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: [email protected] [email protected]
David VogelVelocity Equity Partners
Phone: 617-338-2545Email: [email protected]
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