Where is the MoneyTree?

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ABC 01/27 reporting on PwC MoneyTree report ó VC invested in Atlanta firms down 27.5% in 2009 vs 2008 ó Nationally VC down 37% year over year ó Georgia companies received $302 million in 2009 ó Average VC check (Georgia):$6.9m in 2009, $5.2 in 2008 ó Energy and Software hot sectors - $112m, $42.6m ó All companies stages down, except later stage up 50%

Where to go pick up your check?

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ó Founders, Friends & Family ó Angels ó Venture Capital firms ó State programs ó Federal grants and loans ó SBA – Small Business Admin ó SBIR – Small Business Investment Companies

ó Commercial Banks ó Specialty banks (SVB, Comerica, RBC)

Business Plan

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Does yours answer: óWhat you do? óWho you are like? óYour competitors are? óWho you do it to? ó Size and growth rate of market? ó How can you defend? – proprietary technology,

business model ó Management team? Have one! ó Use of Proceeds

Executive Summary

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ó Obvious – grammar, spelling ó Format! ó Visually appealing ó Easy to find sections, data ó Draws attention to main points

ó PDF – send using Adobe PDF ó 1 pager?? – I am not a believer ó Well laid out, not cramped ó Images, graphs, white space

ó Content – tailor your highlights, bullet points to your audience.

Every securities offering is either:

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• Registered • Exempt • Illegal

Illegal is L Bad!

Securities Act of 1933

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Drafted while looking in a mirror ó Every securities offering must be registered with

the SEC except: ó Section 3 – Exempt Securities ó Section 4 – Exempt Transactions

Help is on the way

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ó Regulation D, promulgated pursuant to Section 4(2) of the Securities Act of 1933 ó 3 safe harbors: J Good óRule 504 óRule 505 óRule 506

Reg D – Rule 506

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ó Unlimited offering amount ó Unlimited number of “Accredited” investors ó No more than 35 (sophisticated) UN-accredited investors ó No specified disclosure format if all offerees Accredited ó If UN-accredited offerees – big disclosure ó No general advertising ó No general solicitation

No General Advertising

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Issuer Cannot: (ie L Bad!) ó advertise in any media (i.e. newspapers, TV,

radio, or the Internet) ó engage in a mass mailing (snail or email) ó conduct informational meetings with potential

investors ó issue a press release that discusses the existence of

the private placement

No General Solicitation

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ó SEC staff’s view is that there must be a nexus between the solicitor and his targets. ó A “substantial pre-existing” relationship. ó all offerees should be people with whom your company,

or any licensed selling agents has a substantial and pre-existing relationship. ó Sufficient to enable the Company to determine the

financial well-being and investor sophistication of the offeree.

Best Defense – keep good records

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ó How do you “prove”: ó no general solicitation or advertising? óYou had sufficient knowledge of their financial

condition? Sophistication?

Best Defense – keep good records

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ó Use an Investor Questionnaire, require it to be completed ó Numbered PPMs/Exec Summaries ó Lots of (self serving) disclaimers óThis is not an offering ó If it is, it is being done only to accrediteds óYou must burn after reading ó Control Sheet to track above ó Due Diligence file archived for transaction

Reg D – Rule 505

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ó Up to $5,000,000 ó Unlimited number of “Accredited” investors ó No more than 35 UN-accredited investors (can be UN-

sophisticated) ó No specified disclosure format if all offerees Accredited ó If UN-accredited offerees – big disclosure ó No general advertising ó No general solicitation ó Not a “covered security” under NSMIA, so no state

preemption.

Reg D – Rule 504

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ó Can issue up to $1,000,000 ó To qualify, Newco: ó must not already be registered with SEC ó Aggregate of ALL securities sold in last 12mos > $1m

ó General solicitation and advertising is permitted if offering is registered under a state reg that permits. ó Not a “covered security” under NSMIA, so no state

preemption. ó Sounds good on paper, rarely used in practice.

Summary of Regulation D

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óRule 506 = J Very Good! óRule 505 = ehhh óRule 504 = not so much ó Section 4(2) = in a pinch

UN-accredited investors – are they worth the hassle?

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ó Non-accredited investors trigger a larger

disclosure obligation (more time and money) ó Non-accredited investors tend to be more hostile

than accredited investors ó Non-accredited investors can hinder an

acquisition ó ANSWER: NO

Form D – E-File is Here

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As of March 16, 2009, all Form D fillings with the SEC must be made on a new form that includes new disclosures. • Annual Amendment • “Date of First Sale” now defined. Must file within 15

days • New disclosures:

• List expected exemption • whether BD or finder used • issuer revenue range.

Section 4(2) – Exempted Transactions

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ó 4(2) “transactions by an issuer not involving a

public offering” ó Reg D is a safe harbor for 4(2). Provides clarity. ó BUT Reg D specifically provides that it is not

exclusive

Section 4(2) – Exempted Transactions

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óWhy use an old school 4(2)? óClassic limited private placement - to 1 or 2

institutional investors. If compliance with Reg D is considered a bother. óAfter-the-fact justification - client comes to you

after 18 months of sporadic capital raising by “any means necessary”.

Blue Sky – Georgia Style

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ó Georgia Uniform Securities Act of 2008 (effective July 1, 2009) ó Supersedes the Georgia Securities Act of 1973 ó Georgia became 15th State to adopt the Uniform

Securities Act of 2002 (promulgated by NCCUS)

GA Limited Offering Exemption

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The exemption formerly known as OCGA 10-5-9(13) is now found in OCGA 10-5-11(14). • Keeps the prohibition on general

solicitation/advertising • Keeps 15 Georgia purchaser maximum • New prohibition on paying commissions • “purchase for investment” statement no longer

required but the issuer must reasonably believe all GA purchasers are purchasing for investment

Employee Benefit Plan Exemption

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ó Prior GA Law OCGA 10-5-9(7) and 10-5-9(9)

limited the registration exemption to employees or the issuer or the issuers affiliates. ó NEW OCGA 10-5-11(21) allows grants to

consultants and advisors, so long as: óAdvisors are natural persons óAdvisors are providing services to issuer at time

of offering.

Recap

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óA few, large, experienced investors = JGood! óLots of small, novice investors, from

multiple states = L Bad!

Practice Tip: Convertible Notes

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Short Version: ó Starts as an investor loan ó Investor gets a convertible promissory note that will

convert into stock on the next (first) round of funding ó No immediate dilution to founders, no shareholder

to babysit ó Investor gets a financial spiff for being early, typically

a conversion discount or warrant coverage

Convertible Notes

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Why? ó Kicks the can down the road on valuation ó Keeps the capital structure cleaner ó Can be seen as win-win ó Usually easier & less contentious to negotiate

(less time and money)

Convertible Note

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But wait, maybe not so simple ó Is the note secured? By real property, other hard assets,

intellectual property? ó Is there a personal guarantor? ó What is the term? ó Is there a price cap? ó Can the Newco prepay? What happens to the conversion? ó Holder’s discretion? Company discretion? Or automatic? ó What if Newco is purchased before maturity or conversion

(“Liquidity Event”)?

Convertible Note: Qualified Financing

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ó Type of Stock - An equity financing selling Series

A Preferred stock ó Amount - Aggregate receipts to the company of

at least $1,000,000 óOne or more transactions ó By certain date

Convertible Note: Conversion Discount or Warrant Coverage

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Conversion? At a “discount”? ó $100K Note. 20% Conversion Discount ó Series A comes in at $1 per share. ó So, Note holder will pay $0.80/share ó $100K in Note turned in for shares at $0.80 a

piece = 125,000 Series A shares

Convertible Note: Conversion Discount or Warrant Coverage

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Warrant Coverage? ó $100K Note. 25% Warrant Coverage. ó So, Note Holder received penny warrants to

purchase Series A shares equal to $125K. ó Series A comes in priced at $1 per share. ó Note Holder exercises Warrants and receives

125,000 shares.

The Holy Grail – A Venture Deal

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Transaction Docs ó Securities Purchase Agreement ó Restated Certificate of Incorporation or Certificate of

Designation ó Investor Rights Agreement (reg rights, affirmative and

negative covenants, preemptive right) ó Voting Agreement (board seats, drag along rights) ó Right of First Refusal and Co-Sale Agreement (founders give

company, then investors ROFR or allows investors to sell into proposed purchase)

Series A Deal Terms

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ó Dividends ó Liquidation Preference (participating, non-participating) ó Conversion: optional (at holders request), mandatory

(QIPO) ó Anti-Dilution Protection: structural (splits, recaps), price

protection: ó Weighted average = (reasonably) J Good for company ó Full Ratchet = (ridiculously) L Bad for company

ó Pay to Play provisions

Series A Deal Terms

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Control terms - Under GA law (and DE), preferred stock votes with common stock on an as-converted basis unless otherwise provided. ó Protective Provisions (aka blocking rights) ó Issuance of any other securities or any authorization or increase ó Liquidation of company, sale of all or substantially all ó Exclusive license ó Declaration/payment of dividends ó Incur debt over $xyz______ ó Any amendment to shareholder agreement, charter, etc.

Series A Deal Terms

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Governance ó Investors to demand right to appoint certain

number of directors, probably majority, e.g. Common nominates and elects 2, Series A investors nominate and elect 3 óObserver rights ó Information rights

Series A Deal Terms

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ó Registration Rights óDemand Rights óPiggyback rights ó Redemption – rarely (ever?) exercised, used as

leverage for investor

Series A Deal Terms

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Agreements with Founders/Management team ó Restricted stock – retroactive vesting óOption Plan ó Employment Agreements ó Invention Assignment óNDA óNon-solicit, non-recruit