Angel Summit Report

2009 Utah Angel Investor Summit

Review Zions Bank Founders Room

December 8, 2009

Report prepared by

Wayne Brown Institute

Lead Sponsor

Sponsors

Ballard Spahr LLP

Stoel Rives LLP, Attorneys at Law

Wayne Brown Institute

2

2009 Utah Angel Investor Summit

Contents

Introduction 3

Status of Angel Investing in Utah 4

Angel Investor Group Updates: 7

Olympus Angels 8

Park City Angels 9

Salt Lake Life Sciences Angels 10

Utah Angels 11

WBI Angels 13

Addenda – Summaries of Keynote Speeches and Panel Discussions: 15

Keynote – George Feiger, CEO, Contango Capital Advisors 16

and EVP of Zions Bancorporation

Panel 1 – Issues in Angel Deals – How to Avoid a Down Round 19

Panel 2 – Building the Best Boards for Angel Deals 22

Panel 3 – From Due Diligence to Closing – 25

Navigating the Process

Summary

Keynote – Alan Hall, Founder and Chairman of 30

MarketStar Corporation, Philanthropist and

Super-Angel investor

Utah Angel Investor Summit booklet , 31

containing speaker and panelist bios and photos

3

Introduction

In the last two or three decades, Angel Investors, or more simply “Angels,” have grown

to become an increasingly significant player in the financial marketplace and contributor

to the health and vitality of the economy of the State of Utah, as well as the nation. In the

last 15 years, the emergence of Angel Groups has helped aggregate capital and fostered

the syndication of capital among angels, promoting a more efficient deployment of

capital to young companies. Startup and early-stage businesses benefit from capital that

fills the gap between early seed funding obtained from “friends and family” and capital

from venture capital firms – “VCs” – that usually do not consider making investments

smaller than $1 to 2 million. Further, Angels often take an active role in businesses when

they invest their money, guiding and helping the entrepreneur to achieve goals for his or

her young company. Accordingly, Angels and Angel Groups can help to spur growth of

young businesses and prepare them for their next level of financing, and can have a very

desirable impact upon the local economies in which they operate.

Angel financing, while more readily available than venture capital, is nevertheless

difficult for a new business to raise. (Angels invest approximately the same amount in

total, $15 billion in 2009, as VCs, but is in many more deals, 60,000 vs. 2500.11

)

Recognizing the importance of Angels and Angel Groups to the economy, the Wayne

Brown Institute and its lead sponsor, Zions Bank, organized the 2009 Utah Angel

Investor Summit. The Summit entitled Best Practices/Best Returns had the following

goals: 1) Educate the Angel Groups on current economic trends as they apply to angels,

and other issues pertinent to improving angel investing. 2) Document and report the

impact of Utah‟s angel groups. 3) Facilitate networking among the groups and the

outstanding faculty assembled. 4) Promote angel investing and angel groups to the local

investment community with an eye to recruiting new members. Angels and Angel groups

from throughout the State of Utah, as well as venture capitalists, private investors and

entrepreneurs, were invited to the Summit, held in Salt Lake City at the Zions Bank

Founders Room on December 8, 2009. This is a summary report of the proceedings of

the Summit.

Keynoting the Summit were George Feiger, CEO of Contango Capital Advisors, an

affiliate of Zions Bank, and EVP of Zions Bancorporation. Jim Swartz managing partner

of Accel Partners (one of the oldest and most successful silicon valley venture capital

firms, bios on all speakers are included in this report). Alan Hall, entrepreneur,

philanthropist and angel investor, offered the Summary Keynote. Several panels were

organized for the event, and panelists were selected from among the community of local

Angels, out of state venture capitalists, investors, regulators, service providers and

entrepreneurs.

1 University of New Hampshire Center for Angel Investing

4

Status of Angel Investing in America

Nationally, the environment for Angel Groups is more and more challenging, as shown in

these two charts.

5

Q1,2 2008 vs Q1,2 2009

27% Decrease from 2008 to 2009 to $9.1 Billion 24,500 Deals Funded a 6% Increase 140,200 Angel Investors - Unchanged 31% Decline in Deal Size Lower Valuations

This has certainly been a challenging period for investors around the United States. However, during this difficult era, the Utah economy benefits from a very active group of investors who are actively investing. Utah has emerged as the hub of Angel investing in the West.

Angel Portfolio Summary 130 Angel Members

Does not include current guest attendees

94 Angel Members have invested to date Average = $76,175 per angel investor Median = $25,000 per angel investor

Range = $5,000 - $1.25m

Number of

Investments Number of Members

5 or more 10

3 or 4 19

2 17

1 51

0 7

Total Companies Invested In: 55

Total Group Investment: $13,740,220

6

Investment Size per Group

Average: $2,748,044

Range: $1,622,000 - $6,911,500

Investment Size per Company

Average: $249,822

Range: $5,000 – $1,250,000

Represented Industries:

Internet

Web Services

Consumer Products

Medical Products

Small Newspaper

Semiconductor

Software

Pharma

Outdoor Products

PCI Compliance

Medical Devices

Business Services

HCIT

Seed Fund

Gaming/Software

Drug Discovery

Consumer Services

BioPharma

Food Service/Software

Cleantech

7

Angel Investor Group Updates

The following pages include the presentations from five Angel Groups in the

State of Utah, each of whom participated in the concluding panel discussion:

Hal Widlansky, Olympus Angels

Reflecting on the last 18 months, Mr. Widlansky characterizes Olympus Angels as

having a “California-style approach to investment,” following his experience in the Bay

area. They skew towards technology and life sciences businesses. Their executive

committee of five members is a recent change.

Angel investments are not done solely for “financial return,” and so they invest a lot more

time than money. Their goal is one deal per quarter, with two thirds of investors active

with at least one investment per year.

John Richards, Utah Angels

Utah Angels is the oldest Angel group in Utah, having been organized in 1998. It has a

small membership (15-20), where individuals are invited by other members and “taken

on a test drive.”

Andrew Laver, Salt Lake Life Sciences Angels

SLLSA focuses exclusively on life sciences field . . . so screening is quite a bit easier.

See fewer deals, but often have been incubating at the university. Andrew is a “fulltime

guy” – meaning permanent ArchAngel and permanent deal lead. He helps on screening

and manages due diligence, but farms out to people with expertise. A number of

investors have “dropped out” due to the downturn in the economy and their portfolios.

Andrew Gutman, Park City Angels

Park City is an “interesting area,” comprised of people who have chosen the lifestyle that

Park City offers – whether early or later in their careers. $600 annual dues is

intentionally high, to ensure serious investors. No min. investment. Many new, younger

members . . . which is good because the younger ones “are more likely to roll up their

sleeves and do the work.” Slide shows 61 members, but that is not correct – should be

less than that.

Brad Bertoch, WBI Angels

WBI Angels is made up primarily of members of the Wayne Brown Institute‟s Board of

Trustees. It also has others from both inside and outside of the State of Utah. It is

aninformal, small group, and lacks the structure of the other groups, but often invests

with them.

8

Olympus Angels

Investments over the last 18 Months

25 Angel Members to date (not including guests) 16 Angel Members have invested to date

Number of Investments

Number of Members

5 or more 2

4 0

3 2

2 6

1 5

OA Investments Industry

Celtek Outdoor Products

Kickstart Seed Fund

Mangia Food Service / Software

Matchbin Small Newspapers / Software

Panoptic Security PCI Compliance / Software

Total $1,622,000

9

Park City Angels

Established 2007, first investment 2008

Investments over the last 18 Months

61 members to date (not including guests) 32 members have invested to date

Number of Investments

Number of Members

5 or more 5

4 1

3 3

2 3

1 22

Investment Size Average of $25,946 per investor Median $25,000 Range: $2,500 – $200,000

PCAN Investments Industry

Catheter Connections Medical Devices

Celtek Outdoor Products

Kickstart Seed Fund

Mangia Food Service / Software

Matchbin Small Newspapers / Software

Ogwa Outdoor Products

Panoptic Security PCI Compliance / Software

Saga Gaming / Software

Wastewater Compliance Systems Cleantech

Zerista Conference Planning / Software

Total $1,816,220

10

Salt Lake Life Science Angels

Seed-stage life science investments Medical devices & products HC Services HCIT Pharma / Biotech

Currently have 16 active members 21 members have invested to date (some not active in 2009)

Number of Investments

Number of

Members

3 or 4 6

2 3

1 14

0 4

Investment Size Company

$1,652,500 invested in 7 companies Average investment per company: $236,071

Individual Angels Average individual investment: $71,848 Median individual investment: $20,000 Range of individual investment: $5,000 - $250,000

SLLSA Group Portfolio Industry

MediPro Pharma Pharma

VisualShare HCIT

Resilient HCIT

Wasatch Microfluidics Medical Device

Q Therapeutics BioPharma

Larada Sciences Medical Device

SentrX Animal Care Medical Product

11

Utah Angels

UtahAngels™ Summary for 2007, 2008 and 2009 Utah Angels Snapshot No entity; free Executive Director and assistants Finances through PayPal Monthly attendance; annual internal “Summit” in Dec No meeting in July or August Attendance and membership by invitation only 21 partners and associates On-leave and emeritus statuses Additional consistent guests (2 right now) Minimum $5 million net worth

Not policed in down economies Required to invest $25,000 each year

Not policed in down economies $1,000 annual dues

Waived if capital not needed Social aspect

River rafting, biking, etc. Currently have 16 active members 21 members have invested to date (some not active in 2009)

Portfolio Summary 21 current partners and associates

Does not include current guest attendees 18 Angel Members have invested to date

Average = $62,400 per angel investor Median = $50,000 per angel investor Average = $107,100 per investment Median = $50,000 per investment

Number of Investments

Number of Members

5 or more 3

3 or 4 5

12

2 4

1 6

0 3

Total Group Investment $6,911,500

Investment Size per Company Average: $255,980 Median: $101,500 Range: $25,000 – $1,160,000

Utah Angels Portfolio Industry UA Investment

Alianza Software $101,500

Alliance Health Software 175,000

Black Ledger Business Services 100,000

CelTek Consumer Products 100,000

Central Logic Business Services 138,000

Concerity Software 25,000

Corda Software 100,000

Crime Reports Consumer Services 100,000

Crown Health Software 33,000

EnticeLabs Business Services 375,000

Family Link Consumer Services 50,000

Five Star Consumer Products 75,000

Matchbin Business Services 25,000

Mozenda Software 25,000

NetVision Software 75,000

OBEO Software 540,000

Ocean Grown Consumer Products 300,000

Orange Soda Business Services 125,000

Panoptic Security Business Services 50,000

ROC Consumer Products 1,000,000

S2/3DVO Software 275,000

Think Software 100,000

Three Purple Dots Consumer Services 100,000

Tru Hearing Consumer Products 178,000

Tru Vision Consumer Products 1,160,000

Zinch Consumer Services 600,000

Total $6,911,500

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WBIAngels

WBI Angels is an informal group of Wayne Brown Institute Board members, and WBI Followers.

Members have to be active angel investors, or active members of other groups.

Can live out of state, but must be willing to invest in Utah or other areas WBI serves.

Members are not required to invest in WBI sourced deals. WBIAngels don’t typically lead deals. Membership is by invitation.

WBIAngels Portfolio Summary 7 Angel Members to date (not including guests) 7 Angel Members have invested to date

Average of 1, median of 1 per member

Number of Investments

Number of Members

5 or more X

3 or 4 2

2 1

1 4

0

Investment Size Average of $ 170K per investor Median $25,000 Range: $5,000 – $1.25M

WBIAngels Investments Industry Total Investment Group Investment

Sendside Networks Internet $ 5.0M $ 1.5M

High West Distillery Consumer 4.5M 25K

Pipeline Micro Semiconductor 7.0M 15K

Catheter Connections Medical Device 1.2M 8K

14

Matchbin Internet 2.0M 135K

MediProPharma Drug Discovery 680K 50K

Velosum Web Services 1.0M 5K

Total $ 21.38M $ 1.738M

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Addenda

Summaries of Keynote Speeches and Panel Discussions

and

Utah Angel Investor Summit program booklet,

containing speaker and panelist bios and photos

16

George Feiger, CEO, Contango Capital Advisors, and EVP of Zions Bancorporation

Keynote speaker

Dr. Feiger, a leading economist (see bio), described the banking industry and Angel

investors as all part of the financial services business, “but we are really at two very

different ends of the financial services business. (Banks) use a telescope and (Angels)

use a microscope.” To illustrate, Dr. Feiger said banks may consider what changes in the

exchange rate of the dollar might mean for the emerging market bond portfolio, while

Angel investors will be more focused on “Will this microprocessor-controlled in-body

insulin pump control Type II diabetes in overweight women over the age of 55 better

than injections?”

State of the Economy

It is important to note what has happened to the effectiveness, the structure and the

operations of our financial markets these past two years. Challenges are not all in the

past. He concludes that rather than recent financial markets being an aberration,

“bubbles, instability and periodic crises are going to be the norm of our financial system

for the foreseeable future – for the next decade at least.”

We‟re not headed back to calm – it will actually be more turbulent, for the following

reasons:

The commercial banking system has been severely damaged, and it will take

several years for this system to be able to operate as effectively as it once did,

The asset-backed securities markets have been hobbled – and Dr. Feiger suggests

that these markets are “at least as important as the banking system.” (To

illustrate: by 2007, more credit came directly from the capital markets into the

U.S. economy than came from the entire banking system. The banking system

was slightly less than half of the credit-generating mechanism in our economy,

and “so it is not enough to fix the banks . . . You‟ve got to fix the more complex

things as well,”

There‟s a lot of agitation to change the financial system, and more often than not,

what Dr. Feiger refers to as “bizarre, populist” reforms introduce new problems

that may make things worse, and

Globalization will create more and bigger bubbles than ever before.

Recent History

For several years, an enormous amount of debt – everywhere – has been repackaged into

securities such as CDOs that were sold to investors. Much of these securities were also

kept on the books by the issuers because of their positive carry value. Accordingly, there

was an extraordinary amount of leverage in the financial system at the start of 2007.

Whereas a bank may be typically leveraged 16 times its equity base, Bear Stearns,

Lehman, Goldman and others, prior to the collapse, were leveraged 28 to 34 times their

equity. In the case of these institutions, this risk was compounded because it was based

on overnight and 48-hour money – the so-called repo market. So a massive mountain of

17

debt was put into “these funny securities” that were sold to investors but heavily carried

on the books of these highly-leveraged institutions.

At one point, a crack developed in the system, as some of these sub-prime mortgages

turned out not to be worth what everyone thought they were, and the price of these

securities collapsed. Once the price of these securities collapsed, then leverage worked in

reverse form: Borrowings against the securities that are no longer worth what they were

led to margin calls. Absent capital to meet the margin call, the investor sells out. More

securities become available on the market, driving the price down further, and resulting

an endless liquidity crisis. Investors failed in their “due diligence” of these new

securities assuming that the large companies packaging and selling them had done the

appropriate risk analysis. (Author‟s note: it is ironic to think that the due diligence done

in angel investing may make the deals substantially less risky than the supposed

securitized notes sold by organizations such as Lehman Brothers and Bear Sterns.)

So with the securities bubble bursting, the liquidity crisis, and dumping of securities, all

the institutions that held these securities started to take massive losses and writing down

their equity. And as a bank‟s equity falls by $1, their lending has to decline by $16,

characteristic of the magic of leverage in a bank. This all resulted in “a massive collapse

of the availability of credit to the real economy, and that‟s what caused the recession.

The recession didn‟t occur because house building stopped, because house construction is

only 2 ½ percent of the economy. Actually, the combination of a massive “double-

spiral” effect of the securities crisis and a broad-based inability of borrowers to repay was

the cause. And according to Dr. Feiger, “one more turn of the screw” could have taken

the United States back to the Great Depression. The U.S. financial system came close to

collapse in 2008. That‟s now history.

Challenges and Complexities

Dr. Feiger then addressed how we can get the financial system functioning again: First,

banks need to be recapitalized, which is “not a trivial task” – amounting to roughly $3

Trillion worldwide, approximately one third of it in the U.S. TARP money has to be

repaid, and banks will need three or four years of good profits to do so, as well as to

process the distressed debt. There has been a rise in rise in the household savings rate,

but this has largely funded the significant increase in government debt. Second, there are

many proposed financial reforms – “populist” in nature – attacking “greedy bankers.”

Capping bankers‟ bonuses, selected prosecutions, more regulators, new regulatory

agencies, and public “naming and shaming” may be good politics, but they severely

handicap operations of the financial institutions as they try to earn money and do things

that will be necessary to be able to get back to financing the economy.

First, bigger is not better. The realities of today‟s financial market will add to the

complexity of the solution. Large institutions are not more profitable than small

institutions. Dr. Feiger suggests that the large banks should be “cut down,” separating

the commercial banking and investment banking and insurance businesses. Giant

conglomerates are “what‟s spread all this risk.”

18

Second, quantitative risk models fail . . . especially when run by regulators. There

are no good ways to model events that happen once every 70 years. According to Dr.

Feiger, “the things you can model are the things you are not afraid of, and the things you

should be afraid of you can‟t model.” Accordingly, the United States‟ entire regulatory

apparatus is based on flawed assumptions.

Third, “a central issue in this financial crisis” is the way we measure market

performance, encouraging imprudent risk-taking, asserts Dr. Feiger. The business

cycles in the U.S. economy do not occur over a quarter or even a year, but may take

many years. The short-term performance ethic that permeates all publicly listed

companies cannot deal with long cycles. So, management attention to short-term

performance (quarterly or even annual earnings) provides incentive for management to

optimize over the short term at the expense of longer-term health and vitality of a

company. Anyone who is prudent will have lost his or her job in 2007.

Fourth, long term risk taking does not suit public companies. Private partnerships are

much more careful about how they invest their partners‟ money, and they‟re much more

careful about what they pay to non-partners. By converting investment banks to publicly-

listed companies, partners‟ equity is leveraged with other peoples‟ equity, and all of it is

leveraged against other peoples‟ debt.

Finally, government promises “more and better regulators.” However, regulatory

agencies do not have access to the computing power of large institutions such as

Goldman Sachs. In addition, the most talented people with the best educations go to

where they are better paid. Regulatory agencies can never compete for the best and

brightest.

Perpetual State of Turbulence

Dr. Feiger suggests that we are experiencing “perpetual turbulence.” Accordingly, we

should expect more economic bubbles – more often, but that is neither bad nor good. His

analogy: „those who live in Salt Lake City know it snows. And to pretend it doesn‟t is a

dangerous thing to do.”

The financial system we‟ve built these last 2 1/2 decades is wonderful, on the one hand,

because it channels money to good purposes, like private equity investment in promising

companies, and successful companies being bought out by larger firms, etc. However,

the other side of the coin is today‟s financial crisis and the ongoing problems that we

face. According to Dr. Feiger, “There is no way to make it better without taking away

the good things. So what we really need to do is learn to adapt to it; it will never be

better than what we have now.” We will continue to have crises from time to time, but

hopefully, there won‟t be any “big” ones.

19

Angel Panels

Excerpts and summaries of comments

(refer to bios of each participant in the program booklet)

Panel 1 – “Issues in Angel Deals – How to Avoid a Down Round”

Jim Swartz, Accel Partners

Founder of Accel Partners, Active in venture capital for four decades

“I think one of the greatly misunderstood areas of Angel financing is the relationship

between Angels and the professionally managed venture capital firms . . . often presented

as an antagonistic relationship. I think it‟s a highly complementary relationship. It‟s

extremely important in the functioning of the venture capital process in the country . . .

and Angels have always been an important part of the process.” Over the past two

decades, Angels have become better organized, and groups of them have become more

active and have played a much more vibrant role in the whole financing environment.”

At Accel Partners, “we believe in the prepared mind,” which is Accel‟s term for “getting

to know an industry and really being specific about an industry and going in depth with it

and having a broad portfolio in it.”

Accel Partners is the largest investor in Facebook. A large percentage of Accel Partners‟

portfolio -- 26 of 39 deals this past year – is with seed or startup companies. In the

current fund, ten of twenty deals are seed or startup. “We‟re very active in the same

types of companies that Angels are involved in, and we love to partner with Angels who

are working in the sectors we work in, and work to build companies.”

Michael Lee, Dominion Ventures

Co-Founder and Managing Director. Active in venture capital for four decades.

Mr. Lee states that at times, there is friction between Angels and venture capitalists. “If

there‟s a mistake made by Angel investors, it is that they don‟t benchmark adequately the

progress that needs to be made before venture capitalists come in.” As a result, there is

often not real progress, or at least not needed focus. If one looks at the three areas that

are important for a company – its technology, the market, and the management team – ten

independent venture capital firms will arrive at essentially the same price. Angels are

often frustrated that the company‟s unique value is not recognized, because they‟re very

close to the company . . . they‟ve been “living with” the company. Venture capitalists

need to “see the proof” – to see the benchmarks and the progress made toward them. He suggests there is often a lack of focus with early-stage money. So, do one thing, and

really do it well. Angels need to help entrepreneurs set benchmarks and establish

expectations so they can be better prepared when they go out to raise the next round of

funding.

20

Things always cost more than what one would expect. A company may make some

headway and is “kinda there,” but no venture capitalist wants to pay for “kinda there.”

Goals and the business plan need to be clearly defined. Benchmarks may be fairly

simple, but they have to be part of the plan.

Second, many Angels are put together with a lot of people with value-added skills. It‟s

not enough that the company has a good idea, and needs some money and we have some.

The next question he asks is “What is it that we can provide? . . . What is it that we can

do for them that they cannot do for themselves? . . . How are we going to create

additional value over and above what we‟re seeing? . . . If we can‟t answer that

question, we usually don‟t invest.” That approach would be good for Angels, as well . . .

If we‟re going to be part of a syndicate, is there somebody at the syndicate who can help

create additional value for this company?

David Rudd, Ballard Spahr

Partner in the Business and Finance Department, Partner-in-charge of the International

Group, and a member of the Life Sciences/Technology, Energy and Project Finance,

Mergers and Acquisitions/Private Equity, P3/Infrastructure, and Securities Groups

Common problems in Angel deals that might prevent venture groups from investing:

1. Realistic valuation of the company

2. Expectations and terms – Angels need to be reasonable and flexible

3. Absence of legal and financial controls

4. Absence of a seasoned board and board committees (audit, compensation, etc.)

5. Unwillingness to transition control or to make changes

6. Company has not asked for enough money

7. Cluttered cap table – (not enough “smart money”) -- too many friends, family

and others in the deals, which complicates the transaction, going forward. This

can often result in securities law violations and restructuring requirements.

Angel groups in this market are raising the bar and are “tremendously strong and do an

exceptional job.”

Larry Rigby, Larada Sciences

Founder, CEO and Board Chairman of Larada Sciences, serial entrepreneur, angel

investor

Mr. Rigby offers a unique perspective. He describes himself as an entrepreneur, but also

an Angel investor. I see it from both sides.”

To avoid a “down round,” all the problems on David Rudd‟s list are important. Also,

when the stock market is performing badly – as it has been -- everything else follows.

Venture capitalists and others will have lower expectations for a company. So here are a

couple of steps to avoid the down round:

21

1. Have some humility. Make sure the business plan is in place and not overblown.

Cut out the hyperbole, and look at things in a very realistic and conservative way,

and

2. Make sure your cap table is structured right. Founders shares should be a

proper portion, depending on who‟s going to contribute what. Angels need to

consider rights. Everyone has gotten more sophisticated about liquidation

preferences, and piggyback rights and ratchets . . . the things VCs had mastered

early on. It‟s very important at each stage of financing to have built into the

structure a bit of flexibility that allows the next investors to come in. The main

thing is to avoid straying too far from where the valuation should be. Angels

should understand and be confident where they are and the amount of money it

will take to get the company to the next round.

Questions and Answers

Q: What have you seen that have been problems? . . . in structure, in type of stock,

or just in lack of performance?

Jim Swartz: Structure can be self-defeating, but Mr. Swartz is not sure it is an obstacle.

“At the end of the day, if we really wanted to do a deal, structure usually wouldn‟t be a

barrier. If it did become a barrier, then the entrepreneur is sufficiently inflexible and

unrealistic, and it‟s probably just not worth doing. Life is short, and you‟d rather be with

people who have an understanding of the world we live in.”

Seed or early-stage investors need to carefully think through what they‟re doing:

Is this a “great project, and I want a seat at the table and to grow with it?” If you

expect a short duration, planning that it will be financed by VC or others, he

advises an investor to discount what they think it will be . . . to perhaps 80 % or

so.

Or do you want a part of the company – and want to work with it? If so, you‟re

really not an Angel; you‟re a venture capitalist, doing exactly what they do.

Over 90 percent of the problems come from being somewhere between – where you get a

big chunk of the company, but not enough money to get the company to where it needs to

be for its valuation.

Q: Considering the changed economy, how have you changed what you look for

and how you look at companies (i.e. new metrics, etc.)?

Michael Lee: “We don‟t fund something today, thinking that the exit is going to be an

IPO. It may be the case, but it is not our goal any longer.” Liquidity is a bigger issue

today. In short, there‟s not a lot of change in what we look for, “but we‟re looking harder

at doing more with a lot less.” Less capital is available – pensions have declined

significantly, and there is shrinkage in the venture capital “pool,” so when he funds

deals, ”we‟re thinking that through and creating bigger reserves because we‟re thinking

we‟ll be carrying it longer.”

22

Larry Rigby: There is great value in generating investment interest “from a variety of

different groups, so that they‟re all running parallel.” He suggests the entrepreneur

should create a feeling of a “horse race.” They should avoid ending up with an “onerous

term sheet that you really don‟t want to swallow, but you have to. If you can, you should

create parallel convergence,” so the company is not compelled to accept adverse terms

from one investor group.

Jim Swartz: Mr. Swartz suggests that the very best entrepreneurs are like the best

politicians, who start to raise their next campaign funds the day after they are elected.

Entrepreneurs should not put it off. They need to start to raise their next round the day

they close their financing.”

“Liquidation preferences are really ugly.” At some point, “they start to get in the way.”

And we don‟t use “ratchets,” he said.

Panel 2 – “Building the Best Boards for Angel Deals”

Jim Swartz, Accel Partners

Founder of Accel Partners, Active in venture capital for four decades

In forming a board for a young company, there are three constituencies to consider: the

founder/entrepreneur, the money interests, and the experts/brain power that add value to

the project and help it succeed. The “perfect board” is comprised of five people: the

founder or CEO, two board members from the investors, and two experts. As the

company grows, the board can grow from there. But remember that “too many board

members can be a big problem.”

Richard “Dick” Shanaman, Eagle Bay Advisors

Founding partner of Utah Ventures (UV Partners)

The NACD (National Association of Corporate Directors) studied and offered many

“platitudes” about attributes of board members, such as integrity, honesty, availability

when your time is needed, and industry experience or experience on other boards, etc.

However, oftentimes people do not want to sit on a board because of the liability issue.

To address this, many companies form “advisory boards” or “advisory councils,” where a

person can get acquainted with the company and decide, in time, whether they would like

to take on the liability of being a board member. It also serves the founders of the

company to allow them to observe a prospective board member to see if he or she fits in.

A company needs people with experience who can serve on a Compensation/HR

Committee, an Audit Committee and/or perhaps a Governance Committee. If exit plans

point toward selling the company down the road, it would be good to have somebody on

the board with knowledge and experience with the Sarbanes-Oxley act.

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Mr. Shanaman suggests getting board member referrals from trusted sources, such as

Scott Anderson at Zions Bank. Directors should plan to serve for at least three years,

because it takes 4 or 5 months to get up to speed. The “advisory” boards or councils

should meet periodically, remain in touch constantly with the development of the

company, and work to use their influence to add credibility to the company.

Ron White, Olympus Angels

Founding member of Olympus Angels

Angels have a fiduciary responsibility as they go on a board – not only with the investors,

but also the other interest holders in the company. They have a responsibility to

encourage the entrepreneur to be more concerned about the board, in advance.

Angels should think seriously about what they are trying to accomplish with the company

and what are the entrepreneur‟s strengths and weaknesses. They really should want to

know the entrepreneur better than his/her spouse, because they need to be able to identify

the support required and how can they can make that happen. Customarily, the person

who often is selected to go on the board is the Angel group‟s “originator,” but it might be

more desirable to select the “best person on our team” who could contribute more to the

company‟s success.

William Borghetti, Sendside Networks

Also previous founder, president and chief technology officer of Campus Pipeline

Mr. Borghetti offers the entrepreneur‟s perspective, although he is also an Angel investor

and a member of WBI Angels. He describes his desired evolution of the board: elect

them for only a year, because the board composition may need to be different in year 2

and year 3. The criteria are not always a mere formula. The individual‟s philosophy is

important. The company and its board members should have interests and expectations

that are aligned. A board can be a phenomenal asset, but is really only as good as what

management and board members put into it. He looks for “chemistry,” involvement, a

unique value-add and, yes, cash (because every early-stage company has a need for cash).

Describing his board at Sendside: “First, I called Dick Shanaman” (for his venture

experience and governance/regulatory/Sarbanes-Oxley experience). Second, he brought

in what he called “an operator” – a former Secretary of the Army who had also run large

private organizations. Then he identified two other individuals who could bring money

and useful experience. They all share a philosophy for the company, “chemistry,” and a

great relationship with each other. Each brings something unique to the table.

Questions and Answers

Q: From an investor‟s standpoint, what do you look for in a CEO, in the way of working

with the board?

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Dick Shanaman: Investors shouldn‟t let their egos “get in the way” of the CEO getting

his job done. They have a plan and are executing the plan. I look for the CEO‟s agility,

honesty and integrity, as well as the people he‟s brought aboard.

Q: What is the role of the Chairman? (i.e. What is his involvement in running

board meetings, having an office at the company, etc?)

Ron White: Mr. White had outstanding experience with the chairman of Nextel. He

understood FCC regulation better than the FCC. When he became chairman, he moved

upstairs. So he actively interfaced with the board, concentrated on building that

relationship and leveraged the capabilities of the board to help the company succeed. If

the entrepreneur can be brought to think through this, he can create a vibrant relationship

that will greatly benefit the company.

William Borghetti: Not a fan of having the “Chairman” title on his business card, he

even avoids using it on many emails. Mr. Borghetti likes to focus instead on what results

are being achieved and how to move the needle. The chairman should work to foster

involvement of board members, through regular communication. “What you put into a

board relationship is what you will get out.”

Jim Swartz: “I‟ve been on a lot of boards, and we‟ve never had a chairman.”

Q: Do LLC structures present unique challenges?

Ron White: “They function essentially the same.”

Jim Swartz: “LLCs are more cumbersome, and there‟s not really the need.”

Q: How should a young company compensate board members?:

Jim Swartz: “No cash compensation, no expenses, no fees” was Mr. Swartz‟

recommendation. Stock could be used, assuming 2-4 years expected service on the

board. With regular involvement in the company, this could work out to be half a point

for a very early stage company, or maybe up to a point – and vesting . . . but “never more

than that.”

William Borghetti: Advisory boards, leveraged as great source of introductions, could

do an equity-based compensation arrangement – including a small option package, based

on how much time they can contribute to the company and what kind of value they bring.

Jim Swartz: Don‟t be afraid to “shoot high” to find the best board members. There are

a lot of great people out there.

Q: Are there differences in the quality of input/contribution from Angels vs.

venture capitalists?

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Ron White: There is a considerable difference between the amount of due diligence an

Angel does vs. what a venture capitalist does. Angels have “day jobs,” and “don‟t have

time.”

Q: How detailed should minutes be?

Jim Swartz: “Zero is best” . . . and he‟s stopped taking notes at board meetings as well.

Q: What are your thoughts about going after some high-profile board members?

Jim Swartz: There are lots of examples of great people who have been asked and who

agreed to serve on a board. If the company wants to be an international business, it

should get an international board member – early – because “the further you go along, the

harder it is to attract capable people.” The hardest thing in the world is to attract a

serious director on the eve of a public offering. “If you can get some really talented

people and lock them in with some early stock, they‟ll be with you a long time.”

Panel 3 – “From Due Diligence to Closing – Navigating the Process”

Benjamin Johnson, Utah Division of Securities

Moderator

The heart of securities regulation really is full disclosure and active due diligence. “Good

Angels deserve the moniker for more than one reason.” Angels are the antidote of the

lower end of the financing community. The Division is very grateful for the Wayne

Brown Institute and the Angel investors who provide a skilled alternative to unlicensed

and/or less-reputable financing sources for six-figure deals.

Larry Rigby, Larada Sciences

Founder, CEO and Board Chairman

Mr. Rigby described “basic principles” which might seem to be an “elaboration of the

obvious” – In summary, he recommends that the company be prepared. “If you don‟t

have your business plan and IP organized/summarized . . . if you don‟t have all the

preparation done, don‟t expect to accelerate to closing.” The CEO must be prepared to

give the presentation, so he believes that “every time you present to a mentoring group, it

is very valuable.

Seven Rules for an entrepreneur:

1. Mr. Rigby suggests presenting to smaller groups. The smaller, the more intimate

and deeper and detailed the discussion can be.

2. The term sheet is the objective – the “first base.” Focus on the things you need to

do to reach first base.

3. Create a “horse race,” as described during Panel 1, above.

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4. Identify and work with the person who is your company‟s advocate within the

group of investors.

5. Invite them to your shop.

6. Promptly deliver on requests from investors. Have your response or other

information prepared and ready for them the next day. Use this event to get a

commitment from them, such as “and what will our next step be?”

7. Structure the deal so you have the ability to create an early closing with a later

closing or closings in-between, so you have a span of time to get the deal done.

Andrew Gutman, Park City Angels Special partner with the Polar Capital private equity firm, and Chairman of the Park

City Angel Network

Mr. Gutman posed the question of how to get the Angel group to move forward with the

due diligence that is required. According to Mr. Gutman, “the odds are not in favor of

these investments being successful at this stage, so if there‟s any time when a diligence

process is critical, it‟s during this very early stage.” There‟s an interesting dilemma: the

Angel investor needs to think through the issue about how the organization should do this

diligence process in a more lively and a more disciplined way. And the entrepreneur has

to think, “how do I get these guys off the mark to do the work?” Once the diligence

process starts, it seems to move along with some ease. It‟s just a challenge to get it

going. He suggests an Angel “deal champion” is essential to the process.

From the company‟s (or entrepreneur‟s) point of view, the more you can do work for the

Angel group, the faster the process will move forward. Present the information about

competition or IP, etc., in a realistic manner, so Angels can accept that research or that

diligence work as bona fide, and so they can gain confidence in the entrepreneur.

Regarding a suggested due diligence checklist, he has seen many of them, but 80% of

information has no relevance to the decision-making. Park City Angels are trying to

come up with a more concise list that focuses on what is needed. They have a

subcommittee working on it.

Steve Grizzell, InnoVentures Capital Management

Member of Utah Angels and Olympus Angels

For InnoVentures, due diligence is a “hybrid” between how Angels approach it and how

venture capitalists approach it, because of the large number of smaller deals they do each

year. They use a simple checklist, of two components:

1. “Character,” as evident in the pro-forma and history. It may be “touchy” to ask

for financials for first 6 months or a year, including salaries, but it is important,

they can reveal if the team and/or the founder are capable of “bootstrapping.” In

addition, Mr. Grizzell likes to see the reaction to that request. The monthly pro-

forma include sales growth numbers, to get a sense for whether they‟re realistic,

and to get a sense for how much capital it is going to take to make the deal work.

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He likes to see if the entrepreneur has his own money in the deal, and he likes to

determine the realistic valuation. This reveals a lot about the owner/team‟s

character. “I‟m suspicious of people with lots of „stories.‟ Avoid „promoters,‟

including really nice guys who bring up religion.”

2. Secondly, Mr. Grizzell likes to know how well the entreepreneur really knows the

customer. And he likes to determine if they can execute the business plan, and if

they can sell.

He writes everything down, shows it to his partners.

Regarding Mr. Grizzell‟s comments, Benjamin Johnson added, “If a guy tosses an LDS

temple recommend on the table, the Division‟s lead investigator starts to prepare

information for the criminal case right now.”

Also, some individuals are good at talking up a good game, so he suggests taking a page

out of the Division Investigator‟s Handbook: When we‟re looking at some white collar

case, we‟ll look at as many documents and other sources about the deal and about the

person as possible, so that when they finally get the person in and they begin to go

through the whole “smooth-talking” routine, it is easy to spot discrepancies.

John E. Richards, Utah Angels Active Angel Investor

Angel deals are getting stronger. For Utah Angels, the first contact person is called the

“archangel,” the champion within the group. The archangels and executive director meet

and discuss, then screen the deals prior to a “Speedpitch” presentation. Of 13 possible

deals last month, six were invited to present. After their presentation, some are invited

back and assigned a “deal lead.” A due diligence meeting is held – preferably at the

company‟s office. If the deal lead gives the green light, they move to a term sheet, and

the close rate is high. However, through this process, a lot of Angels fall out. If any red

flags occur, such as untimely response to requests for information, etc., individual Angels

lose interest and drop out, and the deal is lost.

From his perspective there is no need to establish “urgency” with the Angels. If is no

immediate interest, it is impossible to “force” an Angel to turn around after they‟ve

dismissed the deal at the first presentation.

Hal Widlansky, Mangia / Olympus Angels

Managing director of Olympus Angel Investors, Successful serial entrepreneur

Olympus Angels has a fairly strict set of criteria. Due diligence commences at the

screening meeting. Peter at USTAR “does a good job of funneling deals to them.”

They select 3 to 5 that look interesting, then screen them before an executive committee

of 5 to 8 members. The process is the same as if they were pitching the whole group,

using the “10-20-30 rule” – a 10-minute presentation with no more than 20 slides, using

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30 pt. font. The list is narrowed to 1 to 3 for presentation at next meeting. A “champion”

emerges, and they volunteer to do the initial due diligence. If goes well, a due diligence

team will be formed to go into greater detail. A deal lead will work with the team.

Sometimes, they syndicate to other groups if Olympus Angels cannot take it all. At the

end of the day, they try to determine if this entrepreneur is backable, if it is a viable

company, and if there a real market for the exit. If all those things get checked off, the

deal usually gets done.

Questions and Answers

Q: What level of CPA involvement is useful?

Hal Widlansky: “Audited financials are great. I‟ve never seen a set.” Fortunately, they

have CPAs or former CPAs in their group.

Larry Rigby: “I don‟t have a CPA on my board.” If they need professional pro-forma,

they‟re willing to take 3 weeks at a cost of $3-$4,000. There are firms that can do that.

“So if they haven‟t gone to that level, it is our responsibility as investors to see that they

do get to that level.”

Hal Widlansky: Financial projections are really important. Kent Thomas and his firm,

and others are out there. Mr. Widlansky would expect a company to have their financial

projections done before they come present to his group.

Q: What is the future of Angel groups? Will there be more or fewer members?

John Richards: Utah Angels will be pretty much the same.

Hal Widlansky: Olympus Angels have evolved. The more people we bring in, mid-

career, it will change the complexion of the group. It has evolved from a “breakfast club”

to a “hands on” group that‟s putting capital to work and putting themselves to work

behind their capital.

Andrew Gutman: “Evolution of Angel groups will depend on performance.” The

diligence process is important because continued performance drives continued interest

and involvement among other Angels.

Larry Rigby: Angels are very different from institutional venture capital. “Venture

capital is a bit in disarray.” It‟s very hard to raise a fund. Those who do have money are

reserving it for current portfolios. Handing off to them is not as simple as it once was.

Regarding compensation, if an Angel is put on a company‟s board and is working hard

and putting in a lot of effort, and if they get some stock options, “good for them!”

They‟re not getting a salary, as venture capitalists do.”

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Q: What resources are available at the Division of Securities to help us in due

diligence to eliminate those who might be a approaching us, who have adverse

securities or fraud histories?

Benjamin Johnson: The Utah Division of Securities can help! Its database is quite

extensive. Division personnel can access the database and determine if there have been

any regulatory or criminal or other actions against a person. The Division also has access

to the Utah Courts database. (Mr. Johnson suggests that investors call the Division, and

ask to speak with someone in “Investigations.”)

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Alan Hall, Founder and Chairman of MarketStar Corporation,

Philanthropist and Super-Angel investor

Summary keynote speaker

Mr. Hall started his work life mixing concrete, but has spent his lifetime as a very

successful entrepreneur (see bio). Most recently, he and a partner established Mercato

Partners, a growth equity venture capital firm. Five years ago, following much success in

life, he founded Grow Utah Ventures, a not for profit organization which seeks to

stimulate economic development through entrepreneurship. According to Mr. Hall, he

continues to make a lot of money, but his mission is twofold: to give it away to help the

needy through the Hall Foundation, or to invest in entrepreneurs in communities

throughout the State of Utah.

Grow Utah Ventures “is all about economic development, privately done, through

entrepreneurism throughout the State of Utah . . . and we‟re seeing that it‟s working.”

They have established three “incubator e-stations,” (entrepreneur stations) with two more

coming in Provo and St. George. Grow Utah Ventures does “concepted companies,”

taking a cluster idea to spur entrepreneurs‟ ideas, and then they receive seed funds or

other support to help with legal or other initial costs and to commercialize them.

Island Park . . . “It’s My Money!”

Mr. Hall described Island Park as his “personal investing arm.” It has approximately 60

investments – only in industries that Mr. Hall understands and can make a contribution to

their success. David Norton, a close associate, runs it but takes no salary. Students at

Weber State University are a great resource to him, as 35 students in the Weber State

Entrepreneurial Association do all the deal flow for him. He encouraged others at the

Angel Summit to consider university students as a valuable resource.

Mercato Partners

Mercato invests in technology companies that Mr. Hall understands, and where he

believes he can add marketing and sales expertise to help them succeed. He asserts that

no company has value without revenue, and that sales is the key (not management). He

offers a program called AMP, whereby any business, for a mere cost of $10,000, can

challenge his people to sell the business‟ product. He was confident that „if they can‟t do

it, nobody can sell it.”

Utah Holding

One problem highlighted by Mr. Hall is the large number of Utah companies that are sold

to out-of-state firms. Utah Holding is a new enterprise in the process of being

established, with the goal of buying Utah companies to keep them in Utah and to grow

the Utah economy. It is still in the early stages, but Mr. Hall encouraged everyone to

“stay tuned.”