1. UTSA Colleges of Business and Engineering TAKE YOUR TECHNOLOGY TO THE LIMIT! 1CITE BootCamp September 2013 The Foundation: Structuring Your New Venture and Raising the Cash 2013 Technology Entrepreneurship Boot Camp

2. UTSA Colleges of Business and Engineering TAKE YOUR TECHNOLOGY TO THE 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

3. Choose the Right Entity Sole Proprietorship General Partnership (GP) Corporation – C-Corp – S-Corp Limited Liability Company (LLC) Limited Partnership (LP) Tax Designation

4. Corporation Officers: President, Vice President, CEO, CFO, Secretary, Treasurer Employees/Operations/ Contracts Board of Directors Shareholders Ownership Strategy/Direction Implementation/ Signing Authority Liabilities

5. Limited Liability Company Officers: President, Vice President, CEO, CFO, Secretary, Treasurer Employees/Operations/ Contracts Board of Directors ShareholdersOwnership Strategy/ Direction Implementation/ Signing Authority Liabilities Officers: President, Vice President, CEO, CFO, Secretary, Treasurer Employees/Operations/ Contracts Managers Members

6. So… Corporation or LLC Corporations Most common – easily understood Growth oriented Institutional Investors Prefer Allows for Traditional Option CompensationLLCs Taxes!! (avoid S- election restrictions, etc) Unique Profit Sharing, Distribution of Income Structures

7. Entity Type Fees and Other Costs Timing Corporation Filing Fee: $300 Legal Fees: $700- $1200 Basic documents (may also do shareholders agreement which results in addl fees) LLC Filing Fee: $200 Legal Fee: $1000- $5000 Documents can be more complex as they typically include tax allocation provisions and buy-sell obligations; potentially multiple classes

8. 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

9. Annual Maintenance Annual Minutes –Shareholders Elect Directors –Directors Elect Officers Special Meeting Minutes State Filings –Public Information Report (PIR) –Tax Return

10. 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 RULES FOR RAISING FUNDS

11. Offer vs. Sale Offer triggers compliance requirements Compliance must happen before selling process starts

12. Private Offerings = Exempt Privately negotiated sales Must not involve any general solicitation or general advertising Section 4(2)* - the private-offering exemption - “transactions by an issuer not involving any public offering” * Securities Act of 1933 (the “Securities Act”)

13. 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.

14. 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)

15. “Accredited Investor” 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

16. 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

17. Traditional and Non-Traditional Lenders Most major traditional banks do not lend to startups/do so only rarely Comerica, Square 1 Bank, Silicon Valley Bank lend to entrepreneurial companies (positive c/f) Accts Receivable, Inventory, Fixed Assets Very sensitive to market conditions – this last down turn caused them to become risk adverse 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

18. Angel Investors/ Venture Capital  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.  Venture Capital – $1 million - $50 million Must Still Comply with Applicable Securities Laws: Exemption (“accredited investors”) Notice Filings

19. Strategic Partnering Strategic Private Investors/Partners –Large corporations Potential Acquirors Potential Customers

20. Getting Comfortable with Investor Terminology NVCA Model Legal Documents –www.nvca.org - Model Legal Docs Button Know Offering Terminology

21. Pre-Money Valuation The Original Purchase Price is based upon a fully-diluted pre-money valuation of $4,000,000 and a fully-diluted post-money valuation of $10,000,000 (including an employee pool representing 10% of the fully-diluted post-money capitalization).

22. Capitalization Pre- Financing Post- Financing Security# of Shares% % Common – Founders 3,000,000100%3,000,00030% Option Plan 00%1,000,00010% Series A Preferred 00%6,000,00060% Total 3,000,000100%10,000,000100%

23. Make Sure You Understand Deal Dividends: Example: The Series A Preferred will carry an annual 10% cumulative dividend compounded annually, payable upon a liquidation or redemption. For any other dividends or distributions, participation with Common Stock on an as-converted basis. Liquidation Preference: In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid as follows… non-participating Preferred Stock… full participating Preferred Stock

24. Liquidation Preference (cont.) Liquidation Pref. Alt.Total Amount Received Conversion to Common$60,000,000 Non-Participating$6,000,000 Full Participating$62,400,000 Full Participating with Cap $36,000,000

25. READ EVERYTHING … “Boilerplate” = Most important provisions, do NOT ignore“Boilerplate” = Most important provisions, do NOT ignore Don’t assume a provision can’t be changedDon’t assume a provision can’t be changed Don’t sign contracts until reviewed by a lawyerDon’t sign contracts until reviewed by a lawyer

26. 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.

27. Stephanie Chandler Jackson Walker L.L.P. 210.978.7704 schandler@jw.com 112 E. Pecan Street, Ste. 2400 San Antonio, Texas 78205 www.jw.com