1. GROW SMART Jeffery K. Mitchell Blacksburg, Virginia Office

2. The Grow Smart Series  5-part series  Practical Strategies Raising Capital Corporate Governance Employee Strategies Employee Incentives Protecting IP  Sponsoring Organizations

3. Raising Capital... Avoid the Mistakes  What are the rules?  What do you really need for growth?  What is the deal? Document.  What is the future?

4. Raising Capital… Heavily Regulated Activity The federal and state securities laws are triggered when 1 share of stock is offered or sold to 1 investor.

5. Raising Capital...Why worry?  Rescission rights (unwind investment)  Penalties  Cost of Clean-Up  Future ability to raise capital  Market “black eye”  Impact on sale of company  Ability to finance future companies

6. What is a security?  Stock (Membership Interest)  Treasury Stock  Security Future  Note, Bond, Debenture, evidence of indebt  Pre-organization certificate  Put, call, option  Right to acquire any of the above

7. Raising Capital... No Good Excuses “It’s a good deal.” “ Everybody does it this way. ” “ I didn ’ t mean to break the law.” “It was a private deal” “It’s only one investor.”“ They agreed.” “We wanted to keep it simple.” “ It ’ s only me and my cousins. ”

8. Raising Capital... SEC  Purpose: Protect the small investor  Securities Act of 1933 Section 5(a) provides that unless a registration statement is in effect as to a security, it shall be unlawful for any person (directly or indirectly) –To use any means of interstate commerce to sell such security; or –To “carry or cause to be carried” through the mails or interstate commerce…any such security for the purpose of sale or delivery after sale

9. Raising Capital... Private Offering  Securities Act of 1933 Section 4(2) “Transactions by an issuer not involving any public offering….”  Does the investor need protection?  Company bears the burden Quality of investor Sophisticated versus “accredited” Access to material information –Material –Fraud –Forward looking statements  No General Solicitation Radio, Newspaper, mail No general solicitation at public meetings  Attract investors Relationships Finders (know the rules) Registered broker/dealers VC conferences Angel presentations

10. Raising Capital... State Oversight  Purpose: Protect investors in their state Regulate securities transactions in their state  Virginia Code § 13.1-502 § 13.1-502. Unlawful offers and sales. It shall be unlawful for any person in the offer or sale of any securities, directly or indirectly, (1) To employ any device, scheme or artifice to defraud, or (2) To obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) To engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser. (1956, c. 428.)

11. Raising Capital... The Basic Rule  Every Sale Must Be Registered...unless...  Exempt From Registration Security exemption –Type of security: government, banks, nonprofits (IDAs, etc.) –Existing holders w/out new $ (recap) Transaction exemption –Parameters of transaction –Private offerings

12. Raising Capital... Rule 506  “Safe Harbor” Pre-empts state law for “covered securities” Unlimited “accredited” investors Up to 35 non-accredited investors No dollar limitation No general solicitation No advertising No specified disclosures to “accredited” investors File Form D

13. Raising Capital... Exemptions  Transaction exemption Number of investors Sophistication of investors (“Accredited”) Relationship to issuing company Value of securities issued Type of disclosure contemplated Solicitation manner (broker) Contemplated additional offerings

14. Raising Capital... Step One: Need  How much money is needed and why?  Do needs other than money exist? General business advice Access to other investors Strategic relationships  Non-Ownership (equity) Sources Loan Grant Contractual relationship –Vendor –Joint Venture

15. Raising Capital... Sources of $  Personal Resources- Founders and Owners  Family and Friends  Angels, Angel Networks  Venture Capital  Commercial Banks  Strategic Investors (customer, supplier, competitor)  Government (SBA, SBIR, STTR)  Foundations/Incubators/Accelerators

16. Raising Capital... Subscribe For Sales  Written agreement  Regardless of size  Identify investor/consideration  Document representations of investor  Document status of information  Address deal points (stockholders’ agreement issues)

17. Raising Capital... The PPM  Private Placement Memorandum Elements Cover Securities Disclaimers Risk Factors Business Plan Management Bios Use of Proceeds Dilution Explanation Financial Information Legal and Accounting Issues

18. Raising Capital... Disclose the Risks  Private Placement Memorandum –Risk Factors Stage of company Importance of key individuals Nature of business Customers/Concentration Competition Need for future $$ Illiquid security Technology

19. Raising Capital... Set the Terms  Two sets of issues Economic –Investment issues –Return issues –Dividend issues Governance –Control –Information –Risk Management

20. Raising Capital... Economic Terms  Valuation Pre-money  Use of Offering Proceeds Use of Proceeds Statement Milestones  Return issues % of stock (profit split) Dividend (accrual, cumulative) Anti-Dilution Tag-along; Drag-along Pre-emptive rights Transfer issues Tax Distributions  Exit Strategy Put Right/Call Right

21. Raising Capital... Governance Terms  Board of Directors Number of seats Veto control Chairmanship  Decision Requirements Major transactions –New offerings –Sale of company –Budget Certain $ size agreements Debt Key hires  Day-to-Day management issues  Dispute resolution process

22. Raising Capital... New Dynamics  Addition of outside “voices”  Addition of new owners  Heightened duties Fiduciary duties Corporate protocols Investor relations  Information Expectations  Don’t “pierce the corporate veil”

23. Raising Capital... Steps to Success Conduct a corporate clean-Up Set realistic time expectations Prepare and “vet” a written business plan Establish an initial a term sheet Document. Document. Document. Over-Disclose Risks Avoid unregistered broker issues ($ for the raise) Celebrate the Closing!

24. Conclusion...  Watch for future events March 10: Corporate Governance March 24: Smart Employee Strategies April 7: Employee Incentive Plans April 21: Ten Strategies for Protecting Your IP  Email contact for LeClairRyan: Jeff Mitchell jeff.mitchell@leclairryan.comjeff.mitchell@leclairryan.com  Email contact for SWVTC: Shannon Blevins srb8q@uvawise.edusrb8q@uvawise.edu Esther Bolling ebolling@swtc.info  Questions & Answers

25. Thank You!