Funding a New Venture

1. Funding a New Venture Jim Bourdeau Nixon Peabody LLP Venture and Technology Team

2. The Problem Need cash for start-up expenses Need cash to fund R&D Need to pay for services provided But, at startup, the Venture has no revenues

3. Question? What does the Venture have to offer?

4. Solutions(Typical Funding Sources) Equity Investments Equity in exchange for Cash Equity in exchange for Services Debt Commercial Bank Debt Business Loans Lines of Credit Credit Cards Debentures Debt convertible to Equity

5. BEWARE THE SECURITY LAWS!!!! State Securities Laws (Blue-sky Laws) Federal Securities Laws �33 Act �34 Act �Security� is broadly defined, and can include offers of equity as well as debt instruments

6. Potential Equity Investors Founders Take equity in exchange for expenses paid during formation Make capital contributions of cash (Boot Strapping) Personal Savings Personal loans, second mortgages Borrow against, or take distributions from 401(k)

7. Potential Equity Investors Friends and Family Issue equity in exchange for cash from Friends and Family Angel Investors High Net-worth individuals Located in the local geographic area Typically having some interest in the industry May be willing to invest at very early stages

8. Potential Equity Investors Seed Funds Typically invest in early stages Regional Funds May invest at early revenue stages Private Corporations Venture may have some relationship to the Corporation at the time of Venture�s formation Corporation may have some interest in partnering with the Venture to obtain access to its technology

9. Potential Equity Investors Venture Capital Funds Typically later stage investments Proven Revenues Proven Technology First stages of commercialization Completed FDA Approval process May follow after investments by Regional Funds or Angel Investors Large Investments in exchange for large equity positions with �strings� attached

10. Potential Equity Investors Public Markets Initial Public Offering Public Offerings

11. Debt Cash is loaned to the Venture Cash is returned to lender, over time, with interest May require security for the loan Liens on assets Liens on receivables Liens on Intellectual Property Personal guarantees of Founders

12. Convertible Debt Some or all of the outstanding balance of the principal and interest is convertible into equity Lender has the ability to speculate on the equity value and does not bear the risk of fluctuations in the value of the Venture until after conversion Fixed conversion price Variable conversion price

13. Question? Which is better � Debt or Equity

14. Terms and Buzz-words Common Stock vs. Preferred Stock Debenture Warrant Anti-dilution Fully Diluted