ETP 3700: Equity Financing Mark T. Schenkel, PhD

Courage: Risk and the Dimensions of Work Life Cycle of a Business Venture Bootstrapping Self, Friends and Family Equity Financing

Sources of Equity Funding Strategic partners u Lower expectations of financial returns u Expectations of closer relationship if venture begins to succeed u Know the business u Cultures may clash

Sources of Equity Funding Angel investors u Typical deal size is $10 - $500K u Like to be involved at Board level u Don’t like retail u Looking for 3-7 year pay-off u Often provide a quicker decision than other equity sources u More willing to provide seed or stage-two funding

Sources of Equity Funding Private placement u An accredited investor: – Any national bank. – Any corporation or business trust with assets in excess of $5 million. – Any insider of the issuing company (officer, director, or owner). – Any individual with income over $200,000 or couple with income over $300,000 (must have two years with income at these levels and reasonable expectations on continuation of this level of income). – Any individual with net worth in excess of $1 million.

Sources of Equity Funding Private placement u Safe-harbor exemptions dictates amount that can be raised and be exempt from registration of stock. u SEC Rule 504 applies to offerings up to $1 million dollars. Restrictions more flexible. u SEC Rule 505, private offerings can be up to $5 million, but they must meet more restrictive requirements. u SEC Rule 506, it is possible to raise more than $5 million, but again the requirements are even more specific and restrictive.

Sources of Equity Funding Private placement u Advertising and formal promotion is prohibited. u Potential investors found through personal networking u Time consuming process u Information supplied must comply with all formal requirements u Creates complexity for the entrepreneur u Since transfer of stock is usually restricted, any shareholder problems will be long-term u Management of the Board much for formal, complex, and even political

Downside of Equity Financing u Dilution of ownership u The risk of sharks u New partners

Working with Equity Investors Initial contact u Source of contact u Initial meetings u Identify comfort level and fit u Investor’s expectations

Working with Equity Investors Process: 1. Business plan 2. Confidentiality agreement 3. Letter of Intent 4. Modifications of shareholder agreements