GROW SMART

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GROW SMART

• Jeffery K. Mitchell
• Blacksburg, Virginia Office

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The Grow Smart Series

• 5-part series
• Practical Strategies
• Raising Capital
• Corporate Governance
• Employee Strategies
• Employee Incentives
• Protecting IP
• Sponsoring Organizations

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Raising Capital . . . Avoid the Mistakes

• What are the rules?
• What do you really need for growth?
• What is the deal?
• Document.
• Document.
• Document.
• What is the future?

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Raising CapitalHeavily Regulated Activity

• The federal and state securities laws are
  triggered when 1 share of stock is offered or
  sold to 1 investor.

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Raising Capital...Why worry?

• Rescission rights (unwind investment)
• Penalties
• Cost of Clean-Up
• Future ability to raise capital
• Market black eye
• Impact on sale of company
• Ability to finance future companies

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What is a security?

• Stock (Membership Interest)
• Treasury Stock
• Security Future
• Note, Bond, Debenture, evidence of indebt
• Pre-organization certificate
• Put, call, option
• Right to acquire any of the above

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Raising Capital . . . No Good Excuses

• Its a good deal.
• Everybody does it this way.
• I didnt mean to break the law.
• It was a private deal
• Its only one investor. They agreed.
• We wanted to keep it simple.
• Its only me and my cousins.

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Raising Capital . . . SEC

• Purpose Protect the small investor
• Securities Act of 1933
• Section 5(a) provides that unless a registration
  statement is in effect as to a security, it shall
  be unlawful for any person (directly or
  indirectly)
• To use any means of interstate commerce to sell
  such security or
• To carry or cause to be carried through the
  mails or interstate commerceany such security
  for the purpose of sale or delivery after sale

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Raising Capital . . . Private Offering

• Securities Act of 1933
• Section 4(2) Transactions by an issuer not
  involving any public offering.
• Does the investor need protection?
• Company bears the burden
• Quality of investor
• Sophisticated versus accredited
• Access to material information
• Material
• Fraud
• Forward looking statements
• No General Solicitation
• Radio, Newspaper, mail
• No general solicitation at public meetings
• Attract investors
• Relationships
• Finders (know the rules)
• Registered broker/dealers
• VC conferences
• Angel presentations

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Raising Capital . . . State Oversight

• Purpose
• Protect investors in their state
• Regulate securities transactions in their state
• Virginia Code 13.1-502
• 13.1-502. Unlawful offers and sales.
• It shall be unlawful for any person in the offer
  or sale of any securities, directly or
  indirectly,
• (1) To employ any device, scheme or artifice
  to defraud, or
• (2) To obtain money or property by means of
  any untrue statement of a material fact or any
  omission to state a material fact necessary in
  order to make the statements made, in the light
  of the circumstances under which they were made,
  not misleading, or
• (3) To engage in any transaction, practice or
  course of business which operates or would
  operate as a fraud or deceit upon the purchaser.
• (1956, c. 428.)

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Raising Capital . . . The Basic Rule

• Every Sale Must Be Registered. . .unless . . .
• Exempt From Registration
• Security exemption
• Type of security government, banks, nonprofits
  (IDAs, etc.)
• Existing holders w/out new (recap)
• Transaction exemption
• Parameters of transaction
• Private offerings

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Raising Capital . . . Rule 506

• Safe Harbor
• Pre-empts state law for covered securities
• Unlimited accredited investors
• Up to 35 non-accredited investors
• No dollar limitation
• No general solicitation
• No advertising
• No specified disclosures to accredited
  investors
• File Form D

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Raising Capital . . . Exemptions

• Transaction exemption
• Number of investors
• Sophistication of investors (Accredited)
• Relationship to issuing company
• Value of securities issued
• Type of disclosure contemplated
• Solicitation manner (broker)
• Contemplated additional offerings

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Raising Capital . . . Step One Need

• How much money is needed and why?
• Do needs other than money exist?
• General business advice
• Access to other investors
• Strategic relationships
• Non-Ownership (equity) Sources
• Loan
• Grant
• Contractual relationship
• Vendor
• Joint Venture

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Raising Capital . . . Sources of

• Personal Resources- Founders and Owners
• Family and Friends
• Angels, Angel Networks
• Venture Capital
• Commercial Banks
• Strategic Investors (customer, supplier,
  competitor)
• Government (SBA, SBIR, STTR)
• Foundations/Incubators/Accelerators

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Raising Capital . . . Subscribe For Sales

• Written agreement
• Regardless of size
• Identify investor/consideration
• Document representations of investor
• Document status of information
• Address deal points (stockholders agreement
  issues)

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Raising Capital . . . The PPM

• Private Placement Memorandum Elements
• Cover
• Securities Disclaimers
• Risk Factors
• Business Plan
• Management Bios
• Use of Proceeds
• Dilution Explanation
• Financial Information
• Legal and Accounting Issues

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Raising Capital ... Disclose the Risks

• Private Placement Memorandum Risk Factors
• Stage of company
• Importance of key individuals
• Nature of business
• Customers/Concentration
• Competition
• Need for future
• Illiquid security
• Technology

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Raising Capital . . . Set the Terms

• Two sets of issues
• Economic
• Investment issues
• Return issues
• Dividend issues
• Governance
• Control
• Information
• Risk Management

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Raising Capital . . . Economic Terms

• Valuation
• Pre-money
• Use of Offering Proceeds
• Use of Proceeds Statement
• Milestones
• Return issues
• of stock (profit split)
• Dividend (accrual, cumulative)
• Anti-Dilution
• Tag-along Drag-along
• Pre-emptive rights
• Transfer issues
• Tax Distributions
• Exit Strategy
• Put Right/Call Right

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Raising Capital . . . Governance Terms

• Board of Directors
• Number of seats
• Veto control
• Chairmanship
• Decision Requirements
• Major transactions
• New offerings
• Sale of company
• Budget
• Certain size agreements
• Debt
• Key hires
• Day-to-Day management issues
• Dispute resolution process

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Raising Capital . . . New Dynamics

• Addition of outside voices
• Addition of new owners
• Heightened duties
• Fiduciary duties
• Corporate protocols
• Investor relations
• Information Expectations
• Dont pierce the corporate veil

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Raising Capital . . . Steps to Success

• Conduct a corporate clean-Up
• Set realistic time expectations
• Prepare and vet a written business plan
• Establish an initial a term sheet
• Document. Document. Document.
• Over-Disclose Risks
• Avoid unregistered broker issues ( for the
  raise)
• Celebrate the Closing!

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Conclusion . . .

• Watch for future events
• March 10 Corporate Governance
• March 24 Smart Employee Strategies
• April 7 Employee Incentive Plans
• April 21 Ten Strategies for Protecting Your IP
• Email contact for LeClairRyan
• Jeff Mitchell jeff.mitchell_at_leclairryan.com
• Email contact for SWVTC
• Shannon Blevins srb8q_at_uvawise.edu
• Esther Bolling ebolling_at_swtc.info
• Questions Answers

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Thank You!