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Financing Options

Financing Options. Bootstrap Your Business, Nov. 27, 2006 Presenter: William A. Price, Attorney at Law wpriceiit@yahoo.com. Covered Here: Equity Debt. Not Covered Here: Sales Grants (e.g. SBIR). What’s Covered/What’s Not. Equity Friends and Family Partners Angel Capital

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Financing Options

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  1. Financing Options Bootstrap Your Business, Nov. 27, 2006 Presenter: William A. Price, Attorney at Law wpriceiit@yahoo.com

  2. Covered Here: Equity Debt Not Covered Here: Sales Grants (e.g. SBIR) What’s Covered/What’s Not

  3. Equity Friends and Family Partners Angel Capital Venture Capital IPO Private Equity? Debt Credit Cards Microcredit Factoring SBA 7(a) State Programs SBA 504 Securitization Finance Stages

  4. Friends and Family • Relationship Risks • Documentation Risks (Tax, Estates, etc…) • Expectation Risks (Loan vs. Equity) • Success Problems

  5. Legal Formalities, Friends & Family Investments • Note (for loan) or Deed of Gift or Partnership or Subscription Agreement, to document terms • Records of payments made and received • Provision for Estate Plan Elements (loan forgiveness, distribution share adjustment, etc…)

  6. New Partner Analysis • What key accounts can he/she/they bring? • What capital contribution can he/she/they make? • What is his/her/their business track record? In this business? • Who can replace him/her/them if things don’t work out?

  7. Partnership Agreement Checklist • Identity of Partners • Capital Contributions (Initial and Callable) • Business Identity • Business Operations: Agency and Authority, Periodic Distributions • Buy-Sell: Death, Retirement, Disability, Resignation, Other? • Tax Matters (Form of business, etc…)

  8. Angel Capital • 130,000 angels in US, Q1 and Q2, 2006 • 49,500 deals in 2005 • 4-5 angels usual in each deal • 55% of 2005 deals in seed or startup • 12% of deal proposals accepted, Q1 and Q2, 2006 (Historical rate is 10%.) Source: Center for Venture Research, University of New Hampshire

  9. Structure of An Angel Deal • Term Sheets Before Legal Documents • Disclosure Documents or Partnership/Active Manager Agreements • Due Diligence and other Conditions To Closing • Share Purchase Agreements • Preferred Shareholder/Investor Terms • Convertible Debt?

  10. Venture Capital • $6.2 Billion, 797 Deals, Q3 2006 • $1.2 Billion into Seed/Early Stage (35% of deals) Source: PriceWaterhouseCoopers MoneyTree Survey

  11. Do You Qualify For Venture Capital? • Can You Create A Billion Dollar Company? • Do You Have A Track Record? • Will There Be 10x returns on $3-5 million in a year or two? (1000% -- minimum!) • Do You Like Working For Others? The VC Will Own You!

  12. Venture Capital Deal Structure • Similar to Angel Deals: Term Sheet, then Legals • VC on the Board (35 minute rule?) • Preferred Share Terms Dominate If Bad Things Happen (Esp. duilution on down rounds) • Golden Rule Applies: whoever has the gold, makes the rules

  13. Initial Public Offerings • 99 to date, 2006 • November, 2006 deals: Hostopia.com, Silverback Media, Kolombo Technologies

  14. Valuation Pyramid: Startup to IPO $0.01 cents/share, first issue (fam/frnds) ($0 valuation) $0.10 cents/share, angel deal (1x net income valuation) $1.00 per share, IPO (12-20+x net income valuation)

  15. IPO Legalities • SEC or State Required Disclosures • Subscription and Management Agreements • Multiple Players: Lawyers, Underwriters, Securities Dealers • Alternative End Game: Merger (3-5x net income valuation, but many more happen.)

  16. Private Equity “The basics of a successful private-equity deal are well established. Borrow a lot of money and buy a public company or a neglected division of a company. Cut costs, increase profits, pay back debt and, after a decent—but not too long—interval, take the company public again, by selling its shares.” The Economist, March 16, 2006

  17. Credit Card Debt • Rates: 0% on balance transfers, 10.5-21+% on balances forward • Available Credit: Depends on Assets, Payment History • Dangerous Alternative: Home Equity Loan For Consumption-Related Expenses

  18. Microcredit (<$50k loans) • Local Government Programs (e.g. Elgin, Chicago, DuPage County) • DCEO Participation Loan Program ($10-$750k, 25% of loan total) • Enterprise Zone Participation Loan Program • Other community organization/microcredit programs (e.g. SSBDC’s)

  19. Factoring • Uses Customer’s Credit, Not Yours • Sale of Receivable For Cash • Costs Around 1% per Day • Allows High Growth

  20. SBA 7(a) Loans • $50-250,000 normal range of loans • Most business banks have programs • Prime plus 2.25% to Prime plus 2.75%, loan term less than 7 years (10.75% to 11.25%, if Nov. 24 Prime rate (8.25%).) • Needed: Repayment ability (business plan, track record of entrepreneur, collateral.)

  21. Your Loan Documents • The Loan Agreement: What are your representations and warranties? • The Note: When Are You In Default? What Happens Then? • The Security Instrument: What Can You Lose If You Don’t Pay? When Can You Substitute Collateral?

  22. State Programs (Non-DCEO) • University “Gap” Funds (Illinois Ventures, NWU/UIC ITEC’s) • State Treasurer’s Loan Program • Illinois Finance Authority (bond size deals or Technology Development Bridge Fund) • Sector-specific funds (energy, coal, etc…) • Training grants (Individual and business) • Regional development authorities (e.g. Upper Illinois River Development Authority)(Bonds)

  23. SBA 504 Program • Up to $1.5 million (non-mfg.) or $4 m (mfg.) • Used for Fixed Asset projects (typically adds to a 7(a) for working capital) • Community Development Corporations certified by the SBA: 3% loan packaging fee, SBA issues debenture, loan sold on US market)

  24. Securitization Examples: Any Recurring Revenue Stream o bonds o commercial and residential mortgages o credit cards and merchant vouchers o trade receivables o film and television royalties o music publishing royalties o intellectual property o franchise royalties o export receivables (e.g., steel, grain, pulp and paper, oil and gas) o auto loan and lease receivables o equipment loan and lease receivables o installment sale receivables o aircraft and rolling stock o real estate o oil and gas o investment securities o insurance premiums o toll roads

  25. Securitization Transaction Structure • Bankruptcy Remote (Use a Trust For Proceeds, Payments) • Credit Enhancement Routine • Tax Advantages (Pass-Through To Investors, Not Originating Entity) • Securities Distribution & Secondary Markets By Deal Type (e.g. carbon emission reduction credits)

  26. Additional Resources • US Small Business Administration: www.sba.gov (Topic: “Financing’”) • Angel Capital Association: http://www.angelcapitalassociation.org/ • National Association of Small Business Investment Companies: http://www.nasbic.org/ • National Venture Capital Association: http://www.nvca.org/

  27. Questions/Copies? For a copy of the slides: Your card, or Email with “Financing Options” to wpriceiit@yahoo.com

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