So, you want to raise money for your business ?

1. So, you want to raise money for your business? Or, are you crazy?

2. Deal Size and Complexity

3. Halo Report: US Pacific NW

4. Discussion Topics • Background • On me • On Bellingham Angel Investors • On Subdued Excitement Ventures Funds • Start-up & Early Stage Funding in General • Sources of Funds • Requirements for Funding Success • Traditional Angels and Angel Funding • Screening, Due Diligence, Terms • Seed Angels and Alternative Mechanisms • Debt and its Variations • Common Equity, LLCs and S-Corps

5. About Me: I’m Retired • Education • Oregon State – Chemical Engineering • Harvard Graduate Scholl of Business • 21 Years with ARCO • Executive Positions • NW Executive – Cherry Point Refinery • President, ARCO Pipeline Company • General Manager CQC Kiln • Expert Witness • Management Safety • Rent-A-CEO • Trade Association • Plastics Company • Major Construction Company • Angel Investor • Founding Member of BAI / Manager SEV • Multiple Company Boards • Exit Advisor

6. Bellingham Angel Investorshttp://www.bellinghamangelinvestors.com

7. Bellingham Angel Investors • Founded: 2005 • Members: ~50 Accredited Investors • Activities • Screening: ~ 20 Companies every 2 months • General Meetings: 10/Year • Six with Company Presentations • Four with Education and Portfolio Updates • Affiliations • Angel Capital Association • Co-Investment Partners • AoA / Element 8 / WUTIF / Frontier / Tacoma Angels • OAF / Boise Angels / Seraph / Portland Seed Fund

8. BAI: Investment Activity • Screened: Many Hundreds • Presented: ~150 • Invested • ~36 Companies • 4 Local • PIER / Yapta / Qualnetics / Tatango • Seed: WompMobile • ~$8M Total Investment • Mostly preferred equity • Exits • 8 Including Partials

9. BAI: Current Portfolio

10. Some Interesting Investments

11. Subdued Excitement Ventures • Two Investment Funds Associated with BAI • 90% of BAI Members belong to the Fund(s) • Leverages the processes of BAI • Deal Flow / Screening / Due Diligence • Provides board leadership • Seeks to assemble a diversified portfolio of high-growth startup companies • Allows individuals to spread risk • Fund 1: Fully Invested and Closed • Fund 2: Partially Invested • $1.7M Available for Investment

12. Start-up and Early Stage Funding in General

13. Few Receive Outside Capital

14. Friends and Family Dominate

15. Things to Ponder • Most start-ups fail • Many spectacularly • Raising money is hard • Most who try, fail to do so • It takes time away from your core business • Losing your house sucks • Losing mom’s money isn’t fun either • Other people’s money comes with strings • No one wants to fund your pay, or your play thing • They want a return on their investment • Which, in turn, implies a large payout for the founder

16. Sources of Funds • Customers • Yourself and Your Partners • Friends and Family • Angels • Others, not for today • VC’s • Banks • Government & Quasi Government • Crowd Funding

17. Raising Money from Customers • This what a Business does • It is AlmostAlways the best way to raise money • Use your margin to finance growth • Use payment terms to manage cash • Prove your value via this vehicle to seek other funding • Cash Management • NRE • Pre-payments / Down Payments • Minimum License Payments • Vendors via the Cash Conversion Cycle – Float

18. You + Friends& Families • Almost all start ups receive their first, and likely only, funding in this way • If you raise money from family and friends, use clear legal documents • If you have personal money, outside investors will insist you put some in • Often till it hurts • If you don’t, they may want you to earn your shares • Forget big salaries • Be prepared to make your money on exit or via dividends • Sometimes friends become ex-friends and families fracture • Watch out for people who beg to loan you money • Watch out for people who are buying a job • F&F rounds are often crushed by follow-on rounds who value the company much lower and require superior terms

19. But aren’t Angels, well, “Angels”?

20. Angels & Angel Funding • What is an Angel? • What types of companies do they invest in? • What types of returns are expected? • How much do they invest? • What do they bring besides money? • How do I find them? • What is the process to be selected for funding? • What do they expect from me?

21. What is an Angel? • A high net worth individual (Accredited Investor) who invests in startup and early stage companies • Often associated with an Angel Group of like minded investors • Often a entrepreneur themselves • Seeking • Returns associated with early stage investing, i.e. 25% IRR • An opportunity to share expertise through involvement with the investment

22. Angel Groups are Growing

23. What do Angels invest in?

24. What do Angel funded Companies Look Like? • Potential to be Large • $30M or more in net enterprise value • High Growth • Often 100% top line growth or more • High Gross Margin • Often 45% or more • Scalable • Off a proven or near-proven model • Strong Team • With skin in the game • With a willingness to listen and learn • That recognizes it may need to be replaced • Large and Expanding Market • Strong Barriers to Entry

27. Average Angel Returns

28. Angel Involvement Improves Returns

29. Typical Angel Investment Size • Individual: $10k to $100K • Company: $100k to $1M • SEV: $200k • Percent of Company purchased: 20% to 40% • Pre-money valuations: $500k to $4M • 95% of investments are in preferred shares or notes that convert to such shares • Control provisions are almost always included

30. Why Angels Matter • Angels help the entrepreneur: • Gain a sober second opinion • See around corners • Network with people who can help the Company • Improve overall returns • Improve exit probability and economics • Gain credibility • Find co-investors • Negotiate follow-on rounds • As a Board leader

31. The Process • Application • Website / Executive Summary • Screening • Internal Review • Presentation • The Pitch • Due Diligence • “Getting to No” • Term Sheet Negotiations • Deal Terms • Post-investment Relationship • Communication • Governance

32. Few Companies Receive Investment

33. Reasons Most Deals are Turned Down • Size of the opportunity • Quality or temperament of management • Rate of market growth • Product quality • Competition • Lack of barriers to entry • Stage of development • The deal terms themselves

34. Stress Points

35. Non-Financial Elements Series A Term Sheet Elements Financial Elements Valuation / Ownership Pre-money Warrants Discounts Option Pool Downside Protections Preferences Dividends Redemption Founder Vesting / Repurchase Key Man / D&O Insurance Upside Protections ROFR / Pro-Rata Options Control Provisions BOD or Observation Rights Executive Compensation Restrictions on operation Information Rights Inspection Rights Shareholder Updates Quarterly Financials Audited Financials Valuation Analysis Other No shop / Exclusivity Legal Fees / Confidentiality Drag along / Tag along

36. You Should Know This: • No term sheet can fix a bad investment • When in doubt, don’t invest • Zero pre-money valuation is often too high • The term sheet is the last part of due diligence • Negotiations are more likely to point out fatal intellectual and personality flaws than economic flaws • If they arise, don’t invest • The term sheet is your only chance to negotiate favorable (reasonable?) terms • Ask for reasonable terms and know why you deserve them • If you don’t get them, don’t invest

37. Term Sheet Trends • Angels looking like VC’s • Sophisticated terms • Strong control provisions • VC’s looking like Angels • For non-angel reasons • Second round action • Angels looking like Angels (Pre-formation to Exit) • Very early stage, low valuations, large ownership positions • Hold only through cash positive, w/ agreed exit criteria • Planned Exit at $5-$20MM

38. Alternative Angel Investment Seed or Small Opportunity

39. Seed or Small Opportunity • Typically done by individual Angels versus Groups • Typically investors are very hands on with these deals • Structures to return initial investment with upside sweeteners are the most common • Deals are usually unique to the situation • Companies often will never exceed $2Mto 5M in value • Entrepreneur may prefer to maintain job and company for some time • Investment size: $10k to $250k • Pre-money Valuation: $0 to $750k

40. Range of Investment Structures

41. Common Stock • When will I consider common stock? • When I am effectively a founder • i.e. very low price • When I am buying more than 50% of the Company • When I am virtually certain there will not be another round and the entrepreneur is dedicated to selling the company • When I know the CEO very well (or its me) • When it is a Canadian company and I can get common stock control provisions

42. REVENUE (Royalty Based) FINANCING • Seek return of capital via payments to investors based upon a percent of revenue (perhaps with warrant sweeteners) • Investors must be willing to exchange future value for this risk mitigation. Some examples: • Sacrifice the bulk of equity upside • Common Warrants Vs. Preferred Shares • Increased Pre-money valuation • This only works for Companies: • At, or near, revenue • That can not access traditional lending • With good gross margins • That are not quickly seeking equity rounds

43. Revenue Base Financing (Cont.) • What’s in it for Investors? • Reduced risk of loss of capital • Debt style bankruptcy preference (less clear w/warrants) • Opportunity to participate, albeit less so, in future success • What’s in it for the Company? • Less arguments • Over pre-money • Over preference • Over voting rights • Over redemption • Quicker funding • Low payment risk compared to term loans as revenue matches with payment • Simpler capital table / stock structure • Alignment of interest with single share class following payback

44. Term Loans • Of Two Primary Types: • High Interest (perhaps 15-20%) • Low Interest (perhaps 6-10%) with Warrant Coverage • Terms Typically 3 to 5 years • Year one interest accrued • Year two interest only • Years three to five Term Payments • Equity Type Control Provisions Often Apply • Board Seat • Information Rights • Executive Compensation

45. Closing • Thanks • What other questions do you have?