 00$ 20% $ 0 4405

Note: Discount is reflected in Wealthy Uncle 500,000.00$ 530,000.00$ 20% $ 0.4405 Buddy Who Sold Startup 250,000.00$ 265,000.00$ 20% $ 0.4405

Total Outstanding: $ 750,000.00 $795,000.00

$Details of Investment in Series A Round

Valuation

conversion price, which is 20% lower than the Series A Price.

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Pre-Money ValuationPrice Per Share

New Money InNotes Converted Amazing $ - $ - $ - $ 4,000,000.00 $ 4,000,000.00 Total Round Uncle $500,000.00 $30,000.00 $ 530,000.00 $ 70,000.00 $ 600,000.00

Buddy $250,000.00 $15,000.00 $ 265,000.00 $ 135,000.00 $ 400,000.00 Post-Money Valuation Total $750,000.00 $45,000.00 $ 795,000.00 $ 4,205,000.00 $ 5,000,000.00

$ 795,000.00

$ 12,000,000.00

$ 4,205,000.00

$ 5,000,000.00

$ 7,000,000.00

Principal Interest

$ 0.5506 Note Total

(P+I)New

MoneyTotal Investment

in Round

Key Emerging Company Relationships

Non-Practicing

EntitiesImplementationFormer

Employer Formation

Consultants University

NEWCO

Employees Co-founders

Advisers Spouse

Board

Strategic Venture

AngelInvestors

Partners Investors

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OUR GLOBAL COVERAGE:OUR GLOBAL COVERAGE:Global Reach

Approximately 1,700 lawyers in 19 ffi ld id19 offices worldwide

Our offices are located in critical financial and commercial centers

8 offices in the US totaling 1,420 lawyers

4 offices in Europe totaling 160 lawyers with a significant corporate and securities practice in London

6 offices in Asia Pacific totaling 130 l h ti130 lawyers who are native-speaking or fluent in languages including Korean, Mandarin, Cantonese, Taiwanese and Japanese as well as English

Handle work in dozens ofHandle work in dozens of languages

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Thanks for Inviting Us!Deborah MarshallPartner

M&A

Deborah A. Marshall is a partner with the firm and concentrates her practice on strategic business counseling for emerging growth companies and investors at all stages of development, from start-up entrepreneurs to publicly traded entities and technology-based, multinational

tiM&AEmerging CompaniesVenture CapitalTechnology Transactions

+1.650.565.7004

corporations.Ms. Marshall has advised issuers, investors and investment banking firms in the internet, software, electronics, clean technology, media, entertainment, biopharmaceutical, genomics, medical device and diagnostics sectors. She has significant experience in venture capital financing, mergers and acquisitions, public offerings, private equity and strategic partnerships.Ms. Marshall is a frequent speaker on issues related to venture capital, emerging growth

dmarshall@sidley.com companies, life sciences, public securities and entrepreneurship. She has been a guest lecturer on entrepreneurship at the University of California Berkeley Haas School of Business, as well as a member of the faculty of the Haas Business School’s Global Bio-Executive Program.

Ilan HornsteinAssociate

Emerging CompaniesVenture Capital

Ilan B. Hornstein’s practice encompasses a variety of business and transactional matters, including domestic and cross-border acquisitions, technology transactions, energy project developments, complex secured and unsecured debt financings, and general corporate matters. His clients include domestic and international private and public companies, banks and other financial institutions, private equity firms, and governmental entities.p

Technology Transactions

+1.650.565.7049ihornstein@sidley.com

To better serve and understand his clients, Mr. Hornstein draws on over four years of domestic and international business experience he gained prior to law school. An electrical engineer by training, he has worked in the finance, business development, strategic planning, and information technology departments of a large defense contractor. In addition, he is Raytheon Six Sigma certified and a graduate of Raytheon’s Leadership Development Program. He has worked in Germany, the United Kingdom and the United States.Mr. Hornstein is fluent in English and German.

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QuestionsQuestions

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