Attorney Walter Wright on The Spectrum Of Financing Options
Post on 16-Jan-2015
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Legal Series: Financing Issues - Stops Along the Investment Food Chain
Mass Technology Leadership Council
The Spectrum of Financing OptionsWalter A. Wright, III, Esq.
Trinity Law Group LLC781.329.0008wwright@trinitylg.com
• Like all successful relationships, must be structured and managed properly
• Understand entrepreneur goals and limitations• Understand company goals and limitations• Understand investor goals and limitations• Be certain the investor understands the company,
and that there is a fit between company and investor
Many sources of money …series of stops?a food chain? …financing is a relationship spectrum
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Company
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Entrepreneur
Friends and Family
Public Capital Markets
Operations
Commercial Banks
Quasi-Government Agencies
Angels
Venture Capital
Sources of Capital
The Entrepreneur
• Should be initial source of company funds• Obvious limitations on amount of money available• Entrepreneur needs to show commitment to company
– doesn’t mean you need to tie up your entire net worth• As company grows, it may be necessary to turn to
outside sources• The appropriate type of investor and investment varies
according to type and stage of company
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Friends and Family
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
• Members of immediate and extended family; friends and friends of friends; business acquaintances
• Can be evidence of ‘first believers’ in what you’re doing• Limitations on amounts available• Consider affects on personal relationships• Securities law issues
Placement Agents?• Small investment banks will serve as “finders”• Will act as agents - not as principals• Can provide advice and introductions - but not capital• Will take a success fee - some funds don’t like to pay• Be careful of being locked up; finders often require
– Rights of participation in future offering– Warrants with negligible exercise price
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Angel Investors
• Become more organized, with professional managers who manage investments on behalf of the individuals
• As personal portfolios have declined in value, the amount available for investment has decreased
• Initial funding for product development, putting management team in place, leasing office space, initial equipment purchases, getting the beta, the first sale, etc.
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Institutional Investors
• Commercializing product, creating a sales and distribution network, creating administrative infrastructure requires more substantial capital
• Three common sources of growth capital are: traditional venture capital firms, commercial banks and quasi-government agencies
• As company grows, it may be appropriate to raise capital in public capital markets
The Spectrum of Financing Options
Trinity Law Group LLC
Venture Capital: The Bright Side
• Will take equity - no regular debt service requirement– preferred stock may carry redemption rights with coupon
• Time horizon for liquidity event is beginning to lengthen again, after shrinking over the last few years
• Access to experienced board members and mentors• Ability to leverage investor relationships• Acceleration
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
• Valuations are depressed• Founders give up a substantial piece of the company
– Become especially pronounced over the last 12-18 months• Restrictions on operations, future financings and
corporate transactions• Control at risk• Managing Investors
Venture Capital: The Dark Side
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Commercial Banks• Commercial banking business model not designed
for early stage companies with limited or no tangible assets or cash flows
• There are a limited number of banks who will loan to entrepreneurial tech companies
• Some banks have formed dedicated entities to focus on entrepreneurial companies
• May be appropriate source of expansion capital once operations are up and running
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
• Usually not required to give up an equity stake – some warrant coverage usually required
• As cash flow becomes available from operations or other financing sources, can retire debt
• Establish financial reporting procedures, credit history
Commercial Banks: The Bright Side
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
• Must service debt through regular payments of principal and interest
• Security interest in company’s assets– commercial banks rarely subordinate
• Personal guarantees by founders frequently required– gets back to problem of exposing founders’ personal assets
• At some point, the bank will expect repayment
Commercial Banks: The Dark Side
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Quasi-Government Agencies
• Subset of venture capital• Generally strictly limited by enabling legislation
– Geographic focus– Industry– Size of company– Form of investment– Amount of investment in one company
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
• U.S. Small Business Administration– www.sba.gov
• Massachusetts Capital Resource Co.– www.masscapital.com
• Massachusetts Technology Development Corporation– www.mtdc.com
Quasi-Government Agencies
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
A few examples:
• Timing is critical• VC investors can provide invaluable guidance and
introductions in process• Sizes of company and offering determine purchasers
– if too small, many institutional purchasers will shy away or be prohibited from participating by their investment criteria
• ‘Public Venture Capital’ is attractive, but dangerous– investment banks in this space frequently lack resources or
commitment to provide aftermarket support
Public Equity: Initial Public Offering
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
• Bright Side:Compressed TimetableReduced ExpensesMore Ways To Raise Money
• Dark Side:With no underwriter to support the stock with research
and trading, company becomes an orphanCan end up with worst of both worlds
– Illiquid stock with price dictated by intermittent trades– No ability to value based on company’s story– Added compliance cost and exposure to liability
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Public Equity: Merger with Public Shell
• Funds from operations –plowback• Equipment leasing• Vendors• Customers• Strategic Partners
Operational Alternatives
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
• Financing for ‘big ticket’ tangible asset purchases• Usually provided by third party leasing company,
but may also be available from equipment vendor• Subject to same requirements as traditional loans
– credit checks, security interest, possibly personal guarantees
• Option to buy at end of lease
Equipment Leasing
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
• Industry players can be sources of financing or other resources
• Usually only for a specific functional area, such as product or service development
• In return, partner will get rights in the product or service, e.g., license, distribution, ownership
• May have to agree to exclusive relationship
Strategic Partners & Vendors
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
• Like all successful relationships, must be structured and managed properly
• Understand entrepreneur goals and limitations• Understand company goals and limitations• Understand investor goals and limitations• Be certain the investor understands the company,
and that there is a fit between company and investor
Building Successful Financing Relationships
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Company
The Spectrum of Financing Options
Trinity Law Group LLC www.trinitylg.com
Entrepreneur
Friends and Family
Public Capital Markets
Operations
Commercial Banks
Quasi-Government Agencies
Angels
Venture Capital
Sources of Capital
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 Wright’s 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
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