Accessing Capital in Small Communities

1. Accessing Capital in Small Communities Part 1: Equity Capital

2. Learning Outcomes After this webinar, you’ll be able to: • Summarize the types of capital and forms of financial capital • Describe the types of equity capital that businesses use at different life stages • Identify resources in B.C. that can help businesses in your community attract equity capital • Recognize the barriers that prevent businesses from attracting equity capital

3. What is Capital? Assets that make it possible to generate economic benefit

4. Forms of Financial Capital for Economic Development • Equity: money given for shared ownership • Debt: money loaned at a cost, to be repaid • Grants: money provided for specific outcomes, generally not repayable.

5. Equity Vs Debt Advantages of Equity Advantages of Debt Lender has no claim on future profits or control of the company Interest on debt can be claimed on income taxes No need to comply with securities regulations Variety of types of debt to meet your specific needs • Money does not need to be repaid* • No interest payments to use up limited cash flow • Equity partners may also contribute knowledge and connections • Don’t need to qualify for a loan (credit history, business banking criteria)

6. Equity Vs Debt Disadvantages of Equity Disadvantages of Debt Interest costs must be paid regardless of business results Tough to qualify for loans based on credit history Lenders may require more collateral that you have Non-repayment results in asset seizure and credit problems in the future • Sharing ownership, decision-making, future gains of your company • Slow, complex process to access financing • Ending the relationship = “it’s complicated” • Money rarely comes in small amounts

7. EQUITY A Deeper Dive into

8. What do businesses use equity for? • Higher risk activities • Start-up • Research & development, commercialization • Market / product expansions • Leverage for debt • Down payments

9. Life Stages & Equity Needs

10. Free Cash Flow Income (sales) – Operating costs – Interest & principal payments on debt – Taxes – Capital expenditures = Free Cash Flow • Funds available to pay business owners through dividends / share buy-back OR reinvest in the business.

11. How do Equity Investmentsgenerate Return? • Capital Gains: • Value of an asset (e.g. shares, property) increases • Investor sells the asset for more than they paid • Dividends: • Free cash flow is shared with investors by paying $x per share

12. Investors Consider Risk/Return • Investor risk tolerance • Investment horizon/timeline • Macroeconomic variables • Knowledge of the business/industry • Influence over management • Investment diversification

13. Private vs Public Equity • Public Companies: • Registration & Disclosure Requirements • Private Companies: • Fewer than 50 shareholders • Only sell shares to “qualified purchasers”

14. Programs to Encourage & Attract Equity Investment

15. Small BusinessVenture Capital Tax Credit Program Early-stage financing

16. Small BusinessVenture Capital Tax Credit Program Province offers 30% tax credit to investors who invest in eligible businesses Investors • Employees • Family and friends • Angel Investors • Corporations

17. Small BusinessVenture Capital Tax Credit Program Businesses • Must apply for registration and approval to raise funds • Finance growth • Product development • Scaling up technology • Patient source of equity financing

18. Two Investment Models • 30%tax credit rate • $400,000 (annual max) – fully refundable for individuals • $128.3 million can be raised in 2019 ($38.5m in tax credits)

19. Eligible Business Corporation (EBC) • Direct investment model • Investors receive 30% tax credit • 5-year hold period • Investors up to $400k per year • EBC can raise up to $10M • EBC eligibility criteria: • Permanent establishment in BC • Under 100 employees • 75% BC wages and salaries • 50% assets/expenses applied to eligible activity • No more than 20% assets outside BC • $25,000 in equity capital

20. Venture Capital Corporation (VCC) Indirect investment model • Investor invests in VCC • Investors receive 30% tax credit • VCC must invest 80% of capital raised within 2 years into eligible small businesses • Business eligibility criteria similar to EBC • VCC’s can invest up to $10M within a 2-year period in the small business

21. Eligible Business Activities • Manufacturing & Processing • R&D of Proprietary Technology • Tourism • Community Diversification • New Media • Clean Tech • Advanced Commercialization

22. Employee Share Ownership Program A Deeper Dive into

23. Employee Share Ownership Program Employee & employer together contribute to thelong term success of business Program Information • 20% tax credit to eligible employees • $2,000 investor cap annually • No lifetime limit • Tax credit non-refundable • RRSP eligible • Payroll deductible

24. Employee Share Ownership Program Eligible employees • BC residents • 20 hours per week • Not a major shareholder Eligible employers • Canadian companies that pay at least 25% to wages to BC residents • Less than $500m in assets (with affiliates)

25. Employee Share Ownership Program ESOP Shares • Equity issued from treasury • Must be held for 3 years • Must be at risk ESOP Planning • Retirement/succession planning • Employee recruitment/retention • Employee engagement • Finance growth

26. Investment Funds A Deeper Dive into

27. BCRCF & BC Tech Fund Later-stage financing

28. Equity for Growth/Mature Businesses • Developing a new product or service • Expanding into new markets • Attracting new customers • Putting up collateral for debt-funded assets • Buying out previous owners

29. BC Renaissance Capital Fund BCRCF $90M • Created in 2008 • Invested into 9 Funds managed by8 Fund Managers • Funds are maturing and the BCRCF will be wound up in a few years

30. BC Tech Fund BC Tech Fund $100M • Created in 2016 • 75% Funds | 25% Direct Investments • Focuses on Early Stage A-Round Investments • BC Based Tech Companies:Life Sciences, Digital Media, ICT, Clean Tech

31. Investment Capital Branch Office: 250 952-0136 Toll Free: 800 665-6597 InvestmentCapital@gov.bc.ca

32. Barriers to Attracting Equity Capital Are your local businesses investment-ready?

33. Attractive Business Opportunity • Product or service • Size and accessibility of markets • Management team skills & qualities • Potential revenues & costs • Free cash flow • Detailed financial reporting

34. Sharing Ownership • Willingness to share control and decision-making over the business • Realism about the value of the business and its potential

35. Company Structure & Systems • Sole Proprietorship/Partnership – no shares • Incorporation – share classes • Other shareholders • Financial systems & reporting

36. Isolation • Lack of potential investors • Lack of legal/accounting/technical supports • Lack of peer supports

37. How Can You Help Businesses? • Provide/arrange business planning supports • Referrals to legal/accounting support • Build peer networks (in & out of town) • Make connections to provincial programs • Work regionally!

38. Resources for Support

39. Be a Connector!