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Show Me the Money! Funding for Your Business

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Davis LLP's Ted Maduri and Andrew Lord spoke in HalTech's "Show Me the Money!" business seminar and presented on the legal aspects of financing and SMEs.

Davis LLP's Ted Maduri and Andrew Lord spoke in HalTech's "Show Me the Money!" business seminar and presented on the legal aspects of financing and SMEs.

Published in: Business, Economy & Finance
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  • One of the most important decisions to be made when entering into a new venture is the vehicle to be used to carry on the business. The choice that is made has a significant impact on:- the liabilities the business is exposed to (including lawsuits); - the amount of income tax the business will pay;- the rules and regulations that the business is governed by; - the amount of time, energy and money that must be expended in establishing and maintaining a business/organization; and- ability to enter into contracts.
  • Assume FP corporation is most popular/likely to be used.Articles of Incorporation - government fee + legal fee -- plus by-lawsSpeak to optionsSeparate legal entities vs. divisions
  • Financing options track a company’s stage of growth: owner-funded, friends + family, crowdfunding (!), angel investors (e.g., Dragon’s Den), VC, private equityBuilding ValueLT KNsIP
  • 1. Equity-based: backers buy a small slice of a business, and may get a financialreturn down the road.Investors receive a stake in the company. (If Pebble goes big, you get a percentage of the prize). 2. Rewards-based: backers pitch in and get a reward for their contribution, typically of a value below what they paid. This reward can include a: t-shirt, tote, or unique experience.3. Donations-based: backers provide funds because they connect with the cause and want to support it and be seen to support it. There is no concrete benefit to them. This model is often used by NFPs for project-based fundraising.4. Peer-to-peer lending: backers pool their resources to support initiatives they like by lendingcapital to the initiative. The backers get their money back, but there is typically little or nofinancial benefit.OSCIn early 2014, the OSC will be publishing crowdfunding exemption, with a registration framework for online funding portalExemption will be subject to a 90-day public comment period MaRS ExemptionOSC permitted launch of MaRSVXii (or SVX, MaRS Social Venture Connexion) as an online portal to connect accredited investors with social or environmental impact projects in OntarioThe decision allows MaRSVX to operate without complying with the Know-Your-Client (KYC) and suitability requirements under National Instrument 31-103. By lifting these requirements for two years, the OSC has laid out the elements of a possible framework for permitting equity crowdfunding in Ontario to help bridge the existing funding/capital gap for emerging companies. Portal launched in September 2013
  • State what’s in a TS typically [(see my std term sheet)]cap tableuses$ being raisedsecurity being sold
  • can be voting or non voting
  • Decisions - obviousInfo: (1) about the business; (2) about market, etc. to grow the businessMoney: (1) provided today; (2) ability to provide tomorrowLiquidity: Ability to cash out with certaintyOn your own: Authority and info; likelyneed money; likely have no liquidityFriend and family plus founders: Founders have authority and info, but may need to discuss how decisions made; how to part waysF&F provide money; likely not too worried about the other threeFounders plus professional moneyProfessional money will provide the money and may provide new info; will want decision-making authority, information and liquidity
  • Define USATrumps articles/by-laws/OBCA in some case; is subject to OBCA in othersNot required but recommend as biz growsCan scale from terms sheet to full blown over timeMain items map to levers of power: bullets above
  • S/h (elect directors/fundamental changes) v. directors (management of business and affairs of company) - USA can blur linesBoard seats usually tied to maintaining level of share ownership; may shift if business objectives not met; may also say when you lose seats - e.g., if s/h in breach of USA; forced sale in process; etc.Notice rights: tactical advantage (e.g., slow decision process when quick decisions needed; assert that decisions not properly made)Quorum: min participation level required; prof money may insist that it be part of quorum; auto reconvene to thwart gamesThreshold: default is majority; can set higher levels for some or all decisions; shareholder decision rights: e.g., transactions out of the ordinary course; encumbering assets; borrowing money; issuing shares; changing executive comp; approving budgets/financials, etc.; percentage level can give s/h or s/h block ability either to veto (their votes needed) or to decide without support of others (other votes not needed)Founders only: likely looking for balanceFounders plus F&F: similar, but F&F may want some say over major decisions, may want board seatFounders plus professional money: will want lots of control
  • Accountability to yourself v. your investorsF&F likely just want to know things going wellProfessional money: will drill deep; may need to feed into their own higher level reporting obligationsCan be burden: eats time and money (e.g., audit fees); if company also has bank loans, try to harmonize reporting requirements to save cycles
  • What happens when company needs more money?Borrowing: banks first - s/h guarantees required?then shareholders: optional?debt or equitySitting out: participants repaid first, with interest; dilution?Equity:Pre-emptive right to take up new sharesOversubscription rights = dilution for shallow pocketsFounders: can tip the balance in favour of wealthier foundersFounders + F&F: not necessarily appropriate to require anything more of true F&FFounders + prof money: Important to themBottom line: can give lots of leverage to people who are able to pile in more money
  • Starting point: restriction on transfer of sharesPermitted transfers: flexibility for tax/estate planningDeath or disability: founders leave a legacy to family; Mandatory exit: when things go bad, how do you get rid of the problem? Valuation?Voluntary exit:ROFR/ROFO: protects against strangers, but only to a degreeCo-sale: fair to those who may not lead a saleDrag along: almost certainly required by prof moneyShotgun: beware imbalance of financial powerPuts/redemptions: allows prof money to cash out over time or if business does not perform; may also give founders/employee shareholders an exit planWorth addressing regardless of the stage of investmentExpect to negotiate heavily with professional money
  • Transcript

    • 1. SHOW ME THE MONEY HalTech Regional Innovation Centre January 23, 2014 Ted Maduri 416.941.5412 tmaduri@davis.ca Andrew Lord 416.369.5264 alord@davis.ca
    • 2. Agenda 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Methods of Carrying on Business Incorporation Structuring Tracking Stages of Growth Crowdfunding Typical Documents Types of Securities Levers of Power Shareholders Agreements Management and Control Information Rights Financing Transferring Shares
    • 3. Methods of Carrying on Business I. Sole proprietorship II. Partnership III. Non-share capital corporation IV. Share capital corporation
    • 4. Incorporation • Need to file Articles of Incorporation (by right) • Jurisdiction: federal or provincial • Classes of shares • As a trade-off, need to “maintain” your corporation
    • 5. Getting the Money Out
    • 6. Structuring for Flexibility and Tax Efficiency
    • 7. Financing • Options track a company’s stage of growth • • • • • • owner-funded friends + family crowdfunding (!) angel investors (e.g., Dragons' Den) VC private equity
    • 8. Crowdfunding (“CF”) • • • Kickstarter now in Canada Different forms of CF Equity CF currently not generally permitted in Canada but imminent: • Ontario Securities Commission (“OSC”) considering CF exemption that would legalize equity CF in Ontario • Early 2014, OSC publishing proposed framework for CF exemption • MaRS exemption • Saskatchewan • US SEC
    • 9. Typical documents • • • • Term sheet Subscription agreement Shareholder agreement Agency agreement if agent
    • 10. Types of securities: • • • • • • • common shares preferred shares convertible debenture loan warrants (aka kickers) units options
    • 11. Levers of Power 1. Decision making authority 2. Information 3. Money 4. Liquidity
    • 12. Unanimous Shareholders Agreement Is Your Flight Computer • Management and control • Information rights • Future financing • Transferring shares
    • 13. Management and Control: Voting Power • Seat at the table • Voting v. non-voting shareholders - with exceptions • Board seats: getting them, keeping them and losing them • Notice • Quorum • Threshold for decisions • Majority, special, unanimous • Mandatory players • Consent/veto rights
    • 14. Information Rights • • Type: financials, operational reporting, budget tracking, performance metrics, notice of certain events, etc. Frequency: monthly, quarterly, annually, ad hoc Friends and family Private Equity/VC
    • 15. Financing • Cash calls • Mandatory or optional • Debt or equity • Consequences of participating or sitting out • Pre-emptive rights
    • 16. Transferring Shares • Permitted Transfers • Death or disability • Mandatory exit: • Voluntary Exit: • • • • • Default Termination Bankruptcy Family Law Act Calls • • • • • ROFR/ROFO Co-sale/piggy back Drag along Shotgun Puts/redemptions Valuation???
    • 17. THANK YOU! Ted Maduri Partner, Toronto 416.941.5412 tmaduri@davis.ca Andrew Lord Associate, Toronto 416.369.5264 alord@davis.ca Follow us @DavisLLP

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