On June 6, 2006, Daniel Zimmerman, a business and corporate attorney, at Cooley Godward LLP, gave a talk in Palo Alto, CA on venture concepts for the first time entrepreneur who enters into negotiations with venture capital investors. Zimmerman studied law in Berlin and Germany. He received a LLM degree from UCLA in 1996, and is fluent in English, German, French.
When seeking venture funding, the entrepreneur should be knowledgeable of the different types of securities. Companies usually sell convertible preferred stock, which provide preference payments to preferred stock when the company is acquired or liquidated.
Valuation depends on how much money the entrepreneur needs to raise to get to the next stage of the company, the percentage that the venture capital investor wants of the company, and the option package offered to company employees. Revenues are not usually evaluated since start ups usually do not generate much revenues.
The other preferences that preferred stock holders may have over common stock usually held by founders include voting rights and veto protections.
Veto protections create internal controls such as operational covenants or restrictions that affect hiring certain executives, changing a line of business, increasing salaries, incurring debt, and expending on capital.
Voting rights lead to board approval where preferred holders may be represented by preferred directors. This affects the focus on corporate governance and decreases on conversion prices.
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