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RAISING CAPITAL: Capital Raising Options for Start-Ups and Scaleups

by Alixe Cormick Angel Investor; Member of: Kieretsu Forum, Vancouver Angel Technology Forum (Vantec), and

various advisory boards; and a corporate securities lawyer

October 18, 2016

Disclaimer

• Information purposes only: The materials and information contained in this presentation are intended to provide information (not advice) about equity crowdfunding and related matters. You should not act on this information presented without first consulting with an attorney.

• No Attorney-Client Relationship Created: This information on this presentation is not intended to create, and receipt of it does not constitute, an attorney-client relationship having been created by us with you or anyone else. Do not send us confidential information until you speak with us and receive our authorization to send that information to us. The act of talking to us informally or sending an email to us will not create an attorney-client relationship. If you are not currently a client of Venture Law Corporation, your email will not be considered privileged and may be disclosed to other persons. We promise, however, to keep your name confidential unless you tell us otherwise when talking to any regulators or third parties about securities law matters.

• No Warranties: The information provided in this presentation is provided “as is”. We make no warranties, representations, or claims of any kind concerning the information presented is complete. We are not responsible for any errors or omissions in the content of this presentation or for damages arising from the use of the information provided under any circumstances.

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Outline of Discussion

• Your Initial Capital Structure

• Create a Solid Capital Raising Plan

• Find Investors

• Must Haves for Businesses Looking for Investors

• Your Pitch Deck

• Deal Breakers

• Understanding the Investment Process

• Last Minute Tips

Your Initial Capital Structure: Pre-Outside Capital

• Rough guideline for tech & biotech

• Founders: 80%-90%

• Team Members: 10%-15%

• Advisors: 1%-3%

• Compensate for value not hours worked!

• Put in writing and use vesting agreements

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Your Initial Capital Structure: Pre-Outside Capital - Pricing

• Skin in the game

• Shares issued for less than $0.01 makes a Canadian IPO less likely

• Effect on pricing when looking for outside capital

• Create a cap table: Excel Example

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Your Initial Capital Structure: Outside Capital Rounds

• Non-dilutive capital

• Common, preferred shares, and debentures

• Pre-seed

• Seed

• Series A and subsequent rounds

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Your Initial Capital Structure: Outside Capital Rounds

Round Amount Purpose Pre-$ Valuation

$ Sources % of Business

Pre-Seed

$25,000 to $300,000

Build & test MVP/Proof of Concept/R&D

$100,000 to $1M

Bootstrap/FFB/ Crowdfunding/Gov Grants

5% to 25%

Seed $300,000 to $1M

Beta Test/Launch Product/Proof of Product Solution Fit

$1M to $3M

Angels/Crowdfunding/Seed VCs/Co-investment funds

10% to 50%

Super Seed

$1M to $2M Working Business Model/ Proof of Product Market Fit/Product Traction

$3M to 10M

Angels/Seed VCs/Crowdfunding/ Strategic Investors

10% to 50%

Series A $2M to $30M

Scale customer acquisition and revenue

$10M to 100M

VCs/Family Offices/ Crowdfunding/Instit-utional/ Strategic Investors/AltFin Platforms

20% to 50%

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Your Initial Capital Structure: Valuation

• Geography and investor group dependent

• Look for comparable businesses

• Ultimately a negotiation between investor and business

• Expect 10% to 30% dilution per round

• Use convertible debt or preferred shares if uncertain or to avoid significant dilution

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Create a Solid Capital Raising Plan

• Determine your key milestones or inflection

points that will impact your value

• What is the minimum amount you need to get to each point

• What non-dilutive sources of capital are available to you at each stage?

• Identify what you want to offer investors

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Create a Solid Capital Raising Plan

• Make a list of contacts that can help

• Old school versus new school capital raises

• Identify potential investors or credible market intermediaries

• Sample, track, learn, and improve what you are doing to raise capital

• Keep all doors open

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Find Investors: Identification

• Friends and family

• Angel investor networks

• Free or almost free angel investor forums

• Pay to play angel investor forums

• Online accredited investor portals

• Individual angel investors and venture capital firms

• Introductions from professional advisors and others

• Identification through research

• Signaling angel investors and venture capital firms

• Third-party finders

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Find Investors: Approach

• Method 1:

• Well connected angel/VC assists with introductions

• Commitments;

• Downstream intros and more commitments

• Method 2:

• Credible market intermediary streamlines process

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Find Investors: Start-Up Crowdfunding Portals

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AB, BC, SK, MB, QU, NB, NS

BC, SK, MB, QU, NB, NS

BC, QU, NS, NB

QU, NB, NS

BC, NB

BC BC, SK, MB, NB, NS

QU, NB, NS

Find Investors: AI & OM Crowdfunding Platforms

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ON AB, BC, MB, ON, QU AB, BC, ON, QU

AB, BC, SK, MB, ON

ON ? AB, BC, ON

AB, BC, SK, MB, ON, QU, NB, NS ON AB, BC, SK, MB, ON, QU, NB, NS, PEI, NFL

AB, BC, ON, QU AB, BC, ON, QU

Main Crowdfunding Securities Law Exemptions

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Securities Exemption Jurisdictions Max Raise

Accredited Investor Exemption BC, AB, SK, MB, ON, QU, NB,

NS, NFL, PEI, NU, YK, NWT

Unlimited

Offering Memorandum

Exemption

BC, AB, SK, MB, ON, QU, NB,

NS, NFL, PEI, NU, YK, NWT

Unlimited

Offering Memorandum Light

Exemption

AB, SK. NB $500,000 12 month

max

Start-up Crowdfunding

Exemption

BC, SK, MB, QU, NB, NS $250,000 per offering

$500,000 12 month

max

Integrated Crowdfunding

Exemption

SK, MB, ON, QU, NB, NS $1,500,000 12 month

max

Start-up Business Exemption AB $1,000,000 lifetime

max

Canadian Small Business Marketplace Lending Portals

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Rates: 9.75% and up Rates: 6% and up

Rates: 10% and up

Receivable Financing

Rates: 9% and up

Rates: 15% and up

Must Haves for Businesses Looking for Money

• Tax credits • Small Business Venture Capital Act

• Scientific Research And Experimental Development Tax Incentive Program

• Government grants – NRC Concierge Service

• Product or service that addresses a large market need versus a want or nice to have

• Team that can execute

• Solid understanding of business and challenges

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Your Pitch Deck

• Bare Essentials: • Description of your company;

• Team;

• Problem or need (market opportunity);

• Solution (make sure your name is on this slide);

• Value proposition to investor;

• Any traction you have;

• Use of proceeds (may use a timeline or roadmap);

• Summary & contact information.

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Deal Breakers

• Raising $ to replace debt; pay big salaries; develop an idea not a business; or with no clear purpose

• One man team

• No personal skin in the game

• Unrealistic valuations

• Serious character flaw(s)

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NDAs – Non-Disclosure Agreements

• Exceptions but, seasoned Angel Investors and VCs will not sign

• Business plan contains no proprietary information

• If you really want an NDA:

• narrow coverage

• introduce at due diligence stage

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Understanding the Investment Process

Angel Investors and Venture Capital Funds

• Long process

• Meet and greet first step

• All investment basics must be met

• Due diligence review

• Terms may be renegotiated

• Close in person

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Understanding the Investment Process

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Equity Crowdfunding Timeline (Weeks)

1 2 3 4 5 6 7 8 9 10 11 12

Information Gathering

Preparation

Apply to Funding Portal

Identify & Work Your Network for Support

Contact Media and Work Social Campaign

Campaign Live on Funding

Portal - 1 day to 90 days

Last Minute Tips

• Securing a key investor early will make raising capital off-line and online significantly easier

• In person meeting results in 5x more $ than an email and 3x more $ than a phone call

• Do not launch a crowdfunding campaign unless you know who is funding you

• If crowdfunding , review slides, tips and resources in Equity Crowdfunding for Startups (even if you are not a startup)

• People only invest if they know you, know the business, and like the investment opportunity

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Thank-you and Good-Luck

Venture Law Corporation 618-688 West Hastings Street

Vancouver, BC V6B 1P1 Phone: 604-659-9188

Fax: 604-659-9178 Email: acormick@venturelawcorp.com

Website: www.venturelawcorp.com Blog: www.AlixeCormick.com

Twitter: @AlixeCormick Google+: AlixeCormick

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Resources

Canadian Crowdfunding Specific Exemptions

Start-Up Crowdfunding Exemption

• BCI 45-535 Start-up Crowdfunding Registration and Prospectus Exemptions Form 1 - Start-Up Crowdfunding – Offering Document

• Form 2 - Start-Up Crowdfunding – Risk Acknowledgement

• Form 3 - Start-up Crowdfunding – Funding Portal Information Form

• Form 4 - Start-up Crowdfunding – Funding Portal Individual Information Form

• Form 5 - Start-up Crowdfunding - Report of Exempt Distribution (Form 5) (fillable form)

• Start-up Crowdfunding - Purchasers Information (Schedule 1 to Form 5) (excel)

• Start-up Crowdfunding Guide for Investors

• Start-up Crowdfunding Guide for Businesses

• Start-Up Crowdfunding Guide Preparing an Offering Document

• Start-up Crowdfunding Guide for Funding Portals

• CSA Notice 45-317 Amendment to Start-Up Crowdfunding Exemption (Jan 25, 2016)

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Resources

Canadian Crowdfunding Specific Exemptions

National Instrument 45-108 - Crowdfunding • Notice of Approval MI 45-108 Crowdfunding

• Annex A1 - Multilateral Instrument 45-108 Crowdfunding

• Annex A2 - Form 45-108F1 Crowdfunding Offering Document

• Annex A3 - Form 45-108F2 Risk Acknowledgement

• Annex A4 - Form 45-108F3 Confirmation of Investment Limits

• Annex A5 - Form 45-108F4 Notice of Specified Key Events

• Annex A6 - Form 45-108F5 Personal Information Form and Authorization to Collect, Use and Disclose Personal Information

• Annex A7 - Companion Policy 45-108CP Crowdfunding

• Annex B - Consequential Amendments to National instrument 45-102 Resale of Securities

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Resources

Canadian Amended Offering Memorandum Exemption

• Multilateral CSA Notice of Amendments to National Instrument 45-106 - Prospectus Exemptions Relating To The Offering Memorandum Exemption

• Changes to Companion Policy 45-106CP Prospectus Exemptions (Jan 7, 2016)

• Amendments to NI 45-106 Prospectus Exemptions

• National Instrument 45-106 Prospectus Exemptions

• Companion Policy to National Policy Instrument 45-106 Prospectus Exemptions

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Resources

U.S. Securities Rules

• Regulation D – Rule 506(c) • Eliminating the Prohibition Against General Solicitation and

General Advertising in Rule 506 and Rule 144A Offerings;

• Small Entity Compliance Guide;

• Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings

• Regulation A+ • Amended Conformed Version of Regulation A as Amended

• SEC Title III Crowdfunding Final Rules • Crowdfunding Rule

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