Negotiating with Hedge Funds

Monthly
Webinar
Series

presents

Negotiating
With
Hedge
Funds:

Five
Ways
to
Save
Time,
Money,
&
Dilution

April
25,
2012

Panelists

Adam
J.
Epstein,
Founder,
Third
Creek
Advisors,
LLC

Sara
LaFever,
Account
Manager,
Sagient
Research
Systems

Joseph
A.
Smith,
Member,
Ellenoff
Grossman
&
Schole
LLP

Moderator

Brett
Goetschius,
Editor
and
Publisher,
Growth
Capital
Investor

Thank
you
for
participating
in
“Negotiating
With
Hedge
Funds:
Five
Ways
to
Save
Time,
Money,
&
Dilution.”

This
manual
contains
information
you
will
need
for
this
webinar.

CONFERENCE
MANUAL

This
manual
contains:

•Dial-‐in/log-‐on
instructions.

Speaker
bio
and
contact
information.

•Tips
for
submitting
questions.

•Pertinent
information
from
the
pages
of

Growth
Capital
Investor.

CONFERENCE
DETAILS

The
webinar
is
scheduled
for
Thursday,

April
25,
2013
at
2:00
p.m.
EDT,
1:00
p.m.

CDT,
12:00
p.m.
MDT,
and
11:00
a.m.
PDT.

It
will
last
90
minutes.

HOW
TO
JOIN
THE
WEBINAR

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Conference Manual Page 1

Sagient Research Systems
Sara LaFever

}  CCMMPPOO//OOvveerrnniigghhtt OOffffeerriinngg::  
A confidentially marketed public offering (“CMPO”) is a hybrid
structure between a Registered Direct and a traditional public
follow-on. After registering shares on an S-3 shelf registration,
transactions are typically marketed confidentially to institutional
investors, then announced publicly and “flipped” to a public offering.
Deals are announced after the close of US market trading, and the
public selling process concludes prior to the market opening the
following morning.
}  CCoommmmoonn SSttoocckk -- SShheellff SSaallee::  
A sale of the Company's pre-registered common stock from an
existing shelf registration statement (a.k.a. Registered Direct). The
Registration allows the Company to sell the securities over a period
of time. At PlacementTracker, a Common Stock - Shelf Sale is
tracked when the registered Common Stock is sold in a private
transaction to accredited investors.

}  CCoommmmoonn SSttoocckk
◦  Common Stock transaction may or may not include
purchase Warrants. Sometimes Common Stock with
Purchase Warrants are sold together as a security called a
"Unit".
}  CCoonnvveerrttiibblleess
◦  Convertible Debt (such as Debentures or Notes) and
Convertible Equity (Preferred Stock). A Convertible Note,
Convertible Debenture or Convertible Preferred Stock can
have one of four Conversion Features: 1) Fixed, 2) Floating,
3) Reset, or 4) Company Installment.

From 1995-present
  Convertibles: Fixed Conversion Premium/Discount at
Announcement

-‐40% -‐20% 0% 20% 40% 60%
Common
Stock
Registered
Convertibles
2011
2012
2013
2010

-‐10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00%
100M-‐250M
1M-‐100M
Convertibles
Non-‐registered
Registered

-9%
4.00%
0.63%
-6.00%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Healthcare Energy Tech Financial

Registered
 45.1% have warrants
 Average of 26.81%
 1-100M:
 Average 32.22%
 51.9% have
warrants
 100-250M:
 Average14.91%
 34% have warrants
Non registered
 51.5% have warrants
 Average of 38.35%
 1-100M:
 Average 48.20%
 60.93% have
warrants
 100-250M:
 Average 28.35%
 39.2% have
warrants

Registered
 12.82
Non-Registered
 15.59

}  PlacementTracker is the premier research, analysis, and
reporting tool for private placements by public
companies. Cataloging every private placement since
January 1, 1995, PlacementTracker's interactive database
includes over 29,000 transaction profiles, over 1,900
placement agent profiles, over 14,700 investor profiles,
and over 1,200 legal counsel profiles. As a tool developed
by investment professionals for investment professionals,
PlacementTracker utilizes state-of-the-art web-based
technology to provide subscribers with an easy to use,
comprehensive means to evaluate PIPE transactions and
investors, perform quick transaction pricing, identify
potential issuers and investors, and compile comparable
transaction, investor and agent statistics.

Nego�a�ng
with
Hedge
Funds:
Avoiding
the
Common
Mistakes

5
Ways
to
Save
Time,
Money,
and
Dilu�on

Adam
J.
Epstein,
Founder,
Third
Creek
Advisors,
LLC

Joseph
A.
Smith,
Partner,
Ellenoﬀ
Grossman
&
Schole
LLP

April
25,

2013

©
2013
TCA,
LLC
&
EGS
LLP


OVERVIEW

v  76%
of
all
U.S.
public
companies
have
market
capitaliza�ons
less
than
$500
million

v  On
senior
U.S.
stock
exchanges,
40%
of
companies
have
market
capitaliza�ons
less
than
$250

million
(majority
of
ﬁnancings
for
these
companies
is
restricted
vs.
registered)

v  The
vast
majority
of
public
companies
with
market
capitaliza�ons
less
than
$500
million

regularly
access
the
equity
capital
markets
for
growth
capital

v  Depending
upon
the
year,
hedge
funds
invest
between
$30
billion
and
$50
billion
directly
into

micro-‐
and
small-‐cap
companies
annually

v  Hedge
funds
are
the
primary
source
of
growth
capital
for
the
vast
majority
of
U.S.
public

companies

v  The
focus
of
today’s
program
is
to
highlight
various
ways
micro-‐
and
small-‐cap
companies
can

save
�me,
money,
and
dilu�on
nego�a�ng
with
hedge
funds
for
growth
capital

©
2013
TCA,
LLC
&
EGS
LLP


HEDGE
FUNDS
START
WITH
AN
ADVANTAGE
THAT
COMPANIES
ACCENTUATE

v  Hedge
funds
write
the
checks;
cash
is
king

v  This
situa�on
has
been
exacerbated
post-‐2008
since
there
are
fewer
funds
financing

micro-‐
and
small-‐cap
companies
–
scarcity
has
created
more
leverage

v  But,
the
failure
of
most
companies
to
adequately
prepare
for
financings
accentuates

the
buy-‐side’s
advantage

v  Companies
need
to
use
the
same
three-‐step
process
for
each
financing,
and
should

start
prepara�ons
six
months
before
they
need
the
capital

v  Only
a�er
the
three-‐step
process
is
any
company
in
a
posi�on
to
retain
the
right

investment
bank

v  The
predominant
reason
why
companies
rou�nely
select
the
wrong
investment
bank

©
2013
TCA,
LLC
&
EGS
LLP


MAJORITY
OF
COMPANIES
ARE
UNPREPARED
FOR
INVESTOR
MEETINGS

v  Deference
to
investment
banks
should
be
replaced
by
data;
singling
out
funds
with
whom
to

construc�vely
meet
is
more
science
than
art

v  Five
cri�cal
ques�ons
that
rarely
get
asked/answered:

1.  Is
your
company
being
brutally
realis�c
about
macro/micro
elements
which
might

impact
the
financing

2.  For
directors
-‐-‐
does
the
management
team
have
recent,
relevant
experience
securing

financing;
has
the
board
listened
to
management’s
presenta�on

3.  Is
management
prepared
to
present
the
company
extemporaneously
(without

handouts,
iPads,
or
laptops)

4.  Does
management
know
the
five
likeliest
concerns
that
investors
will
have
about

financing
your
company

5.  Has
management
reviewed
what
has
previously
been
promised
to
investors
with

respect
to
milestones
and
use
of
prior
financing
proceeds

v  Loose
lips
sink
ships

©
2013
TCA,
LLC
&
EGS
LLP


NEGOTIATING/DOCUMENTATION
–
LEVELING
THE
PLAYING
FIELD

v  Though
not
binding,
recent
financing
terms
received
by
substan�ally
similar
companies
are

proba�ve;
companies
must
possess/analyze
the
data

v  “Anything
you
say,
can
and
will
be
used
against
you…”

v  Prior
to
signing
a
term
sheet,
call
the
CFOs
of
the
last
few
companies
that
the
lead
investor

financed;
in
the
case
of
registered
offerings
test
alloca�ons
by
referencing
13F
filings

v  Impossible
to
overstate
the
importance
of
deal
documenta�on
in
restricted
stock

or

conver�ble
instrument
deals;
cri�cal
to
understand
that
most
corporate
a�orneys
don’t
stand

a
chance
nego�a�ng
against
hyper-‐specialized
hedge
fund
a�orneys

v  Ask
the
investment
banker
to
provide
you
with
the
expected
deal
documenta�on
as
soon
as

possible,
so
you
and
your
a�orney
actually
have
�me
to
read
it
and
understand
it.
You
cannot

digest
a
conver�ble
debt
deal
overnight

v  You
almost
always
will
have
to
give
up
SOME
warrant
coverage

©
2013
TCA,
LLC
&
EGS
LLP


POST-‐FINANCING
MISTAKES
ARE
COSTLY…
BUT
AVOIDABLE

v  Penal�es
in
restricted
stock/conver�ble
deal
documenta�on
can
cost
a
fortune,
they
are
in
the

documents
for
good
reasons,
and
they
are
rarely
waived

v  Especially
with
structured
ﬁnancings,
companies
o�en
fail
to
appreciate
the
complexi�es
of

complying
with
the
terms

v  Understand
whether
the
dilu�on
protec�on
in
your
warrants
is
limited
to
a
downward
adjustment

of
your
price
or
also
involves
an
increase
in
the
number
of
warrant
shares
(an
“exploding”
warrant

in
hedge-‐speak)

v  Make
sure
the
“purchase
price”
in
the
dilu�on
provision
does
NOT
deduct
the
Black-‐Scholes
value

of
any
warrant
component
in
your
subsequent
deals,
because
you
are
likely
going
to
issue
warrants

in
the
future

v  Make
sure
the
CFO
(or
whoever
interfaces
with
your
transfer
agent
on
a
regular
basis)
is
made

aware
of
all
deadlines
for
delivering
shares
on
conversions
or
warrant
exercises,
and
have
a
system

in
place
for
covering
that
chore
when
the
CFO
is
out
of
the
oﬃce

v  Don’t
get
cute
with
refusing
to
honor
conversions.
The
courts
are
never
going
to
rule
in
your
favor

©
2013
TCA,
LLC
&
EGS
LLP


MAKING
WORKOUTS
LESS
COSTLY,
TIME-‐CONSUMING
&
FRUSTRATING

v  Companies
need
to
be�er
understand
the
business
and
psychology
of
the
buy-‐side

v  Restricted
stock/conver�ble
deal
documenta�on
can’t
be
construc�vely
amended
without

first
understanding/evalua�ng
the
business
ra�onale
for
the
breached
term(s)

v  Impact
on
hedge
funds’
P&L
is
where
the
rubber
meets
the
road

v  If
you
are
dealing
with
mul�ple
investors,
understand
that
you
have
work
through
them
one

at
a
�me
(or
through
the
banker
that
arranged
the
deal)
–
the
funds
cannot
meet
you

together
or
they
may
be
ac�ng
as
a
“group”
for
short-‐swing
profit
purposes

v  Beware
of
paying
a
banker
to
arrange
a
workout:
this
will
eliminate
the
3(a)(9)
exemp�on

that
will
at
least
allow
the
investors
to
“tack”
their
prior
holding

periods
for
Rule
144

purposes
or
maintain
the
registered
status
of
a
previously
registered
security

v  Don’t
be
bashful
about
asking
the
investor
if
they
have
wri�en
off
their
investment
in
your

company.
They
may
not
say,
but
it
cannot
hurt
to
ask

©
2013
TCA,
LLC
&
EGS
LLP


FOUR
SUCCINCT
TAKEAWAYS

1.  In
the
aggregate,
micro-‐
and
small-‐cap
companies
would
undertake
faster,
smarter,

less-‐dilu�ve
financings
if
they
prepared
further
in
advance,
and
u�lized
deal
data
(vs.

officer/director,
third-‐party
specula�on)
to
ascertain
what
financing
structure
and

terms
are
most
likely

2.  Far
too
many
companies
cede
addi�onal
advantage
to
the
buy-‐side
by
making
poor

banking
and
deal
a�orney
choices;
the
rou�ne
failure
to
undertake
any
diligence

whatsoever
on
the
hedge
funds
that
are
about
to
provide
financing
is
icing
on
the
cake

3.  Be
prepared
to
give
up
a
bigger
discount
to
your
market
price
in
order
to
avoid
having

to
give
the
investors
too
many
of
the
“gotcha”
provisions

4.  There
is
no
free
lunch!
Every
�me
you
go
to
market,
you
are
compe�ng
against
dozens

of
similar
deals
being
offered
to
a
limited
universe
of
poten�al
investors
that
same

week

©
2013
TCA,
LLC
&
EGS
LLP


SPEAKER
BIOS
AND
CONTACT
INFORMATION

Sara
LaFever
is
an
account
manager
at
Sagient
Research
Systems
in
San
Diego,
where
she
works
with
three
of
Sagient’s
capital
markets

research
tools:
PlacementTracker,
BioMedTracker,
and
CatalystTracker.
She
received
her
BA
from
New
York
University
and
is
pursuing
a

Master’s
in
Library
and
Information
Sciences
from
San
Jose
State
University.
Ms.
LaFever
began
her
career
with
Sagient
as
an
analyst.

CONTACT

Sara
LaFever

Account
Manager

Sagient
Research
Systems

858-‐200-‐2357

slafever@sagientresearch.com


Adam
J.
Epstein
is
a
corporate
director,
and
a
special
advisor
to
small-‐cap
boards
and
investment
funds
through
his
firm,
Third
Creek

Advisors,
LLC
(“TCA”).
He
is
the
author
of
The
Perfect
Corporate
Board:
A
Handbook
for
Mastering
the
Unique
Challenges
of
Small-‐Cap

Companies
(McGraw
Hill,
2012).

Mr.
Epstein
is
lead
director
of
OCZ
Technology
Group,
Inc.,
and
a
Board
Leadership
Fellow
at
the
National
Association
of
Corporate

Directors,
the
highest
level
of
credentialing
for
corporate
directors
and
corporate
governance
professionals.
Mr.
Epstein
is
a
regularly

featured
speaker
at
national
corporate
governance
forums
and
investor
conferences,
and
a
regular
contributor
to
Directorship
magazine.

Prior
to
founding
TCA,
Mr.
Epstein
co-‐founded
and
was
a
principal
of
Enable
Capital
Management,
LLC
(“ECM”).
During
his
tenure,
ECM’s

special
situation
hedge
funds
invested
in
more
than
500
small-‐cap
financings
in
the
United
States,
the
European
Union,
and

Australasia.
Mr.
Epstein
started
his
career
as
an
attorney
at
Brobeck,
Phleger
&
Harrison.

CONTACT

Adam
J.
Epstein

Founder

Third
Creek
Advisors,
LLC

ae@thirdcreekadvisors.com


Joseph
A.
Smith,
a
member
of
the
Firm,
is
widely
recognized
as
the
leading
expert
in
the
field
of
Private
Investments
in
Public
Equity

(PIPEs)
and
Registered
Direct
offerings,
where
he
developed
and
perfected
many
of
the
most
commonly
used
transaction
structures,

including
the
intra-‐day
and
overnight
shelf
takedown,
confidentially
marketed
public
offerings
(CMPOs),
the
self-‐liquidating
convertible

debenture
and
the
equity
line
of
credit.

Mr.
Smith’s
clients
are
mainly
investment
banks
and
institutional
investment
funds,
where
he
and
his
team
facilitate
approximately
75

financing
transactions
each
year.
He
has
more
than
25
years
of
experience
representing
small-‐
and
mid-‐cap
public
and
private
companies

in
all
phases
of
development,
from
formation
through
IPO
and
subsequent
merger
and
acquisition
activity;
and
broker-‐dealers
with
their

regulatory
issues.
He
also
assists
broker-‐dealers
with
regulatory
issues.
Under
Mr.
Smith’s
leadership,
Ellenoff
Grossman
&
Schole
has

been
ranked
as
the
No.
1
legal
adviser
to
placement
agents
every
year
since
2003.

Mr.
Smith
is
a
regular
speaker
on
legal
issues
relating
to
the
PIPE
and
RD
markets
at
the
PIPEs
Conference
and
other
venues.
He
has

undergraduate
and
MBA
degrees
from
the
University
of
California,
Berkeley
and
a
law
degree
from
UCLA.

CONTACT

Joseph
A.
Smith

Partner

Ellenoff
Grossman
&
Schole
LLP

212-‐931-‐8719

jsmith@egsllp.com


Negotiating with Hedge Funds

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Negotiating with Hedge Funds