Financing the Entrepreneur’s Business:

Financing the Entrepreneur’s

Business:

Steve LeeseJohn SnowDavid Vogel

January 18, 2011

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Financing the Entrepreneur’s Business

Introductions

• David Vogel, Velocity Equity Partners

• Steve Leese, Quabbin Capital

• John Snow, Quabbin Capital

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• Sources of Financing• Friends and Family• Angels• Venture Capital• Terms of Venture Capital Financing• Questions – don’t wait until the end!

Agenda

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Sources of Financing

• Friends and Family• Angels• Venture Capital• Commercial Loans• Government Loans• Corporate or Strategic Partners• Grants from foundations

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Sources of Financing

Stage Pre-Seed Seed/ Start-Up Early Later

SourceFounders,

Friends and Family

Individual Angels Funding Gap

between $500,000and $2,000,000

Venture Funds

Investment up to $100,000

$100,000 to

$500,000$2,000,000 and up

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Venture Capital

• Advantages– More Cash

• Access to Additional Capital– Value Added Expertise

• Management Experience• Industry Experience• Access to Strategic Partners• Access to Personnel

– Enhance Credibility in Marketplace– Facilitate Liquidity Event

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Venture Capital (continued)

• Disadvantages– Months Long Process– Dilution of Equity Ownership– Sacrifice Control– Replacement of Management– Forced Liquidity Event– V.C. Imposed Business Objectives– Your New “Partner”/“Boss”

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Employee Matters

• Employment Agreements• Non-Competition Agreements• Confidentiality Agreements• Assignment of inventions and proprietary information• Key Man Life Insurance• Shares reserved for employees

– Stock option pool: 10 – 20% of fully diluted– Vesting provisions for stock options

• Restrict transfer of shares by Founders and Employees– Reverse vesting (often opposed by Founders)– Vesting 25% per year– Buy-back of unvested shares upon termination of employment

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Additional Rights

• Information Rights– Annual, quarterly and monthly financial

statements– Budgets and business plans– Inspection rights

• Registration Rights– Contractual right to register or participate in

registration of shares for resale to public– Liquidity for investors

Private Equity-beyond venture

• Used for more advanced cases:– Company has sustainable earnings or is

approaching earnings stage rapidly– Buyouts

• Control (50% +) passes to investor group– Growth equity, mezzanine loans:

• Used for acquisitions, expansion, hiring, partial sale of company

• Capital passes from investors to company

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Why private equity?

• Can accelerate company’s growth• Experience of capital providers• Better governance

– Board of directors– Debt structure requires discipline, planning– Growth strategy-the game changes

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Risk-not a four letter word

• Management-can they grow the company?

• Markets-will they remain favorable?• Economy-recent downturn as example.• Obsolescence

– Commodity like product or service• Investor group, lenders-leadership

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Is it worth it?

• Capital is expensive• Investment/purchase process a huge

distraction to a business• Managements can be discouraged• Many companies good to own

– Only a few are worth investing in• Growth is always key-creates value

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Example-NE Patriots

• A $172 million buyout in 1994• Now worth $1.4 billion (source: Forbes)

– Breakeven business-potential earnings– Markets-Patriots became a great product– Economy-fans have persevered, grown – Obsolescence-shrewd personnel moves– Leadership-the Kraft’s, Belichick, Brady,

Wilfork; creates a professional culture

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Private equity realizations

• Exits:– Sell to a strategic investor (a competitor)-

usually most desirable– Sell to another financial buyer– IPO-currently limited to large companies

• $1 billion plus buyouts– Downside scenarios

• Distressed sales-debt driven-result in losses• Bankruptcy

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Questions, comments?

• We are available anytime to respond to questions

• It has been our privilege to be here tonight.

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Steve Leese and John Snow Quabbin Capital

Phone: 617 330-9041Email: steve.leese@quabbincapital.com john.snow@quabbincapital.com

David VogelVelocity Equity Partners

Phone: 617-338-2545Email: dvogel@velocityep.com