Ride the Storm: Navigating Through Unstable Periods / Katerina Rudko (Belka G...
ย
Attorney Walter Wright on The Spectrum Of Financing Options
1. Legal Series: Financing Issues - Stops
Along the Investment Food Chain
Mass Technology Leadership Council
The Spectrum of Financing Options
Walter A. Wright, III, Esq.
Trinity Law Group LLC
781.329.0008
wwright@trinitylg.com
2. The Spectrum of Financing Options
Many sources of money โฆseries of stops?
a food chain? โฆfinancing is a relationship
spectrum
โข Like all successful relationships, must be structured
and managed properly
โข Understand entrepreneur goals and limitations
โข Understand company goals and limitations
โข Understand investor goals and limitations
โข Be certain the investor understands the company,
and that there is a fit between company and investor
Trinity Law Group LLC www.trinitylg.com
3. The Spectrum of Financing Options
Sources of Capital
Entrepreneur
Friends and Family
Angels
Venture Capital
Company
Commercial Banks
Quasi-Government Agencies
Public Capital Markets
Operations
Trinity Law Group LLC www.trinitylg.com
4. The Spectrum of Financing Options
The Entrepreneur
โข Should be initial source of company funds
โข Obvious limitations on amount of money available
โข Entrepreneur needs to show commitment to company
โ doesnโt mean you need to tie up your entire net worth
โข As company grows, it may be necessary to turn to
outside sources
โข The appropriate type of investor and investment varies
according to type and stage of company
Trinity Law Group LLC www.trinitylg.com
5. The Spectrum of Financing Options
Friends and Family
โข Members of immediate and extended family; friends
and friends of friends; business acquaintances
โข Can be evidence of โfirst believersโ in what youโre doing
โข Limitations on amounts available
โข Consider affects on personal relationships
โข Securities law issues
Trinity Law Group LLC www.trinitylg.com
6. The Spectrum of Financing Options
Placement Agents?
โข Small investment banks will serve as โfindersโ
โข Will act as agents - not as principals
โข Can provide advice and introductions - but not capital
โข Will take a success fee - some funds donโt like to pay
โข Be careful of being locked up; finders often require
โ Rights of participation in future offering
โ Warrants with negligible exercise price
Trinity Law Group LLC www.trinitylg.com
7. The Spectrum of Financing Options
Angel Investors
โข Become more organized, with professional managers
who manage investments on behalf of the individuals
โข As personal portfolios have declined in value, the
amount available for investment has decreased
โข Initial funding for product development, putting
management team in place, leasing office space,
initial equipment purchases, getting the beta, the first
sale, etc.
Trinity Law Group LLC www.trinitylg.com
8. The Spectrum of Financing Options
Institutional Investors
โข Commercializing product, creating a sales and
distribution network, creating administrative
infrastructure requires more substantial capital
โข Three common sources of growth capital are:
traditional venture capital firms, commercial banks
and quasi-government agencies
โข As company grows, it may be appropriate to raise
capital in public capital markets
Trinity Law Group LLC
9. The Spectrum of Financing Options
Venture Capital: The Bright Side
โข Will take equity - no regular debt service requirement
โ preferred stock may carry redemption rights with coupon
โข Time horizon for liquidity event is beginning to
lengthen again, after shrinking over the last few years
โข Access to experienced board members and mentors
โข Ability to leverage investor relationships
โข Acceleration
Trinity Law Group LLC www.trinitylg.com
10. The Spectrum of Financing Options
Venture Capital: The Dark Side
โข Valuations are depressed
โข Founders give up a substantial piece of the company
โ Become especially pronounced over the last 12-18 months
โข Restrictions on operations, future financings and
corporate transactions
โข Control at risk
โข Managing Investors
Trinity Law Group LLC www.trinitylg.com
11. The Spectrum of Financing Options
Commercial Banks
โข Commercial banking business model not designed
for early stage companies with limited or no tangible
assets or cash flows
โข There are a limited number of banks who will loan to
entrepreneurial tech companies
โข Some banks have formed dedicated entities to focus
on entrepreneurial companies
โข May be appropriate source of expansion capital once
operations are up and running
Trinity Law Group LLC www.trinitylg.com
12. The Spectrum of Financing Options
Commercial Banks: The Bright Side
โข Usually not required to give up an equity stake
โ some warrant coverage usually required
โข As cash flow becomes available from operations or
other financing sources, can retire debt
โข Establish financial reporting procedures, credit history
Trinity Law Group LLC www.trinitylg.com
13. The Spectrum of Financing Options
Commercial Banks: The Dark Side
โข Must service debt through regular payments of
principal and interest
โข Security interest in companyโs assets
โ commercial banks rarely subordinate
โข Personal guarantees by founders frequently required
โ gets back to problem of exposing foundersโ personal assets
โข At some point, the bank will expect repayment
Trinity Law Group LLC www.trinitylg.com
14. The Spectrum of Financing Options
Quasi-Government Agencies
โข Subset of venture capital
โข Generally strictly limited by enabling legislation
โ Geographic focus
โ Industry
โ Size of company
โ Form of investment
โ Amount of investment in one company
Trinity Law Group LLC www.trinitylg.com
15. The Spectrum of Financing Options
Quasi-Government Agencies
A few examples:
โข U.S. Small Business Administration
โ www.sba.gov
โข Massachusetts Capital Resource Co.
โ www.masscapital.com
โข Massachusetts Technology Development Corporation
โ www.mtdc.com
Trinity Law Group LLC www.trinitylg.com
16. The Spectrum of Financing Options
Public Equity: Initial Public Offering
โข Timing is critical
โข VC investors can provide invaluable guidance and
introductions in process
โข Sizes of company and offering determine purchasers
โ if too small, many institutional purchasers will shy away or be
prohibited from participating by their investment criteria
โข โPublic Venture Capitalโ is attractive, but dangerous
โ investment banks in this space frequently lack resources or
commitment to provide aftermarket support
Trinity Law Group LLC www.trinitylg.com
17. The Spectrum of Financing Options
Public Equity: Merger with Public Shell
โข Bright Side:
Compressed Timetable
Reduced Expenses
More Ways To Raise Money
โข Dark Side:
With no underwriter to support the stock with research and
trading, company becomes an orphan
Can end up with worst of both worlds
โ Illiquid stock with price dictated by intermittent trades
โ No ability to value based on companyโs story
โ Added compliance cost and exposure to liability
Trinity Law Group LLC www.trinitylg.com
18. The Spectrum of Financing Options
Operational Alternatives
โข Funds from operations โplowback
โข Equipment leasing
โข Vendors
โข Customers
โข Strategic Partners
Trinity Law Group LLC www.trinitylg.com
19. The Spectrum of Financing Options
Equipment Leasing
โข Financing for โbig ticketโ tangible asset purchases
โข Usually provided by third party leasing company,
but may also be available from equipment vendor
โข Subject to same requirements as traditional loans
โ credit checks, security interest, possibly
personal guarantees
โข Option to buy at end of lease
Trinity Law Group LLC www.trinitylg.com
20. The Spectrum of Financing Options
Strategic Partners & Vendors
โข Industry players can be sources of financing or
other resources
โข Usually only for a specific functional area, such
as product or service development
โข In return, partner will get rights in the product or
service, e.g., license, distribution, ownership
โข May have to agree to exclusive relationship
Trinity Law Group LLC www.trinitylg.com
21. The Spectrum of Financing Options
Building Successful Financing Relationships
โข Like all successful relationships, must be structured
and managed properly
โข Understand entrepreneur goals and limitations
โข Understand company goals and limitations
โข Understand investor goals and limitations
โข Be certain the investor understands the company,
and that there is a fit between company and investor
Trinity Law Group LLC www.trinitylg.com
22. The Spectrum of Financing Options
Sources of Capital
Entrepreneur
Friends and Family
Angels
Venture Capital
Company
Commercial Banks
Quasi-Government Agencies
Public Capital Markets
Operations
Trinity Law Group LLC www.trinitylg.com
23. Trinity Law Group is a greater Boston corporate law firm which practices the broad range of
business law throughout Massachusetts, the United States and the world with well-recognized
attorneys of stellar academic and professional accomplishment. Trinity Law Group is founded on
the three pillars of strategy, technology and relationships that are transforming the practice of
business law.
Walter Wright has represented and counseled a broad spectrum of companies, investors,
entrepreneurs and executives. Walt Wright has been named by Massachusetts Super Lawyers in
Boston magazine as one of the top 100 attorneys in Massachusetts. The list compiles the 100
lawyers who received the highest total of points in the Massachusetts Super Lawyers nomination,
research and blue ribbon review process based on surveys of over 35,000 lawyers across the state.
Walt Wright specializes in business and corporate law; leads a law and strategic counseling practice
intensely focused on the organizational, venture capital financing, operational and transactional
requirements of entrepreneurs, emerging technology, marketing and information companies as well
as representing major venture capital funds and angel groups in investment transactions and
executives in transition.
Walt Wrightโs law and strategic counseling practice intensely focuses on the organizational, venture
financing, operational and transactional requirements of entrepreneurs, emerging technology and
information companies as well as representing venture capital funds and angel groups in investment
transactions and executives.
Walter A. Wright, III Attorney Trinity Law Group LLC wwright@trinitylg.com 781.329.0088