Download Financing Your Company

Technology Commercialization and Venturing
Workshop: Financing Your Company
Richard E. Honen, Esq.
Phillips Lytle LLP
Rensselaer Polytechnic Institute
Center for Automation Technologies and Systems
September 13, 2006
Raising Capital: Business Plans
 In any scenario, you will need some form of business plan
 Include discussion of relevant market and realistic pro forma
financials
 Be prepared; think of it as your company’s resumé
Raising Capital: Choice of Entity
 Choice of business entity refers to corporation, limited liability
company, or other form of organization
 Involves tax and structural issues
 A major factor is the extent to which you plan to seek venture
capital investment
Raising Capital: Characteristics of Debt, Equity
and Grants
 Debt needs to be repaid but is largely non-dilutive
 Equity represents ownership –no present obligation to repay
 Grants may often be the most available and familiar vehicle
Raising Capital: Characteristics of Common and
Preferred Stock
 Common stock carries voting and ownership proportionate to
the holding
 Preferred stock carries a level of control and return
disproportionate to the level of the holding
 Preferred stock characteristics typically include provisions on
dilution, return, voting, and treatment of founders’ equity
 Same characteristics apply without regard to choice of
business entity
Types of Debt: Government Financing
 Federal, state, county, municipal and other loan programs or
credit enhancement programs are available
 Underwriting process and terms are usually cognizant of a
new company’s situation
 The process can be slow, but often no slower then traditional
equity given today’s capital environment
Types of Debt: Traditional Asset Based Lending
 If the company is credit-worthy or there is sufficient ancillary
capital (other then intellectual property), bank financing may
be available
 Must be able to hit the bank’s ratios
 Personal guaranties will normally be required
 The presence of government or bank financing is often a
comfort to later investors
Types of Debt: Self Financing
 Aging payables, factoring receivables, giving customers
discounts for up-front payments, and skipping paychecks are
all ways of financing growth through operations
 Must have actual operations and some level of revenue
 Frugality is no longer considered a bad business practice
Types of Equity: Seed Capital
 The capital used to start a venture
 Usually comes from the founders or friends, and usually takes
the form of common stock
 Very few funds make seed capital investments
Types of Equity: Angel Capital
 Angels are high net worth individuals who often invest based
on management, interest or geographic region
 Angel groups are increasingly working together to make joint
investments
 Angels may be satisfied with common stock with some
preferences
 Local angel group www.techvalleyangels.com
Types of Equity: Institutional Venture Capital
 Venture capital funds invest much higher amounts than do
angel investors
 Funds always require preferred securities with full panoply of
preferred rights
 Must normally be beyond the concept or technology transfer
stage
Types of Equity: Strategic Investors
 Large companies investing in their own space (or in a space in
which the strategic investor wants a foothold)
 Terms are similar to terms required by venture capital funds
 Licensing or a customer relationship may often be a key
component
 Beware of the lack of the shared greed protection
Hybrid Investments: Convertible Debt
 Very popular for early stage companies
 The investment is made as a loan, and is convertible to equity
on the terms of the next venture financing
 Very flexible
Securities Issues: General Concepts
 The process of raising money is governed by Federal and state
securities laws
 Disclaimers are often used to document the level of risk
 More protections apply to non-accredited investors
Negotiating and Practice Points
 Keep your eye on the big picture
 Concentrate on deal-level points and be aware of the strategy
behind the acquisition
 Understand why the other party needs a given point
 Involve your advisors early
Please call or mail with any questions or comments:
Richard E. Honen
Phillips Lytle LLP
Omni Plaza
Albany, New York 12207
518-472-1224 x 1225
[email protected]
www.phillipslytle.com
© Phillips Lytle LLP 2006