Campaign to Raise Capital and Securities Laws

1. Campaign to Raise Capital and Securities Laws New venture financing

2. The campaign to raise capital The vast majority of funded deals using venture capital follow this course of events: Set funding objectives Prepare the plan to attract investors Pick the best capital-raising strategy Assign tasks Launch the campaign Make presentations Incorporate feedback from presentations

3. The campaign to raise capital Modify plan but maintain vision Due diligence The lead VC says “We will invest!” Closing the VC contract Closing week Cash in the bank

4. The Road Show Definition: a presentation by an issuer of securities to potential buyers The term “road show” applies to the presentations management gives to analysts, fund managers, and potential investors around the country when they want to issue securities or do an initial public offering (IPO) The road show is intended to generate excitement and interest in the issue or IPO, and is often critical to the success of the offering. Also known as a "dog and pony show."

5. 1994: Netscape’s Road Show Netscape files to go public on June 23, 1994 Overwhelming reception on the road suggests a bubble psychology is taking over the investment community Instead of meeting with 3-4 analysts from a given institutional investor in each city, Netscape got 50-75 at their presentations – most wanted to understand the Internet Investors didn’t want to miss “the next Microsoft”

6. Chips and Technologies

7. Chips and Technologies First products “EGA” = Enhanced Graphics Adapter. EGA produces a display of 16 simultaneous colors from a palette of 64 at a resolution of up to 640×350 pixels. Yes, it’s now obsolete… Here’s the full 64-color EGA palette

8. Chips and Technologies Financing

9. Chips and Technologies Equity Ownership

10. Chips and Technologies Equity Ownership

11. How do they figure out valuations? Angel investor valuation techniques for seed stage companies • Cost-to-duplicate • Market multiple • Discounted cash flow • Valuation by stage (milestones) http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

12. Cost-to-duplicate • Calculate how much it would cost to build another company just like it from scratch – the idea is that a smart investor wouldn't pay more than it would cost to duplicate. • The cost-to-duplicate a software business, for instance, might be figured as the total cost of programming time that is gone into designing its software. • Problem: Doesn’t reflect future earnings potential of company and ROI http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

13. Market multiple • Values the company against recent acquisitions of similar companies in the market.  • Example: mobile application software firms are selling for 5x sales. Knowing what real investors are willing to pay for mobile software, you could use a five-times multiple as the basis for valuing your mobile apps venture, while adjusting the multiple up or down to factor for different characteristics (Note: if your mobile software company, say, were at an earlier stage of development than other comparable businesses, it would probably fetch a lower multiple than five, given that investors are taking on more risk) • Problem: Difficult to find comparables http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

14. Discounted cash flow • For most startups – especially those that have yet to start generating earnings – the bulk of the value rests on future potential. • DCF involves forecasting how much cash flow the company will produce in the future and using an expected ROI to calculate how much that cash flow is worth. Startups get higher discount rate to account for high risk company fail to generate sustainable cash flows • Problem: depends on the analyst's ability to forecast future market conditions and make good assumptions about long term growth rates http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

15. Valuation by stage • “Rule of thumb" values are typically set by the investors, depending on the venture's stage of commercial development. • The further the company has progressed along the development pathway, the lower the company's risk and the higher its value. http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

16. Valuation by stage • Many private equity firms will utilize an approach whereby they provide additional funding when the firm reaches a given milestone. • For example, the initial round of financing may be targeted toward providing wages for employees to develop a product. Once the product is proved to be successful, a subsequent round of funding is provided to mass produce and market the invention.  http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

17. Valuation by stage examples http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

18. Securities law and private financing What are the rules for issuing shares of private equity?

19. What is a security? • Common and preferred stock, notes, bonds, debentures, voting-trust certificates, CDs, warrants, options, subscription rights, etc. – investor must be passive or “nearly so” • Exists whenever one person provides money or some item of value with the expectation that it will be used to generate profits or other monetary return for the investor primarily from the efforts of others

20. What is a security? • A limited partnership • A cow • An orange grove • A condominium unit • A parcel of oil property

21. Business financing disclosures • Laws require seller of securities to make buyer aware of material factors that bear on present conditions and future prospects of the business, plus relevant details regarding participation in business and its profits • Prospectus, offering circular, or memorandum are common practice • These prevent arguments over whether disclosures have been made or what they were • Since 1995 “safe harbor” statements are allowable in disclosures when making “future-looking statements” • The company – not the accountant – is responsible for the accuracy of pro forma financials

22. Private offerings • Do not require company to undergo expensive and lengthy registration process with SEC • Offerees are presumed to be sophisticated enough not to need review of prospectus by government • Historically exempt from govt oversight based on “sophistication” of investor, number of purchasers, and amount of $ raised – all highly subjective and resulted in liabilities for issuers

23. Regulation D to the rescue • File a notice with the SEC on “Form D” • Rule 504 – issuer can sell up to $1M in securities during any 12-month period – no limits on sophistication or number of investors – not available to investment companies or “blank check” companies • Rule 506 – issuer can sell unlimited amount of its securities but only to “sophisticated” investors – available for transactions that do not involve > 35 investors – sales to accredited investors, relatives of investors are not included • Rule 505 – adds flexibility to 506 issuers; permits sale of up to $5M in 12-month period to any 35 investors + unlimited accredited investors

24. Form D is 3 (ish) pages long!

25. Other issues with private securities • Issues are still subject to antifraud and civil liability provisions, even if exempt from federal regulation • Resale is severely restricted, limiting liquidity • Securities regulation is complex – an error can cost the entrepreneur and its effects last for several years

26. The “prospectus” is your business plan with risk factors • Executive summary • Company description • Risk factors • Products • Market • Competition • Marketing program • Management • Manufacturing • Service and field engineering • Future products • Facilities • Capital requirements • Financial data and forecasts

27. Other stuff • Term sheets • Stock rights issue