1. ETP 3700: Equity Financing
Mark T. Schenkel, PhD

2. Courage: Risk and the Dimensions of Work
Life Cycle of a Business Venture
Bootstrapping
Self, Friends and Family
Equity Financing

3. 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

4. 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

5. 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.

6. 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.

7. 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

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

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

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