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

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

Sources of Equity Funding Private placement 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 Safe-harbor exemptions dictates amount that can be raised and be exempt from registration of stock. SEC Rule 504 applies to offerings up to $1 million dollars. Restrictions more flexible. SEC Rule 505, private offerings can be up to $5 million, but they must meet more restrictive requirements. 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 Advertising and formal promotion is prohibited. Potential investors found through personal networking Time consuming process Information supplied must comply with all formal requirements Creates complexity for the entrepreneur Since transfer of stock is usually restricted, any shareholder problems will be long-term Management of the Board much for formal, complex, and even political

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

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

Working with Equity Investors Process: Business plan Confidentiality agreement Letter of Intent Modifications of shareholder agreements