Financing Your Company:

Technology Commercialization and Venturing Workshop: Financing Your

Company

Rensselaer Polytechnic Institute Center for Automation Technologies and Systems

September 13, 2006

Richard E. Honen, Esq.Phillips Lytle LLP

Raising Capital: Business Plans

In any scenario, you will need some form of business plan

Include discussion of relevant market and realistic pro forma financials

Be prepared; think of it as your company’s resumé

Raising Capital: Choice of Entity

Choice of business entity refers to corporation, limited liability company, or other form of organization

Involves tax and structural issues

A major factor is the extent to which you plan to seek venture capital investment

Raising Capital: Characteristics of Debt, Equity and Grants

Debt needs to be repaid but is largely non-dilutive

Equity represents ownership –no present obligation to repay

Grants may often be the most available and familiar vehicle

Raising Capital: Characteristics of Common and Preferred Stock

Common stock carries voting and ownership proportionate to the holding

Preferred stock carries a level of control and return disproportionate to the level of the holding

Preferred stock characteristics typically include provisions on dilution, return, voting, and treatment of founders’ equity

Same characteristics apply without regard to choice of business entity

Types of Debt: Government Financing

Federal, state, county, municipal and other loan programs or credit enhancement programs are available

Underwriting process and terms are usually cognizant of a new company’s situation

The process can be slow, but often no slower then traditional equity given today’s capital environment

Types of Debt: Traditional Asset Based Lending

If the company is credit-worthy or there is sufficient ancillary capital (other then intellectual property), bank financing may be available

Must be able to hit the bank’s ratios

Personal guaranties will normally be required

The presence of government or bank financing is often a comfort to later investors

Types of Debt: Self Financing

Aging payables, factoring receivables, giving customers discounts for up-front payments, and skipping paychecks are all ways of financing growth through operations

Must have actual operations and some level of revenue

Frugality is no longer considered a bad business practice

Types of Equity: Seed Capital

The capital used to start a venture

Usually comes from the founders or friends, and usually takes the form of common stock

Very few funds make seed capital investments

Types of Equity: Angel Capital

Angels are high net worth individuals who often invest based on management, interest or geographic region

Angel groups are increasingly working together to make joint investments

Angels may be satisfied with common stock with some preferences

Local angel group www.techvalleyangels.com

Types of Equity: Institutional Venture Capital

Venture capital funds invest much higher amounts than do angel investors

Funds always require preferred securities with full panoply of preferred rights

Must normally be beyond the concept or technology transfer stage

Types of Equity: Strategic Investors

Large companies investing in their own space (or in a space in which the strategic investor wants a foothold)

Terms are similar to terms required by venture capital funds

Licensing or a customer relationship may often be a key component

Beware of the lack of the shared greed protection

Hybrid Investments: Convertible Debt

Very popular for early stage companies

The investment is made as a loan, and is convertible to equity on the terms of the next venture financing

Very flexible

Securities Issues: General Concepts

The process of raising money is governed by Federal and state securities laws

Disclaimers are often used to document the level of risk

More protections apply to non-accredited investors

Negotiating and Practice Points

Keep your eye on the big picture

Concentrate on deal-level points and be aware of the strategy behind the acquisition

Understand why the other party needs a given point

Involve your advisors early

Please call or mail with any questions or comments:

Richard E. HonenPhillips Lytle LLP

Omni PlazaAlbany, New York 12207

518-472-1224 x [email protected]

www.phillipslytle.com

© Phillips Lytle LLP 2006