Negotiating with Hedge Funds


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Negotiating with Hedge Funds

  1. 1. Monthly  Webinar  Series    presents    Negotiating  With  Hedge  Funds:    Five  Ways  to  Save  Time,  Money,  &  Dilution    April  25,  2012    Panelists  Adam  J.  Epstein,  Founder,  Third  Creek  Advisors,  LLC  Sara  LaFever,  Account  Manager,  Sagient  Research  Systems  Joseph  A.  Smith,  Member,  Ellenoff  Grossman  &  Schole  LLP        Moderator  Brett  Goetschius,  Editor  and  Publisher,  Growth  Capital  Investor    
  2. 2. Thank  you  for  participating  in  “Negotiating  With  Hedge  Funds:  Five  Ways  to  Save  Time,  Money,  &  Dilution.”    This  manual  contains  information  you  will  need  for  this  webinar.    CONFERENCE  MANUAL    This  manual  contains:       •Dial-­‐in/log-­‐on  instructions.     Speaker  bio  and  contact  information.     •Tips  for  submitting  questions.     •Pertinent  information  from  the  pages  of     Growth  Capital  Investor.    CONFERENCE  DETAILS    The  webinar  is  scheduled  for  Thursday,  April  25,  2013  at  2:00  p.m.  EDT,  1:00  p.m.  CDT,  12:00  p.m.  MDT,  and  11:00  a.m.  PDT.  It  will  last  90  minutes.    HOW  TO  JOIN  THE  WEBINAR    Online  With  Streaming  Audio  •Go  to  •On  the  “Join  a  Meeting”  side  of  the  login  page,  enter  meeting  room:  mnm2  •Enter  your  unique  PIN  (sent  in  your  email  confirmation).  •Click  on  “Join  Meeting”  to  access  the  presentation.  •Make  sure  your  computer  speakers  are  turned  on  and  at  the  correct  volume.  You  can  adjust  the  volume  by  using  the  up  and  down  arrows  above  the  presenter’s  box.    Optional  Telephone  Access  If  you  have  trouble  streaming  the  sound  through  your  computer,  please  follow  these  instructions  to  listen  by  phone:    •Dial  1-­‐877-­‐533-­‐4964  about  5-­‐10  minutes  before  the  start  of  the  conference.    •Enter  your  unique  PIN  (sent  in  your  e-­‐mail  confirmation).  •You  will  hear  music  on  hold  until  the  conference  has  started  or  be  connected  directly  if  it  has  already  begun.  •If  you  have  trouble  with  your  PIN  stay  on  the  line  and  an  operator  will  assist  you.  •If  you  are  using  a  speakerphone,  put  the  phone  on  MUTE  for  best  sound  quality.  •If  you  are  disconnected  at  any  point,  just  repeat  the  processes  above.      PLEASE  NOTE:  Only  one  dial  in  and  one  log  on  per  PIN  are  allowed.      If  you  have  problems  accessing  the  webinar,  please  call  877-­‐297-­‐2901.    HOW  TO  SUBMIT  QUESTIONS    Questions  may  be  submitted  at  any  time  during  the  call  using  the  chat  function  on    the  web  interface  in  the  lower  left  corner  of  your  screen.  Just  type  in  your  question  and  send  it  to  “Q&A  session”  in  the  drop-­‐down  menu.    Conference Manual Page 1
  3. 3. Sagient Research SystemsSara LaFeverConference Manual Page 2
  4. 4. }  CCMMPPOO//OOvveerrnniigghhtt OOffffeerriinngg:: 
A confidentially marketed public offering (“CMPO”) is a hybridstructure between a Registered Direct and a traditional publicfollow-on. After registering shares on an S-3 shelf registration,transactions are typically marketed confidentially to institutionalinvestors, then announced publicly and “flipped” to a public offering.Deals are announced after the close of US market trading, and thepublic selling process concludes prior to the market opening thefollowing morning.}  CCoommmmoonn SSttoocckk -- SShheellff SSaallee:: 
A sale of the Companys pre-registered common stock from anexisting shelf registration statement (a.k.a. Registered Direct). TheRegistration allows the Company to sell the securities over a periodof time. At PlacementTracker, a Common Stock - Shelf Sale istracked when the registered Common Stock is sold in a privatetransaction to accredited investors.Conference Manual Page 3
  5. 5. }  CCoommmmoonn SSttoocckk◦  Common Stock transaction may or may not includepurchase Warrants. Sometimes Common Stock withPurchase Warrants are sold together as a security called a"Unit".}  CCoonnvveerrttiibblleess◦  Convertible Debt (such as Debentures or Notes) andConvertible Equity (Preferred Stock). A Convertible Note,Convertible Debenture or Convertible Preferred Stock canhave one of four Conversion Features: 1) Fixed, 2) Floating,3) Reset, or 4) Company Installment.Conference Manual Page 4
  6. 6.   From 1995-present  Convertibles: Fixed Conversion Premium/Discount atAnnouncementConference Manual Page 5
  7. 7. -­‐40% -­‐20% 0% 20% 40% 60%Common  StockRegisteredConvertibles2011201220132010Conference Manual Page 6
  8. 8. -­‐10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00%100M-­‐250M1M-­‐100MConvertiblesNon-­‐registeredRegisteredConference Manual Page 7
  9. 9. -9%4.00%0.63%-6.00%-12%-10%-8%-6%-4%-2%0%2%4%6%Healthcare Energy Tech FinancialConference Manual Page 8
  10. 10. Registered 45.1% have warrants Average of 26.81% 1-100M: Average 32.22% 51.9% havewarrants 100-250M: Average14.91% 34% have warrantsNon registered 51.5% have warrants Average of 38.35% 1-100M: Average 48.20% 60.93% havewarrants 100-250M: Average 28.35% 39.2% havewarrantsConference Manual Page 9
  11. 11. Registered 12.82Non-Registered 15.59Conference Manual Page 10
  12. 12. }  PlacementTracker is the premier research, analysis, andreporting tool for private placements by publiccompanies. Cataloging every private placement sinceJanuary 1, 1995, PlacementTrackers interactive databaseincludes over 29,000 transaction profiles, over 1,900placement agent profiles, over 14,700 investor profiles,and over 1,200 legal counsel profiles. As a tool developedby investment professionals for investment professionals,PlacementTracker utilizes state-of-the-art web-basedtechnology to provide subscribers with an easy to use,comprehensive means to evaluate PIPE transactions andinvestors, perform quick transaction pricing, identifypotential issuers and investors, and compile comparabletransaction, investor and agent statistics.Conference Manual Page 11
  13. 13.      Nego�a�ng  with  Hedge  Funds:  Avoiding  the  Common  Mistakes  5  Ways  to  Save  Time,  Money,  and  Dilu�on      Adam  J.  Epstein,  Founder,  Third  Creek  Advisors,  LLC  Joseph  A.  Smith,  Partner,  Ellenoff  Grossman  &  Schole  LLP    April  25,    2013              ©  2013  TCA,  LLC  &  EGS  LLP  Conference Manual Page 12
  14. 14.      OVERVIEW    v  76%  of  all  U.S.  public  companies  have  market  capitaliza�ons  less  than  $500  million  v  On  senior  U.S.  stock  exchanges,  40%  of  companies  have  market  capitaliza�ons  less  than  $250  million  (majority  of  financings  for  these  companies  is  restricted  vs.  registered)  v  The  vast  majority  of  public  companies  with  market  capitaliza�ons  less  than  $500  million  regularly  access  the  equity  capital  markets  for  growth  capital  v  Depending  upon  the  year,  hedge  funds  invest  between  $30  billion  and  $50  billion  directly  into  micro-­‐  and  small-­‐cap  companies  annually  v  Hedge  funds  are  the  primary  source  of  growth  capital  for  the  vast  majority  of  U.S.  public  companies  v  The  focus  of  today’s  program  is  to  highlight  various  ways  micro-­‐  and  small-­‐cap  companies  can  save  �me,  money,  and  dilu�on  nego�a�ng  with  hedge  funds  for  growth  capital            ©  2013  TCA,  LLC  &  EGS  LLP  Conference Manual Page 13
  15. 15.      HEDGE  FUNDS  START  WITH  AN  ADVANTAGE  THAT  COMPANIES  ACCENTUATE    v  Hedge  funds  write  the  checks;  cash  is  king  v  This  situa�on  has  been  exacerbated  post-­‐2008  since  there  are  fewer  funds  financing  micro-­‐  and  small-­‐cap  companies  –  scarcity  has  created  more  leverage  v  But,  the  failure  of  most  companies  to  adequately  prepare  for  financings  accentuates  the  buy-­‐side’s  advantage  v  Companies  need  to  use  the  same  three-­‐step  process  for  each  financing,  and  should  start  prepara�ons  six  months  before  they  need  the  capital  v  Only  a�er  the  three-­‐step  process  is  any  company  in  a  posi�on  to  retain  the  right  investment  bank  v  The  predominant  reason  why  companies  rou�nely  select  the  wrong  investment  bank            ©  2013  TCA,  LLC  &  EGS  LLP  Conference Manual Page 14
  16. 16.      MAJORITY  OF  COMPANIES  ARE  UNPREPARED  FOR  INVESTOR  MEETINGS    v  Deference  to  investment  banks  should  be  replaced  by  data;  singling  out  funds  with  whom  to  construc�vely  meet  is  more  science  than  art  v  Five  cri�cal  ques�ons  that  rarely  get  asked/answered:    1.  Is  your  company  being  brutally  realis�c  about  macro/micro  elements  which  might  impact  the  financing  2.  For  directors  -­‐-­‐  does  the  management  team  have  recent,  relevant  experience  securing  financing;  has  the  board  listened  to  management’s  presenta�on    3.  Is  management  prepared  to  present  the  company  extemporaneously  (without  handouts,  iPads,  or  laptops)  4.  Does  management  know  the  five  likeliest  concerns  that  investors  will  have  about  financing  your  company  5.  Has  management  reviewed  what  has  previously  been  promised  to  investors  with  respect  to  milestones  and  use  of  prior  financing  proceeds  v  Loose  lips  sink  ships        ©  2013  TCA,  LLC  &  EGS  LLP  Conference Manual Page 15
  17. 17.      NEGOTIATING/DOCUMENTATION  –  LEVELING  THE  PLAYING  FIELD    v  Though  not  binding,  recent  financing  terms  received  by  substan�ally  similar  companies  are  proba�ve;  companies  must  possess/analyze  the  data  v  “Anything  you  say,  can  and  will  be  used  against  you…”  v  Prior  to  signing  a  term  sheet,  call  the  CFOs  of  the  last  few  companies  that  the  lead  investor  financed;  in  the  case  of  registered  offerings  test  alloca�ons  by  referencing  13F  filings    v  Impossible  to  overstate  the  importance  of  deal  documenta�on  in  restricted  stock    or  conver�ble  instrument  deals;  cri�cal  to  understand  that  most  corporate  a�orneys  don’t  stand  a  chance  nego�a�ng  against  hyper-­‐specialized  hedge  fund  a�orneys  v  Ask  the  investment  banker  to  provide  you  with  the  expected  deal  documenta�on  as  soon  as  possible,  so  you  and  your  a�orney  actually  have  �me  to  read  it  and  understand  it.  You  cannot  digest  a  conver�ble  debt  deal  overnight    v  You  almost  always  will  have  to  give  up  SOME  warrant  coverage        ©  2013  TCA,  LLC  &  EGS  LLP  Conference Manual Page 16
  18. 18.      POST-­‐FINANCING  MISTAKES  ARE  COSTLY…  BUT  AVOIDABLE    v  Penal�es  in  restricted  stock/conver�ble  deal  documenta�on  can  cost  a  fortune,  they  are  in  the  documents  for  good  reasons,  and  they  are  rarely  waived  v  Especially  with  structured  financings,  companies  o�en  fail  to  appreciate  the  complexi�es  of  complying  with  the  terms  v  Understand  whether  the  dilu�on  protec�on  in  your  warrants  is  limited  to  a  downward  adjustment  of  your  price  or  also  involves  an  increase  in  the  number  of  warrant  shares  (an  “exploding”  warrant  in  hedge-­‐speak)  v  Make  sure  the  “purchase  price”  in  the  dilu�on  provision  does  NOT  deduct  the  Black-­‐Scholes  value  of  any  warrant  component  in  your  subsequent  deals,  because  you  are  likely  going  to  issue  warrants  in  the  future  v  Make  sure  the  CFO  (or  whoever  interfaces  with  your  transfer  agent  on  a  regular  basis)  is  made  aware  of  all  deadlines  for  delivering  shares  on  conversions  or  warrant  exercises,  and  have  a  system  in  place  for  covering  that  chore  when  the  CFO  is  out  of  the  office    v  Don’t  get  cute  with  refusing  to  honor  conversions.  The  courts  are  never  going  to  rule  in  your  favor    ©  2013  TCA,  LLC  &  EGS  LLP  Conference Manual Page 17
  19. 19.      MAKING  WORKOUTS  LESS  COSTLY,  TIME-­‐CONSUMING  &  FRUSTRATING    v  Companies  need  to  be�er  understand  the  business  and  psychology  of  the  buy-­‐side  v  Restricted  stock/conver�ble  deal  documenta�on  can’t  be  construc�vely  amended  without  first  understanding/evalua�ng  the  business  ra�onale  for  the  breached  term(s)  v  Impact  on  hedge  funds’  P&L  is  where  the  rubber  meets  the  road    v  If  you  are  dealing  with  mul�ple  investors,  understand  that  you  have  work  through  them  one  at  a  �me  (or  through  the  banker  that  arranged  the  deal)  –  the  funds  cannot  meet  you  together  or  they  may  be  ac�ng  as  a  “group”  for  short-­‐swing  profit  purposes  v  Beware  of  paying  a  banker  to  arrange  a  workout:  this  will  eliminate  the  3(a)(9)  exemp�on  that  will  at  least  allow  the  investors  to  “tack”  their  prior  holding    periods  for  Rule  144  purposes  or  maintain  the  registered  status  of  a  previously  registered  security    v  Don’t  be  bashful  about  asking  the  investor  if  they  have  wri�en  off  their  investment  in  your  company.  They  may  not  say,  but  it  cannot  hurt  to  ask      ©  2013  TCA,  LLC  &  EGS  LLP  Conference Manual Page 18
  20. 20.      FOUR  SUCCINCT  TAKEAWAYS    1.  In  the  aggregate,  micro-­‐  and  small-­‐cap  companies  would  undertake  faster,  smarter,  less-­‐dilu�ve  financings  if  they  prepared  further  in  advance,  and  u�lized  deal  data  (vs.  officer/director,  third-­‐party  specula�on)  to  ascertain  what  financing  structure  and  terms  are  most  likely    2.  Far  too  many  companies  cede  addi�onal  advantage  to  the  buy-­‐side  by  making  poor  banking  and  deal  a�orney  choices;  the  rou�ne  failure  to  undertake  any  diligence  whatsoever  on  the  hedge  funds  that  are  about  to  provide  financing  is  icing  on  the  cake  3.  Be  prepared  to  give  up  a  bigger  discount  to  your  market  price  in  order  to  avoid  having  to  give  the  investors  too  many  of  the  “gotcha”  provisions  4.  There  is  no  free  lunch!  Every  �me  you  go  to  market,  you  are  compe�ng  against  dozens  of  similar  deals  being  offered  to  a  limited  universe  of  poten�al  investors  that  same  week            ©  2013  TCA,  LLC  &  EGS  LLP  Conference Manual Page 19
  21. 21.      Conference Manual Page 20
  22. 22. SPEAKER  BIOS  AND  CONTACT  INFORMATION        Sara  LaFever  is  an  account  manager  at  Sagient  Research  Systems  in  San  Diego,  where  she  works  with  three  of  Sagient’s  capital  markets  research  tools:  PlacementTracker,  BioMedTracker,  and  CatalystTracker.  She  received  her  BA  from  New  York  University  and  is  pursuing  a  Master’s  in  Library  and  Information  Sciences  from  San  Jose  State  University.  Ms.  LaFever  began  her  career  with  Sagient  as  an  analyst.    CONTACT  Sara  LaFever  Account  Manager  Sagient  Research  Systems  858-­‐200-­‐2357    Conference Manual Page 21
  23. 23.    Adam  J.  Epstein  is  a  corporate  director,  and  a  special  advisor  to  small-­‐cap  boards  and  investment  funds  through  his  firm,  Third  Creek  Advisors,  LLC  (“TCA”).  He  is  the  author  of  The  Perfect  Corporate  Board:  A  Handbook  for  Mastering  the  Unique  Challenges  of  Small-­‐Cap  Companies  (McGraw  Hill,  2012).    Mr.  Epstein  is  lead  director  of  OCZ  Technology  Group,  Inc.,  and  a  Board  Leadership  Fellow  at  the  National  Association  of  Corporate  Directors,  the  highest  level  of  credentialing  for  corporate  directors  and  corporate  governance  professionals.  Mr.  Epstein  is  a  regularly  featured  speaker  at  national  corporate  governance  forums  and  investor  conferences,  and  a  regular  contributor  to  Directorship  magazine.    Prior  to  founding  TCA,  Mr.  Epstein  co-­‐founded  and  was  a  principal  of  Enable  Capital  Management,  LLC  (“ECM”).  During  his  tenure,  ECM’s  special  situation  hedge  funds  invested  in  more  than  500  small-­‐cap  financings  in  the  United  States,  the  European  Union,  and  Australasia.  Mr.  Epstein  started  his  career  as  an  attorney  at  Brobeck,  Phleger  &  Harrison.    CONTACT  Adam  J.  Epstein  Founder  Third  Creek  Advisors,  LLC    Conference Manual Page 22
  24. 24.    Joseph  A.  Smith,  a  member  of  the  Firm,  is  widely  recognized  as  the  leading  expert  in  the  field  of  Private  Investments  in  Public  Equity  (PIPEs)  and  Registered  Direct  offerings,  where  he  developed  and  perfected  many  of  the  most  commonly  used  transaction  structures,  including  the  intra-­‐day  and  overnight  shelf  takedown,  confidentially  marketed  public  offerings  (CMPOs),  the  self-­‐liquidating  convertible  debenture  and  the  equity  line  of  credit.      Mr.  Smith’s  clients  are  mainly  investment  banks  and  institutional  investment  funds,  where  he  and  his  team  facilitate  approximately  75  financing  transactions  each  year.  He  has  more  than  25  years  of  experience  representing  small-­‐  and  mid-­‐cap  public  and  private  companies  in  all  phases  of  development,  from  formation  through  IPO  and  subsequent  merger  and  acquisition  activity;  and  broker-­‐dealers  with  their  regulatory  issues.  He  also  assists  broker-­‐dealers  with  regulatory  issues.  Under  Mr.  Smith’s  leadership,  Ellenoff  Grossman  &  Schole  has  been  ranked  as  the  No.  1  legal  adviser  to  placement  agents  every  year  since  2003.    Mr.  Smith  is  a  regular  speaker  on  legal  issues  relating  to  the  PIPE  and  RD  markets  at  the  PIPEs  Conference  and  other  venues.  He  has  undergraduate  and  MBA  degrees  from  the  University  of  California,  Berkeley  and  a  law  degree  from  UCLA.    CONTACT  Joseph  A.  Smith  Partner  Ellenoff  Grossman  &  Schole  LLP  212-­‐931-­‐8719    Conference Manual Page 23