Attorney Walter Wright on The Spectrum Of Financing Options

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 [email protected]

http://www.masstlc.org/

mailto:[email protected]

http://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

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



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





Friends and Family



• 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





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.





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


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





• 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





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





• 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





• 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






• 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





• U.S. Small Business Administration– www.sba.gov

• Massachusetts Capital Resource Co.– www.masscapital.com

• Massachusetts Technology Development Corporation– www.mtdc.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





• 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



Public Equity: Merger with Public Shell



• Funds from operations –plowback• Equipment leasing• Vendors• Customers• Strategic Partners

Operational Alternatives





• 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





• 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





• 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





Company



Entrepreneur

Friends and Family

Public Capital Markets

Operations

Commercial Banks


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 [email protected] 781.329.0088


http://www.trinitylg.com/waw.html

mailto:[email protected]


Attorney Walter Wright on The Spectrum Of Financing Options

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