Angel Investing Glen Caplan | July 10, 2008

2 hutchlaw.com “Starting companies are like having babies - fun to conceive but hell to deliver.” - Anonymous

3 hutchlaw.com Sources of Capital  Dilutive  Self Funding (Bootstrapping)  Angel Investors  Venture Capitalists  Corporate Investment (Strategic Investment)  Non-Dilutive  Grants, SBIR’s NIH, STTR’s, loans, etc.

4 hutchlaw.com What do VC and Angel Investors Want?  Venture Capitalists  10X return on initial investment in 3-5 years  Angel Groups  5X-10X in 3-5 years… Some similarities to VC’s in investment return expectations  Individual Angel Investors  Make money… less requirement on multiples…positive returns are great!!!

5 hutchlaw.com Who are Angel Investors?  Individuals  Other Successful Entrepreneurs  Organized Groups  One signature for all dealings  Better preparation for institutional rounds

6 hutchlaw.com Characteristics of Angel Investors  High Net Worth Individuals  High Risk Appetite  Early Stage Preference  Individuals - $25,000 - $50,000  Organized Groups - $100,000 - $500,000  Endangered species?

7 hutchlaw.com Pros/Cons of Angel Investors PROS  Terms offered by Company  Speed  Less sophisticated on terms and value  Simpler investor relations CONS  Follow-on investment  Less “Value Added”  Less sophisticated on terms and value  Issues for VC’s

8 hutchlaw.com The Life Cycle of a Venture Deal 100 Ecstasy -100 Agony Fun Scale 0 9 to 12 months Business Plan Rejections Due Diligence They like the idea Interest Shown Term Sheet The Negotiated Deal Last Minute Demands/ Expectation Mismatch All Reject Reformulate Plan

9 hutchlaw.com Types of Fundraising  Common Stock  Rarely Used  Preferred Stock  Provides special rights, preferences and privileges to investors  Convertible Promissory Note  Converts at a discount at financing

10 hutchlaw.com 4 Principles of Term Sheets  Valuation  Pre-Money Valuation  Option Pool  Exit Strategy  Liquidation Preference  Registration Rights  Down-Side Protection  Anti-Dilution Protection  Control  Protective Provisions

11 hutchlaw.com Disclosure Notebook  Risk Factors  Term Sheet  Use of Proceeds  Business Plan and Financial Projections  Financial Statements  Capitalization Chart  QBV Disclosure  Certificate of Incorporation  Bylaws  Subscription Agreement  Stockholders Agreement

12 hutchlaw.com Securities Law Issues Rule 504  Raise up to $1 million  Unlimited number of investors  No required level of investor sophistication or wealth  No formal disclosure documents – but antifraud provisions apply  One year time period and then a 6 month quiet period  No general solicitation or advertising  Typically used for friends and family Rule 506  Unlimited dollar amount  Accredited investors only  No general solicitation or advertising  No formal disclosure documents – but antifraud provisions apply FORM D  Filed with SEC within 15 days of first sale

13 hutchlaw.com Accredited Investors  Individual net worth or net worth with spouse of at least $1 million  Individual income in excess of $200,000 in each of the 2 most recent years or joint income with spouse in excess of $300,000 in each of those years and reasonable expectation of reaching the same income level in the year in which the purchase is made  Director or Executive Officer of the Company  Corporation or partnership with assets in excess of $5 million

14 hutchlaw.com North Carolina Qualified Business Tax Credit  Available to passive investors with North Carolina income  A credit not a deduction on your income tax return  25% of the amount of invested  Available in the year after the year in which the investment was made  A $7 million aggregate limitation per year  Must register with the North Carolina Secretary of State’s office  Must have $5 million or less in income  Must have reviewed or audited financial statements submitted to the Secretary of State each year  Certain disqualified industries – professional services, construction, retail, real estate, entertainment, recreation  Must be engaged primarily in manufacturing, processing, warehousing, wholesaling, research and development, service-related industry

15 hutchlaw.com Angel Investment Groups  Wilmington Investor Network Wilmington, NC  Piedmont Entrepreneurs Network Greensboro, NC  Inception Micro Angel Fund Winston-Salem, NC  WED3.org Charlotte, NC  Charleston Angel Partners Charleston, SC  Avansis Ventures Reston, VA  New Vantage Group Vienna, VA  Emergent Growth Fund II Gainesville, FL  Startup Florida Sarasota, FL  New World Angels Boca Raton, FL  Springboard Capital Jacksonville, FL  Savannah Angel Partners Savannah, GA

16 hutchlaw.com Angel Investment Groups (Continued)  Atlanta Technology Angels Atlanta, GA  Seraph Group Atlanta, GA  Nashville Capital Network Nashville, TN  Angel Capital Association g

17 hutchlaw.com … and then what? “Only one thing is certain about a new venture: It’s going to turn out very different from its business plan.” - William Congolton, Venture Capitalist

18 hutchlaw.com Hutchison Law Group 5410 Trinity Road Suite 400 Raleigh, NC Tel: Fax: hutchlaw.com Driven by Our Clients’ Success SM A