Transcript Slide 1

TAKE YOUR
TECHNOLOGY
TO THE
LIMIT!
2014 Technology Entrepreneurship
Boot Camp
Sponsored by Jackson Walker
UTSA Colleges of
Business and Engineering
CITE BootCamp January 2013
1
TAKE YOUR
TECHNOLOGY
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LIMIT!
Stephanie L. Chandler
• Partner: Business Transactions
(Corporate/Securities/M&A)
• Firm-wide Section Head:
Technology Section
University of Nebraska
B.S.B.A. in Finance
University of Virginia
Juris Doctorate
UTSA Colleges of
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Choose the Right Entity
When Should You
Formalize Structure?
Initiation of Business Operations
Asset Protection
Capital Raising
Succession Planning
Multiple other factors ….
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Choose the Right Entity
• Sole Proprietorship
• General Partnership (GP)
• Corporation
– C-Corp
– S-Corp
• Limited Partnership (LP)
• Limited Liability Company (LLC)
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Sole Proprietorship
General Partnership (GP)
* Even in Texas your homestead
protection may be limited
depending on the specific facts so
your home may still be at risk.
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Default Entity
No liability protection,
partners are jointly
and severally liable
for all partnership
liabilities*
The fallacy of a DBA
filing …. county DBAs
and State of Texas
DBAs
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Corporation
Shareholders
Board of Directors
Officers:
President, Vice President,
CEO, CFO, Secretary, Treasurer
Employees/Operations/
Contracts
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Ownership
Strategy/Direction
Implementation/
Signing Authority
Liabilities
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Corporation
Pros
• Liability limited
• Ease of creation
• Most common –
easily understood
• Growth oriented
• Centralized
Management
• Equity
Compensation
Easily Implemented
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Cons
• Federal income tax
and Texas Margin
tax
• S-election
restrictions
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Limited Liability Company
Shareholders
Members
Ownership
Board of Directors
Managers
Strategy/
Direction
Officers:
Officers:
President, Vice President,
CEO, CFO, Secretary, Treasurer
President, Vice President,
CEO, CFO, Secretary, Treasurer
Employees/Operations/
Contracts
Employees/Operations/
Contracts
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Implementation/
Signing Authority
Liabilities
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Limited Liability Company (LLC)
Pros
• Can have tax flow
through
• Limited liability
Cons
• Federal income tax and
Texas margin tax
• Different terminology
(i.e. Managers and Members
instead of Board and
Shareholders)
• Not as accepted by
institutional investors
• Difficult if option
compensation is part of your
growth strategy
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Traditional and
Non-Traditional Lenders
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Most major traditional banks
do not lend to startups/
do so only rarely
Silicon Valley Bank, Square 1
Bank lend to entrepreneurial
companies (positive c/f)
Accts Receivable, Inventory,
Fixed Assets
Terms may include: company’s stock, fees, collateral, agreement
to pay for AR audits, monthly reporting, audited financial
statements, compliance reporting, financial covenants plus all
banking relationships – checking, credit cards, investments, etc.
must be with lender
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Angel Investors
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Friends and Family
Angel Funding – wealthy private
individuals, with background in
business, usually smaller than VC’s
($25K - $250K). They prefer to deal
directly with the entrepreneur, like local
deals, often want to develop a
relationship with owners, they are
limited in the number of investments
they will do concurrently. Usually
easier to deal with than VC’s.
Invaluable to start-ups.
Must Still Comply with Applicable Securities
Laws:
• Exemption (“accredited investors”)
• Notice Filings
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RULES FOR RAISING FUNDS
Starting Place:
Registration Required
• All offerings must be registered with the SEC
• Unless, that offering is exempt from
Registration
• Doesn’t matter if small private sale or an
offering which is immediately listed on the
NYSE
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Private Offerings = Exempt
• Privately
negotiated sales
• Must not involve
any general
solicitation or
general
advertising
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• Section 4(2)* - the
private-offering
exemption “transactions by an
issuer not involving
any public offering”
* Securities Act of 1933
(the “Securities Act”)
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Reg D
• Rule 504 provides an exemption for the
offer and sale of up to $1 million of
securities in a 12-month period
• Rule 505 provides an exemption for
offers and sales of securities totaling up
to $5 million in any 12-month period.
• Rule 506 provides another exemption for
sales of securities under Section 4(2)
with no dollar limit.
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Rule 506
• Unlimited number of “accredited
investors” and 35 “sophisticated”
nonaccredited investors
• Popular if Integration is a concern
• Popular to comply with Blue Sky
(National Securities Markets
Improvement Act of 1996 (NSMIA)
removed offerings under Rule 506 from
state regulation)
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“Accredited Investor”
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a bank, insurance company, registered investment company,
etc.
an employee benefit plan
a charitable organization, corporation or partnership with
assets ≥ $5 million
a director, executive officer or general partner of the company
selling the securities
a business in which all the equity owners are accredited
investors
a natural person with a net worth of at least $1 million (not
including house)
a natural person with income exceeding $200,000 in each
of the two most recent years or joint income with a spouse
exceeding $300,000
a trust with assets of at least $5 million
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Why Only Accredited Investors?
Private placement memorandum (“PPM”) that meets Reg
D requirements = $$$$$
If more than $1 million is raised in a 12-month period, Rule
504 is not available
Under Rule 505 and 506, a PPM would be required to
offer securities to nonaccredited investors
NOTE: Even if not required, delivering a PPM or at least a
detailed business plan is probably advisable for liability
and marketing reasons, particularly in fulfilling the
antifraud requirement.
NEWSFLASH: May now also allow to do broader
solicitation with the changes resulting from JOBS Act
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JOBS Act
• New Rule 506(c)—General solicitation and
advertising permitted
– Sales only to accredited investors
– Reasonable steps to verify AI status
• 506(d): Bad Actor disqualification
– 506 Unavailable if a Covered Person has had a
Disqualifying Event
• 506(e): Reporting of prior “bad actor events”
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A Few Warnings
• Once you go 506(c), you can’t turn back.
• Extra requirements and complications may
scare off some investors
• Does the issuer have a legitimate business
justification for using 506(c)?
• Securities Fraud Rules still very much apply
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Angel Investors (continued)
Advantages
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Provides needed capital for start-ups, usually seek smaller
deals, like early stage enterprises, higher risk levels, less
formal investment criteria, often very enthusiastic, can
attract additional investors, requires little control, often
brings vast amount of knowledge & experience, often look
beyond monetary gain, they are located everywhere
Disadvantages
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Rarely make follow-on investments, tend to be less patient
than VC’s, may require some form of control (board seat),
may lack industry knowledge, do not have national
recognition so they are hard to find, they chose to be
“hidden” to avoid being pestered with business plans and
telephone calls
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Crowdfunding Basics
• Must be conducted through a registered
BD or “funding portal”
• Issuers can raise up to $1,000,000 a
year
• Investors can invest, in any 12-month
period, across all 4(a)(6) offerings:
– Greater of $2,000 or 5% of income or net
worth, if both income and net worth are <
$100,000
– 10% of income or net worth, if either income
or net worth is ≥ $100,000, up to a max of
$100,000.
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Highlights of the
Crowdfunding Rules
• Issuers can’t conduct an offering (or concurrent offerings)
through more than one intermediary
• Exemption not available to private funds (or funds that
are excluded from the definition of investment company
by Section 3(b) or Section 3(c) of that Act).
• Exemption not available to shells—entities with “no
specific business plan” other than to engage in a merger
or acquisition with unidentified company or companies.
• For purposes of the dollar limits, “issuer” includes any
entity controlled by or under common control with the
issuer. It also includes any predecessor.
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Highlights of the
Crowdfunding Rules
Form C, which has to be filed on EDGAR and provided to the intermediary
and investors, includes, among other things:
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Description of business, capitalization, management and ownership
Risk factor disclosures
Detailed description of any exempt offerings conducted within the last
three years;
A financial description including discussion of results of operations,
liquidity, and capital resources
Financial statements, which need to be (taking into account the targeted
amount for the offering):
i.
ii.
iii.
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Certified by the PEO for issuers with $100,000 or less in 4(a)(6) offerings in
the last year;
Reviewed by an independent public accountant (and include the review
report) for $100,000 to $500,000; and
Audited by an independent public accountant (and include audit report) for
over $500,000.
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Highlights of the
Crowdfunding Rules
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If the offering doesn’t raise its target amount, offering cancelled and
funds returned.
Amendment to Form C has to to report any material change. Any
investor that does not reaffirm their commitment within 5 business days
will have their investment cancelled.
4(a)(6) issuers have to file an annual report on EDGAR (Form C-AR)
that includes most of the items from Form C, including financials.
Funding portals are prohibited from handling investor funds or
securities.
Form C needs to be made available for at least 21 days before
securities can be sold (but commitments can be accepted during that
time).
Funding portals have their own registration statement they need to
file—Form Funding Portal.
Securities purchased in 4(a)(6) offerings are still somewhat restricted.
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Venture Capital ($1 million - $50 million)
Advantages
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Excellent source of capital / funding committed to your
business
VC’s often are prepared to invest in continued rounds as
the business grows and achieve it’s milestones
Bring valuable skills, contacts, experience and discipline to
your business
VC’s have common goals with the entrepreneur – growth,
profitability and increased value of the business
VC’s time horizon is often 3 – 7 years before exiting.
Looking to have a 3 – 7 times return on their capital
Exiting usually in the form of a Public Offering or Sale to a
larger business after reaching certain milestones.
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Venture Capital ($1 million - $50 million)
Disadvantages
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Raising Equity Capital – demanding, costly, time
consuming. Your business suffers as you devote your time
to answering questions
Due Diligence process can be brutal – background checks,
justification of your business plan, legal review, patent
review, financial forecasts, etc (note: this can be a very useful
process to force management to think through every issue. This is
valuable even if funding doesn’t occur)
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Often the entrepreneur will lose control after 2nd round of
financing. VC’s may want to bring in a marquee CEO, CFO,
etc. to run the business.
Management reporting to the VC’s is often onerous,
requiring 4 to 6 board meetings per year plus answering
questions, providing updates and monthly reporting.
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Grants
GRANTS.gov
SBIR (Small Business Innovation Research) www.sbir.gov
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11 federal departments participate
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2.5% of the total extramural research budgets agencies
Advantages
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Funds are non-dilutive – don’t have to give up any
ownership
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Great way to fund your initial invention
Disadvantages
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UTSA Colleges of
Business and Engineering
Takes tremendous amount of time, drawn out process – 8 to 14
months
No guarantee of having your application approved
Costs money to prepare the grant application properly
Significant reporting, follow on audits, strict rules,
SBIR grant may not be perfectly aligned or you may have
trouble finding a grant solicitation that matches your needs
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Other Alternatives
• Private Foundations
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The Robert Wood Johnson Foundation
The Kresge Foundation
Otto Bremer Foundation
The Kate B. Reynolds Charitable Trust
• Private Foundations
• American Heart Foundation
• Juvenile Diabetes
• National Burn Repository of the American
Burn Association
• American Cancer Society
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Governmental Programs
• Federal R&D Contracts
– National Institute of Health
http://oamp.od.nih.gov/contracts/contract.htm
– Department of Energy
http://www.energy.gov
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Governmental Funds
• Texas Emerging Technology Fund (ETF)
– Apply through T3DC (South Texas)
– emerging scientific or technology fields that
have a reasonable probability of enhancing
this state ’s national and global economic
competitiveness.
– Must have partnership with Texas State
institution
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Strategic Partnering
Strategic Private
Investors/Partners
– Large corporations
• Potential Acquirors
• Potential Customers
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Getting Comfortable with Investor
Terminology
• NVCA Model Legal Documents
– www.nvca.org - Model Legal Docs Button
• Offering Terms
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Closing Date
Investors
Amount Raised
Price Per Share
Pre-Money Valuation
Capitalization
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Capitalization
PreFinancing
Security
# of Shares
%
# of Shares
%
Common –
Founders
3,000,000
100%
3,000,000
30%
0
0%
1,000,000
10%
0
0%
6,000,000
60%
3,000,000
100%
10,000,000
100%
Option
Plan
Series A
Preferred
Total
* Consider role of bridge notes
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PostFinancing
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Joint Ownership Issues
Not only your partner, but …
Buy-sell/Shareholders
agreements
What if I don’t
want to keep doing this?
What if my partner
dies? Gets divorced?
Files for bankruptcy?
Issues are always easier to
resolve before money is a factor
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READ EVERYTHING …
• “Boilerplate” = Most
important provisions, do
NOT ignore
• Don’t assume a provision
can’t be changed
• Don’t sign contracts until
reviewed by a lawyer
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Use of Forms
13. Venue. This Agreement and all amendments or
modifications hereof shall be governed by and
interpreted in accordance with the laws of the State
of Confusion governing contracts wholly executed
and performed therein, and shall be binding upon and
inure to the benefit of the parties, their respective heirs,
executors, administrators and successors. Jurisdiction for
any suit filed to enforce the provisions of this Agreement
by either party shall be filed in the federal or state courts
of Mostfavorable District of Confusion in Hitsville,
Confusion or Miracle County, Confusion.
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Stephanie L. Chandler, Esq.
210.978.7704
[email protected]
112 E. Pecan Street, Ste. 2400
San Antonio, Texas 78205
www.jw.com
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