Cash is the lifeblood of any business, especially early-stage, high-growth enterprises. We will discuss: The Capital Fundraising Plan (know how much you need to raise and when to raise it); Grant Funding (what could be better than money you don’t have to repay and doesn’t cost you equity); Securities Law Basics (how to avoid personally obligating yourself to give back every dime of investor money if things don’t go well); How to Structure Investor Funding (what’s the best way for you to take in investor money). And….of course, your questions!

1. Structuring the Investment Richard C. Bruder • [email_address] • www.elp-law.com Ann Arbor Spark 2011 Business Law and Order Series Financing I

2. The Scenario -start up company -excellent team of Founders -web-based home delivery grocery -Needs $100K for prototype + early marketing -Investor: a Founder of opentable.com

3. The Question – How to Structure? Two basic choices: -convertible debt -preferred stock [common stock/royalty agreement]

4. Convertible Debt – What is It?

5. Convertible Debt – What is It? -a loan by the investor -with interest (8-10%) -repayment date (1-3 years) -expectation: never repaid but converted to equity at next funding round -converted “at a discount” (15%-30%) -variation: “warrant coverage”

6. Convertible Debt – What is It? Example: one year later, web site built and some revenues! Investor #2 invests $500K at $1.00 per share Investor #1 gets to convert at $0.80 cents per share (20% discount), and gets 125,000 shares

7. Preferred Stock – What is It?

8. Preferred Stock – What is It? -equity in the company -a share in the profits/ sale proceeds -never needs to be “repaid” -Convertible into common equity -How much equity? – PRICING.

9. Key Difference – Pricing

10. Preferred Stock (First Round) Example: At first round , company has a “Pre-Money Value” of $500K. Investor invests $100K. “Post Money Value” is $600K. Investor gets $100K/$600K, or 1/6 th = 16.67%

11. Convertible Loan (First Round) Example: At first round , Investor invested $100K At second round (prototype + some revenue) Pre Money Value is $1.0M Investor gets to convert as if C ompany had a “Pre-Money Value” of $800K (and a Post Money Value of $900K). Investor gets $100K/$900K, or 11.11%

12. Key Difference – To Price or Not to Price

13. Pro and Con of Pricing the Deal

14. Pro and Con of Pricing the Deal -avoid confrontation (arguing over price) -avoid delay (arguing over price) -round isn’t large enough to establish value -no lead investor to take on pricing burden -must repay convertible loan -more “alignment” with preferred -Investor: why help grow the company – it just raises my conversion price -This deal is HOT! I want IN! -I took all the risk, for only a 15-30% discount

15. New and Improved! Convertible Debt With a Cap

16. New and Improved! Convertible Debt With a Cap “I will convert my loan at the next round Pre Money Value, not to exceed $700K.” Next Round has a “true” Pre Money Value of $1.0M. Investor converts at 100/800K, or 12.5%

17. Key Point: The Investor is More Important Than the Structure

18. Michigan’s New Investment Tax Credit

19. Michigan’s New Investment Tax Credit Invest between 1/1/11 and 1/1/13 Get a 25% Michigan tax credit (spread over 2 years – 5 years)

20. Michigan’s New Investment Tax Credit Available only to : Qualified Investors for Qualified Investments in Qualified Businesses

21. Michigan’s New Investment Tax Credit Qualified Investors -invest through an angel group or VC fund that is registered with the Michigan Strategic Fund -no relatives, board members or felons

22. Michigan’s New Investment Tax Credit Qualified Investments -at least $20K -can be equity OR debt -must stay in the deal for 3 years (unless a “legitimate” exit) -investor submits annual report

23. Michigan’s New Investment Tax Credit Qualified Business -seed or early stage (see MCL 125.2233) -incorporated and HQ in Mich -Majority of employees in Mich -Pre-Money Value less than $10M -less than 100 FTEs less than 5 years old (10 years if TTO) -no retail -no life science (unless covered under MSF Act sec 88a) -innovative with potential for high growth - seek Preliminary Assessment of Eligibility (Form SBITC-001)!