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ACA Syndication Webinar:

“Conducting and Sharing Due Diligence for a

Syndicated Deal”

May 26, 2010

Thank you to our sponsors and partners:

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Discussants

Andrea Alms – Jefferson Corner Group (VA)

Troy Knauss – Piedmont Angel Network / Guardant Partners (NC)

Bruce MacCormack – Bellingham Angels (WA)

Dan Quigg – North Coast Angel Fund (OH)

Discussion Points

Process – Sharing Due Diligence & Understanding Risks

Legal Implications – Treaties, Hold Harmless, Consents

Effective Tools – Makes Sharing Efficient

Recent Examples of Syndicated Deals

'Common' Standards - Due Diligence Documents / Templates

Open Q&A – Please send questions via text throughout the presentation and the

speakers will respond after each presentation and during the Q&A session.

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General Process of Conducting & Sharing Due DiligenceDan Quigg – North Coast Angel Fund (OH)

Extending the Power

The Power of Many

The Power of Expertise

The Power of Risk

Process of Due Diligence

Quality, not Quantity

Main Things are the Plain Things

Buried Treasure vs. Skeletons in the Closet

Measuring Potential

“You can’t choose your relatives, but you can choose

your co-investment partners”*

*Rob Robinson, Kolohala Ventures

Sharing Due Diligence – Legal ImplicationsBruce MacCormack – Bellingham Angel Group (WA)

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To create an uncomplicated yet effective mechanism for Angel Groups in the

Pacific Northwest to work productively together

To build and organize a co-investment infrastructure that allows member groups to

exchange investment opportunities in a secure and confidential manner

To optimize inter group relationships and investment opportunities in the NW

Region to the mutual benefit of both Angel Investors and Entrepreneurs alike

To recognize and acknowledge the need to hold each other harmless in the due

diligence process through pre-agreed consensual documents

What are the NW ACA Regional Objectives ?

18 Angel Groups now participating in the NW Region co-investment initiative with

nominated Screening Committee Representatives

Regular monthly conference calls to share deals and other useful information have built

inter group trust and confidence

Major increase in the use of a proprietary collaborative software platform to exchange

deal information and due diligence

Completion and agreement to use common administrative processes (e.g. Agreement

of Cooperation for Due Diligence Sharing and Company Consent Agreement)

Many co-investment deals completed by participating NW Angel Groups over the last

twelve months

What has been accomplished ?

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Agreement of Cooperation for Due Diligence Sharing Signed by lead representatives of each Angel Group

Specifies all due diligence material from another group is provided without warranty of accuracy or thoroughness

Each group shall be responsible to conduct their own due diligence and reliance on any other material is at their own risk

Company Consent Agreement Part of the entrepreneur’s online application process

Permits original angel group to share all and any information supplied by the entrepreneur with another angel group for the purpose of co-investment or ‘topping up’ under funded deals

Common Documents (Links included in Reference Section of this presentation)

Company Consent Agreement

Welcome to the Bellingham Angel Group funding application.

While some fields are optional, we highly recommend you fill-out all fields in this application to the best

of your ability. The one-pager is the most important document when we consider your application, so

take the time to make yours stand out!

Also, applications with a short video pitch generally attract more attention and may considerably

improve your chances of getting funded. You can record a short video pitch directly from the application.

By completing and submitting this application, you are also agreeing that the Bellingham Angel Group,

may share any or all of your information with other Angel Groups in the Region for co-investment

purposes, „topping up‟ any underfunded investment requirements. Company will be contacted before

information is shared with other groups and in most cases information will not be shared until some

members of the Bellingham Angels have made an offer to invest in the Company.

We look forward to receiving your application and hope you‟ll benefit from thinking about some of the

questions below.

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Conference Call Survey Results

Are the conference call objectives being met?

Having the call once a month is:

Length of call: 1 hour is:

Would you like to remain a participant?

Yes, 100%

Just right, 90%

Too frequent, 10%

Just right, 90%

Too short, 10%

Yes, 100%

Other Comments: “I really like the opportunity to connect with groups outside of the area and appreciate the forum this provides.”

“How many receive money?”

“I may not be able to make every cal, but I find it interesting and good way to begin to get to know my ... colleagues.”

“We think it‟s working great and even touted the calls to [other] groups.”

Effective Tools – Makes Sharing Efficient Andrea Alms – Jefferson Corner Group (VA)

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Tier I

“Dating Phase” …You’re cute…let’s get to know each other.

Angel decides if they want to get involved - similar interest and

goals.

Tools for Matchmaking:

Pick-up the phone

Visit other angel groups

Investor conferences (e.g., ACA)

Identify common investors in other angel groups

Ask about deal and transaction history

Syndication Dating Questions

• What type of investor are you? Why?

• What is your favorite investment book?

• What was your last syndication relationship like?

• What is your ideal investment deal?

• What does your investment group do?

• What has been your favorite syndicated investment so far?

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Tier II

“Engagement Phase” …it is getting serious…met the family…

DD Light, validation and confirmation, determining amount of investment.

Tools:

Attend the other angel group‟s screening or due diligence meeting on a

particular company

Talk to anyone and everyone in the room

Conference Calls (services, frequency, length of call)

Document exchange database (e.g., term sheets, exec summary)

GoogleDocs (free), IntraLink (charges fee), Angelsoft, and more

Confidentiality agreements…Treaties…

Tier III

“Married Phase” … now… it’s official…

Exploration and preparation for later stage funding processes.

Angel working with management team to prepare for later/larger rounds

including institutional investment. Working with co-investor on many deals…

Tools:

Monitoring reports – deciding on dissemination of information

Board seats

Dilution

Buy-out

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Success = simplicity + managed expectations

Recent Examples of Syndicated DealsTroy Knauss – Guardant Partners / Piedmont Angel Network

Does a strong relationship with VCs help angel groups with syndication ?

How does syndication limited to regional angel groups impact an overall deal ?

Are some groups willing to take a back seat in the process to the lead group ?

Should they take a back seat ?

What happens to a deal when one group goes ‘native’ ?

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More than 20 Angel

Groups in the

Southeast U.S.

Syndicate Together

Recent Successful Syndicated Deal

4 angel groups, 3 states (NC, FL, VA)

Due diligence coordinated by one lead group

Oversubscribed round by $300,000

Purposefully sought larger round due to dry powder availability of combined angel

groups

Only one group reserved funding for the next round

Board representation & monitoring significant

Set upfront expectations on Board representation

Set agreement on financial and monitoring reporting arrangement

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Almost all angels have lost deals to VCs

Almost all angels have lost deals to other angels

How do you keep the deal together when you are fighting outside pressures ? Is the deal

even worth it ?

Built syndication to invest $2.0 million at a $2.5 million pre-money; VC trumped the deal

with a $6.0 million investment at a $4.0 million pre-money. VC offered to allow us to invest

with them. Would you invest ?

Guess what happened ?

Syndicated Deal Gone Wrong

Common documents allow groups to standardize procedures and terms of each

deal

Who leads ?

How is the Board is structured ?

Acceptable Terms ? Liquidation Preferences ? Redemption ? Vesting ?

Standardization leads to better and more timely due diligence

Syndication is currently taking too long to complete

Goal is to complete due diligence within 30 – 60 days, not 90 – 120 days

If terms are different for each group, that could take another 30 days to negotiate

‘Common’ Standard Due Diligence

Documents & Templates

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Important to establish a common set

of due diligence request documents

Important to agree on required

terms in the subscription documents

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Important to agree on the standard

template for the due diligence report

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ACA Syndication Webinar Series

Case Studies in Syndication: June 23 http://www.angelcapitalassociation.org/events/syndication-webinars/

References:

Syndication Standardization Tools:

• Agreement of Cooperation for Due Diligence Sharing / Hold Harmless Agreement

• Company Consent Agreement

• Common Due Diligence Request List

• Common Required Terms

• Common Due Diligence Report Template