Funding a New Venture

Jim Bourdeau

Nixon Peabody LLP

Venture and Technology Team

The Problem

• Need cash for start-up expenses

• Need cash to fund R&D

• Need to pay for services provided

• But, at startup, the Venture has no revenues

Question?

• What does the Venture have to offer?

Solutions(Typical Funding Sources)

• Equity Investments– Equity in exchange for Cash– Equity in exchange for Services

• Debt– Commercial Bank Debt

• Business Loans

• Lines of Credit

• Credit Cards

– Debentures– Debt convertible to Equity

BEWARE THE SECURITY LAWS!!!!

• State Securities Laws (Blue-sky Laws)

• Federal Securities Laws– ’33 Act– ’34 Act

• “Security” is broadly defined, and can include offers of equity as well as debt instruments

Potential Equity Investors

• Founders– Take equity in exchange for expenses paid

during formation– Make capital contributions of cash (Boot

Strapping)• Personal Savings• Personal loans, second mortgages• Borrow against, or take distributions from 401(k)

Potential Equity Investors

• Friends and Family– Issue equity in exchange for cash from

Friends and Family

• Angel Investors– High Net-worth individuals – Located in the local geographic area– Typically having some interest in the industry– May be willing to invest at very early stages

Potential Equity Investors

• Seed Funds– Typically invest in early stages

• Regional Funds– May invest at early revenue stages

• Private Corporations– Venture may have some relationship to the

Corporation at the time of Venture’s formation– Corporation may have some interest in partnering

with the Venture to obtain access to its technology

Potential Equity Investors

• Venture Capital Funds– Typically later stage investments

• Proven Revenues• Proven Technology

– First stages of commercialization– Completed FDA Approval process

• May follow after investments by Regional Funds or Angel Investors

– Large Investments in exchange for large equity positions with “strings” attached

Potential Equity Investors

• Public Markets– Initial Public Offering– Public Offerings

Debt

• Cash is loaned to the Venture

• Cash is returned to lender, over time, with interest

• May require security for the loan– Liens on assets– Liens on receivables– Liens on Intellectual Property– Personal guarantees of Founders

Convertible Debt• Some or all of the outstanding balance of

the principal and interest is convertible into equity

• Lender has the ability to speculate on the equity value and does not bear the risk of fluctuations in the value of the Venture until after conversion– Fixed conversion price– Variable conversion price

Question?

• Which is better – Debt or Equity

Terms and Buzz-words

• Common Stock vs. Preferred Stock

• Debenture

• Warrant

• Anti-dilution

• Fully Diluted