Raising Capital: Negotiating with Potential Investors (Series: The Start-Up/Small Business Advisor)

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DISCLAIMER
The material in this webinar is for informational purposes only. It
should not be considered legal, financial or other professional advice.
You should consult with an attorney or other appropriate professional
to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure the information it
publishes is accurate, Financial Poise™ makes no guaranty in this
regard.
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MEET THE FACULTY
Moderator:
Christopher Cahill – Lowis & Gellen LLC
Panelists:
Alex Davie – Riggs Davie PLC
Nick Petit – Vamonde
Richard Swart– CrowdSmart
Andrew Stephenson – CrowdCheck
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ABOUT THIS WEBINAR: Raising Capital: Negotiating
with Potential Investors
Every business needs capital (cash) to fund its activities. But not all capital is created equal. At
the most macro level, a business can raise cash by selling equity or by borrowing (and these
alternatives are not by any means mutually exclusive).
This webinar explains the different types of capital available to fund a startup; how to identify
potential funding sources; how to evaluate competing funding proposals; and how to negotiate
financing terms.
This webinar is delivered in Plain English, understandable to you even if you do not have a
background in the subject. It brings you into an engaging, even sometimes humorous,
conversation designed to entertain as it teaches. And, it is specifically designed to be viewed as a
stand-alone webinar, meaning that you do not have to view the other webinars in the series to get
a lot out of it.
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ABOUT THIS SERIES: THE START-UP/SMALL
BUSINESS ADVISOR 2019
Most startups are not destined to become billion dollar unicorns. Most, in fact, will fail and most of those that survive will
never be more than small businesses. Whether and to what extent a startup will be successful depends on many factors. One
set of factors is the foundational pillars on which the company is built, and includes things such as the company’s capital
structure, financial controls, human capital, market niche, and marketing functions.
This series explores each of these topics, giving startups and their advisors useful tools and insight into how they can build a
foundation for success.
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business
owners, and executives without much background in these areas, yet is also valuable to attorneys, accountants, and other
seasoned professionals. And, as with every Financial Poise Webinar, each episode brings you into engaging, sometimes
humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed
independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one,
some, or all episodes.
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EPISODES IN THIS SERIES
1/22/19 Episode #1:
The Very Basics - Forming the Business
2/19/19 Episode #2:
Raising Capital: Negotiating with Potential Investors
3/19/19 Episode #3:
HR-101: Finding, Negotiating With & Retaining Potential Hires
4/16/19 Episode #4:
What Every Founder/Entrepreneur Must Know
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

EPISODE #2:
RAISING CAPITAL: NEGOTIATING
WITH POTENTIAL INVESTORS
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MAJOR CATEGORIES OF CAPITAL SOURCES
• Debt (Borrowing money from a financing source)
• Equity (Selling percentage of ownership in exchange for capital)

DEBT & BORROWING
• Loan given to business that must be paid back with interest over
specified period of time
• Attractive for startup founders who wish to maintain company
ownership

EQUITY – SELLING OWNERSHIP INTERESTS
• Individuals or firms provide money in exchange for an ownership
percentage (shares, stock) in a company
• May take numerous forms
• Entails loss of some ownership to founders, but can be beneficial for
startup that doesn’t expect to generate revenue sufficient to repay
loans or reinvest in the company

COMMON SOURCES OF CAPITAL
• Banks & other Lenders
• Family & Friends
• Angel Investors
• Venture Capital Funds
• Private Placement Investors
• Equity Crowdfunding

BANKS & OTHER LENDERS
• Numerous forms of debt financing (national banks, SBA, community
banks, credit unions)
• May offer short, mid, or long-term financing at various interest rates
• Lending may be tailored to company’s specific needs, such as
working capital, equipment, real estate

BANKS & OTHER LENDERS (cont’d)
• Company must generate enough cash flow to cover interest
payments and repay principal
• Can be paid off early, and thus can be more flexible than equity
investment

BANKS & OTHER LENDERS (cont’d)
• Traditional Lenders
• Asset Based Lenders
• Alternative Lenders

ANGEL INVESTORS
• Equity-based investing by wealthy individuals
• May be an industry executive or experienced businessperson able to
provide guidance to company
• May give company credibility to attract other investors.
• Angels may work in organized groups to screen deals & invest with
each other, while many invest on their own.

WHAT DO ANGELS WANT?
• High growth and scalability
• Thus software and tech, more than manufacturing
• A market for the innovation, a moat against future competitors
• Payoff (exit) in 5 to 10 years
• To build their own brand to gain access to future deals

WHAT ANGELS HAVE GOTTEN
• 2.5x exit on average
• 4.5 year average holding period for successful exits
• 50% to 70% dilution when investing at seed stage [per Angel
Resource Institute]
• If initial valuation is $10 million and 50% - 70% dilution expected,
then to reach 2.5x Angel investment, exit valuation should be $83
million, or 8.3x

ANGEL BATTING AVERAGE
• Lower than baseball batting averages
• Many losers, but high returns from winners
• Likely need for future investments rounds
• Angels diversify their bets, and bet with funds they can afford to lose

VENTURE CAPITAL
• Investment firms willing to put forward a large sums of money in
exchange for equity in the company
• Financing typically conditioned on VC pulling money out after
company is acquired or goes public.
• VCs are professional investors seeking significant return on
investment

DILUTION
• First Founder(s) own 100%
• Then seed funders and employees are distributed shares
• Then Angels purchase a percentage of total shares

DILUTION (cont’d)
• NOTE: With each of these steps, the ownership share of the
predecessor owners is diluted
• Venture Capital and other later funders are likely to insist on some
control (e.g., a Board seat) an on preferential payouts in the event of
a liquidation- these doubly dilute their predecessors
[See Equity Investment Simulation at http://ownyourventure.com/equitySim.html]

NON-EQUITY CROWDFUNDING
Reward Crowdfunding (Kickstarter, Indiegogo)
✓ Backers contribute money (usually small amounts) in exchange for
a reward
✓ Reward is often the item being produced
✓ No equity given, no debt incurred

NON-EQUITY CROWDFUNDING (cont’d)
• Equity Crowdfunding
✓ Offering of securities to a group of investors.
✓ Often subject to securities and financial regulation. (JOBS Act)
✓ Enables broad groups of small investors to support startup,
potentially aiming to use a different funding source to finance
further growth

OFFERING PROCESS FOR EQUITY
SECURITIES
• Offers and sales of equity securities must either be registered with
the SEC and offered publicly or exempt from registration and
offered privately
• Pre-JOBS Act (2012), an investor must have been an accredited
investor in order to participate in an exempt offering, and issuers
of private equity securities were barred from engaging in general
solicitation or advertising

ACCREDITED INVESTORS IN EXEMPT
OFFERINGS – WHO?
“Accredited investors” include natural persons who:
• possess a net worth (alone or with spouse) >$1 million (excluding
value of home, and not counting home mortgage as a liability, unless
it is underwater) or
• have an annual income >$200,000 (or joint income with spouse
>$300,000) in the 2 most recent years, and reasonable expectation
of similar or higher income in the current year

INVESTING IN PRIVATE EQUITY SECURITIES
PRE-JOBS ACT [Rule 506(b)]
• Accredited investor has pre-existing, substantive relationship
directly with issuer
• AI has pre-existing, substantive relationship with an intermediary,
such as a broker-dealer or investment advisor
• AI purchases resold private equity shares in secondary markets

JOBS ACT OF 2012 (IN SUMMARY)
• SEC’s prohibition on general solicitation and advertising eliminated
in certain private offerings in which only accredited investors
participate (Rule 506(c) and Title II)
• In addition to pre-JOBS Act access via issuers and intermediaries
with whom AIs had pre-existing substantive relationships, AIs can
now invest in private equity securities via on-line investment
platforms that advertise and engage in general solicitation

JOBS ACT OF 2012 (IN SUMMARY) (cont’d)
• Accredited investors and the “crowd” of non-accredited investors
will be able to invest in private equity securities via Title III (aka Reg
CF) on-line “crowdfunding portals” (with annual investing limits
keyed to income, net worth)
• • Accredited investors and non-accredited investors will be able to
invest in private equity securities via Title IV (aka Reg A+) offering
platforms (with annual investing limits keyed to income, net worth)

WHO IS AN ACCREDITED INVESTOR?
Includes:
• natural person with net worth (alone or with spouse) exceeding $1
million [value of primary residence not counted; mortgages not
counted against, unless underwater)
or
• natural person with income > $200k (or joint income with spouse >
$300k in the two most recent years, and reasonable expectation of
equal or greater income this year

COMMON DOCUMENTATION WHEN DEALING
WITH INVESTORS
• Term Sheets
✓ Set out details of investor funding; come in a variety of forms
depending on the round of funding addressed and investor involved.
• Stock Purchase Agreements
✓ Agreement between company & shareholders regulating sale and
transfer of company’s shares; often include provisions governing right
of first refusal, redemption of shares

WITH INVESTORS (cont’d)
• Business Loan Agreements/Financing Agreements
✓ Set forth terms of financing with lenders, length of loan, interest
rates, conditions, etc
• Personal Guaranty
✓ Executed by startup owners to guarantee repayment of loan from
personal assets in event of default by company

WITH INVESTORS (cont’d)
• Convertible Notes
✓ Short-term debt that automatically converts into equity upon
future events in a company’s life, such as a later round of
financing when a valuation is established
• Security Agreements
✓ Involved with debt financing: lender is granted a secured interest
in company’s assets, on which it can foreclose and sell in the
event the company defaults on its loan obligations

DUE DILIGENCE IS A 2-WAY STREET
• Do your own due diligence
✓ Startups seeking investment capital should do their own due
diligence into their funding sources
✓ Know your investors! Be skeptical of “matchmaking” services
offering to solicit or pair you with investors

ABOUT THE FACULTY
CHRISTOPHER CAHILL – ccahill@lowis-gellen.com
Christopher Cahill is Head of the Bankruptcy and Restructuring Practice Group at Lowis & Gellen LLP, in
Chicago. He advises businesses on relationships with vendors, customers, and lenders, to maximize market
share, return, and liquidity. He also litigates on behalf of secured creditors, trade creditors, and in chapter 11
cases and advised more generally on corporate restructuring, including workouts, loan forbearance,
assignments for the benefit of creditors, UCC Article 9 foreclosure sales, and avoidance litigation.
Mr. Cahill also publishes and speaks frequently on commercial insolvency and commercial transaction
issues. He is an Executive Editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland,
Elizabeth Vandesteeg & Christopher M. Cahill eds., 2019), a comprehensive treatise that is updated annually
and published by Thomson Reuters. In addition, Mr. Cahill is the host of Financial Poise Radio, a weekly
interview and commentary podcast for investors and other market participants, with 100 episodes and
counting.
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ABOUT THE FACULTY
ALEX DAVIE – adavie@riggsdavie.com
Alex is a co-founder and member of Riggs Davie PLC of Nashville, Tennessee. Many businesses look to Alex as their
outside "general counsel" for day-to-day legal needs as well as their trusted adviser on high-stakes transactions, such as
capital raising, partnership buyouts and disputes, technology transactions, and mergers and acquisitions. Alex frequently
works with technology companies, including startups and emerging growth companies, and with private investment
funds, such as private equity, venture capital, and hedge funds. Alex also represents buyers and sellers of small and
middle market businesses in many industries, including technology, healthcare, real estate, financial services, and
consumer products and services. Alex is active in Nashville's startup community as a member of the board of directors of
the Nashville Business Incubation Center and as a mentor at the Nashville Entrepreneur Center, and he participates in
numerous other events geared towards making Nashville a nationally ranked location for starting a business. Alex is the
editor and primary contributor to the Strictly Business Law Blog (<http://www.strictlybusinesslawblog.com/> where he
has written extensively on legal topics of interest to his startup and investment management clients. He also regularly
contributes to other publications, where he has written extensively on legal topics of interest to his startup and
investment management clients.
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ABOUT THE FACULTY
NICK PETIT – nick@vamonde.com
Nick is an experienced entrepreneur and proven leader that couples business strategy and disciplined
execution with enabling and emerging technologies. As CMO of VAMONDE, Nick inspires a multi-talented
team leading growth and shaping the future or travel and cultural discovery. VAMONDE is a SaaS platform
that is transforming how our most important cities and cultural institutions leverage new technology and
rethink marketing.
Nick is a growth-oriented executive delivering high-impact results across strategy, operations, and business
development for technology and business services firms. He’s a 3X entrepreneur, Big 4 leader, innovation
executive, part-time butcher, traveler, painter, and Peace Corps veteran.
Nick serves on the board of directors for G-PAC - Gun Violence Prevention PAC.
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ABOUT THE FACULTY
ANDREW STEPHENSON- andrewstephenson@crowdcheck.com
Andrew D. Stephenson, Chief Product Officer for CrowdCheck and Partner with CrowdCheck Law, is an
entrepreneurial attorney focused on assisting small and early stage businesses with corporate
governance and securities law related matters. Prior to joining CrowdCheck, Andrew was involved with
evaluating internal company communications and reports as part of complex civil litigation matters.
Andrew has also worked for the United States Congress, handling a wide range of policy areas.
Andrew received his B.A. from Claremont McKenna College and graduated, cum laude, from the University of
California, Hastings College of the Law. Andrew is a member of the California and District of Columbia bars.
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ABOUT THE FACULTY
RICHARD SWART – richard@crowdsmart.io
Richard Swart is a strategic advisor to CrowdSmart.io the world’s first collective intelligence powered
engine that score startups and provides a highly accurate prediction of whether the startup will scale and
grow. He bounces between academia, think tanks and strategic positions with high growth startups. He
has lectured on five continents, advised dozens of organizations, banks, funds and governments, and is
a globally recognized expert in alternative finance. He had one exit as an extrepreneur, one
miserable failure and his learning from that failure propelled him to international’s prominence in helping
other entrepreneurs.
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QUESTIONS OR COMMENTS?
If you have any questions about this webinar that you did not get to ask during
the live premiere, or if you are watching this webinar On Demand, please do
not hesitate to email us at info@financialpoise.com with any questions or
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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ABOUT FINANCIAL POISE
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business owners and executives, and investors. Its
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Raising Capital: Negotiating with Potential Investors (Series: The Start-Up/Small Business Advisor)

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