1. Technology Commercialization and Venturing Workshop: Financing Your Company Rensselaer Polytechnic Institute Center for Automation Technologies and Systems September 13, 2006 Richard E. Honen, Esq. Phillips Lytle LLP

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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.comwww.techvalleyangels.com

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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 rhonen@phillipslytle.com www.phillipslytle.com © Phillips Lytle LLP 2006