Venture Capital Financing MBA 6314/TME 3413 October, 2003
Overview <ul><li>VC and corporate finance </li></ul><ul><li>Overview of VC industry </li></ul><ul><li>The VC life cycle </...
Conventional Financing <ul><li>Assets </li></ul><ul><li>Inventory & receivables </li></ul><ul><li>Land & buildings </li></...
VC Financing <ul><li>Fills the cash gap between cash needs to finance high growth and cash available from earnings and con...
Overview of VC Industry <ul><li>Angel investors </li></ul><ul><li>Private equity funds </li></ul><ul><li>Labor sponsored f...
Gap With U.S. Has Closed Disbursements 1995-2001; Canada & U.S. $ Invested by Canadian VCs - $ Billions $ Invested by US V...
Less $ to Big Deals Drives Decline $ Invested by Transaction Size; Atlantic Region $33M $23M $48M $53M $75M $53M
Technology Almost Exclusive Focus  Disbursements in Canada $1,089M $1,774M $1,751M $2,986M $6,629M $4,874M
Capital Markets Playing Field Concept Investigation Basic Design Prototype Building Market Entry Manufacturing Ramp-up Kno...
The VC Life Cycle <ul><li>Submit business plan </li></ul><ul><li>Preliminary assessment </li></ul><ul><li>Meet the people ...
The Business Life Cycle
Typical SME Growth Profiles   High-Growth Firm Moderate-Growth Firm Low-Growth Firm VC Prospects
VC Investment Criteria <ul><li>Exponential growth potential </li></ul><ul><li>Attractive industry </li></ul><ul><li>Sustai...
The Ingredients- Good CEO <ul><li>Good CEO is the most critical element </li></ul><ul><ul><li>Best is “been there and done...
The Ingredients-Strong Management Team <ul><li>Characteristics Include: </li></ul><ul><ul><li>Honesty/Integrity/Competence...
The Ingredients-Technology/Core Competence <ul><li>Ability to define and enunciate what it is </li></ul><ul><li>Ability to...
The Ingredients-The Business Model <ul><li>Implies having a well defined business model that says, “I know who my customer...
Ingredients-The Value Proposition <ul><li>Why will/do our customers buy or product? </li></ul><ul><ul><li>Ease the Pain </...
The Ingredients-The Strategic Alliance <ul><li>A “must” for most emerging companies </li></ul><ul><ul><li>distribution </l...
Venture Capital Valuation & Pricing Internal Rate of Return (IRR)
VC Investments and IRR
VC Target IRR <ul><li>Seed </li></ul><ul><li>Startup </li></ul><ul><li>First stage </li></ul><ul><li>Second stage </li></u...
What are they prepared to pay for? <ul><li>In later stage companies VC’s can value the “cake” as well as the “ingredients”...
Why so High? <ul><li>Base IRR =risk free rate </li></ul><ul><li>Plus premiums </li></ul>
Why so High? <ul><li>Systematic risk in capital markets </li></ul><ul><li>Unsystematic (unique) risk diversified away </li...
Why so High? <ul><li>Liquidity premium </li></ul><ul><li>4-7 year investment time horizon </li></ul><ul><li>Not easy to li...
Why so High? <ul><li>Value added premium </li></ul><ul><li>Recruitment of key personnel </li></ul><ul><li>Strategy </li></...
Why so High? <ul><li>Portfolio average return </li></ul><ul><li>2-6-2 rule </li></ul>
Valuation and Pricing <ul><li>Magnitude of investment </li></ul><ul><li>Staging of investment </li></ul><ul><li>Syndicatio...
Magnitude of Investment <ul><li>Typically >$1.0 million for institutional </li></ul><ul><li>Small deals too costly </li></...
Staging of Investment <ul><li>All up front </li></ul><ul><li>Two or three tranches </li></ul><ul><li>Contingent on meeting...
Syndication <ul><li>Sharing the deal with other VC firms </li></ul><ul><li>Diversify the risk </li></ul><ul><li>Broaden th...
Target IRR <ul><li>25-80 % </li></ul><ul><li>Stage of company </li></ul><ul><li>Use of funds </li></ul><ul><li>Deal struct...
Investment Time Horizon <ul><li>4-7 years </li></ul><ul><li>How long will it take to create value? </li></ul><ul><li>Years...
Terminal Value of Firm <ul><li>Projected earnings at exit </li></ul><ul><li>Price/earnings ratio (PER) </li></ul><ul><li>P...
% Ownership Required <ul><li>Magnitude of investment </li></ul><ul><li>Duration of investment </li></ul><ul><li>Target IRR...
VC Investments and IRR
% Ownership Required
Deal Structure <ul><li>Shares </li></ul><ul><li>Shares and subordinated debt </li></ul><ul><li>Shares and convertible subo...
Typical Investment Structures <ul><li>Early Stage </li></ul><ul><ul><li>Common Shares- Maybe “Put” requirement or “Forced ...
Typical Investment Structures <ul><li>Later Stage Investments (Mezzanine) </li></ul><ul><ul><li>Convertible Debentures/Deb...
Deal Structure Spreadsheets Three Scenarios <ul><li>$1.0 m VC investment </li></ul><ul><li>5 year time horizon </li></ul><...
Scenario A
Scenario B
Scenario C
The Venture Capital Method Step 1 <ul><li>Given the VC investment, the target IRR and the investment time horizon, determi...
The Venture Capital Method Step 2 <ul><li>Given the projected earnings at exit and an appropriate Price Earnings ratio (PE...
The Venture Capital Method Step 3 <ul><li>Determine the % ownership required by dividing the required future value of the ...
The Venture Capital Method Step 4 <ul><li>Determine number of new shares (NS) to be issued to VC. </li></ul><ul><li>Find n...
The Venture Capital Method Step 5 <ul><li>Determine pre and post-money valuation </li></ul><ul><li>If 30% of the company i...
The Venture Capital Method Step 6 <ul><li>Assess future dilution due to issuance of additional shares prior to exit. </li>...
The Venture Capital Method Step 7 <ul><li>Calculate adjustment to required ownership % due to expected future dilution </l...
Venture Capital Method Spreadsheet
The Venture Capital Method Multiple Rounds of Financing <ul><li>Often subsequent rounds of financing are anticipated befor...
Sensitivity Analysis <ul><li>Terminal Value </li></ul><ul><ul><li>Future Earnings (Sales, Expenses, Profits) </li></ul></u...
The VC-Company Relationship <ul><li>VC Fees </li></ul><ul><li>The Shareholder’s Agreement </li></ul><ul><li>Corporate Gove...
VC Fees <ul><li>Commitment fee </li></ul><ul><li>Termination fee </li></ul><ul><li>Due diligence expenses </li></ul><ul><l...
Shareholder’s Agreement <ul><li>Defacto control over critical decisions </li></ul><ul><ul><li>Hiring/firing key management...
Shareholder’s Agreement <ul><li>Exit Provisions </li></ul><ul><ul><li>“ Put”/ “Call” Rights </li></ul></ul><ul><ul><li>“ D...
Shareholder’s Agreement <ul><li>Corporate Governance </li></ul><ul><ul><li>Board of Directors </li></ul></ul><ul><ul><li>I...
Corporate Governance <ul><li>No interference in day-today operations </li></ul><ul><li>Regular reporting (monthly) </li></...
Exit Alternatives <ul><li>Sale to company treasury </li></ul><ul><li>Sale to equity partners </li></ul><ul><li>Sale to own...
The Initial Public Offering (IPO) <ul><li>Address capital needs beyond limits of VC’s </li></ul><ul><li>Liquidity for VC’s...
What Should You Expect From Your V.C? <ul><li>An investment in size, scope and structure consistent with the execution req...
Realities of the Current Market <ul><li>Financing based on “Napkin” business plans is “out” </li></ul><ul><li>Fundamentals...
Investors Active in Atlantic Canada  ACF Equity Atlantic Inc. BMO Capital BDC Venture Capital Group Canadian Science and T...
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    1. 1. Venture Capital Financing MBA 6314/TME 3413 October, 2003
    2. 2. Overview <ul><li>VC and corporate finance </li></ul><ul><li>Overview of VC industry </li></ul><ul><li>The VC life cycle </li></ul><ul><li>The VC investment process </li></ul><ul><li>Negotiations </li></ul><ul><li>Valuation and pricing </li></ul><ul><li>Deal structure </li></ul><ul><li>The “Venture Capital Method” </li></ul><ul><li>The Shareholder’s Agreement </li></ul><ul><li>Growing the business </li></ul><ul><li>The exit </li></ul>
    3. 3. Conventional Financing <ul><li>Assets </li></ul><ul><li>Inventory & receivables </li></ul><ul><li>Land & buildings </li></ul><ul><li>Equipment & vehicles </li></ul><ul><li>Other </li></ul><ul><li>Liabilities & Equities </li></ul><ul><li>Operating line of credit </li></ul><ul><li>Mortgage </li></ul><ul><li>Term loan </li></ul><ul><li>Share capital & retained earnings </li></ul>
    4. 4. VC Financing <ul><li>Fills the cash gap between cash needs to finance high growth and cash available from earnings and conventional financing </li></ul><ul><li>Giving up a piece of the pie to grow a bigger pie </li></ul>
    5. 5. Overview of VC Industry <ul><li>Angel investors </li></ul><ul><li>Private equity funds </li></ul><ul><li>Labor sponsored funds </li></ul><ul><li>Institutional investors </li></ul><ul><li>Diversified versus focused </li></ul><ul><li>Venture Capital Trends </li></ul>
    6. 6. Gap With U.S. Has Closed Disbursements 1995-2001; Canada & U.S. $ Invested by Canadian VCs - $ Billions $ Invested by US VCs - $ CDN Billion
    7. 7. Less $ to Big Deals Drives Decline $ Invested by Transaction Size; Atlantic Region $33M $23M $48M $53M $75M $53M
    8. 8. Technology Almost Exclusive Focus Disbursements in Canada $1,089M $1,774M $1,751M $2,986M $6,629M $4,874M
    9. 9. Capital Markets Playing Field Concept Investigation Basic Design Prototype Building Market Entry Manufacturing Ramp-up Knowledge Acquisition Government Programs Public Issues Commercial Banks Non-Financial Corporations Venture Capital Funds Seed Funds Wealthy Family Funds Private Investors Faminly and Friends Personal Savings Phase I Phase II Phase III
    10. 10. The VC Life Cycle <ul><li>Submit business plan </li></ul><ul><li>Preliminary assessment </li></ul><ul><li>Meet the people </li></ul><ul><li>Light due diligence </li></ul><ul><li>Term sheet </li></ul><ul><li>Heavy due diligence </li></ul><ul><li>Investment memorandum </li></ul><ul><li>Commitment letter </li></ul><ul><li>Shareholder’s agreement </li></ul><ul><li>Grow the company </li></ul><ul><li>Exit </li></ul>
    11. 11. The Business Life Cycle
    12. 12. Typical SME Growth Profiles High-Growth Firm Moderate-Growth Firm Low-Growth Firm VC Prospects
    13. 13. VC Investment Criteria <ul><li>Exponential growth potential </li></ul><ul><li>Attractive industry </li></ul><ul><li>Sustainable advantage platform </li></ul><ul><li>Excellent team “execution” </li></ul><ul><li>Owners receptive to involvement of outsiders </li></ul><ul><li>Owners willing to share the wealth creation </li></ul><ul><li>Credible exit alternatives (4-7 years out) </li></ul>
    14. 14. The Ingredients- Good CEO <ul><li>Good CEO is the most critical element </li></ul><ul><ul><li>Best is “been there and done that” </li></ul></ul><ul><ul><li>Has specific domain experience/expertise </li></ul></ul><ul><ul><li>“ Knows what he/she doesn’t know & locates resources to fill gaps. </li></ul></ul><ul><ul><li>Shows “fire in the belly” </li></ul></ul><ul><ul><li>Recognizes urgency-revenue generation/ burn rate </li></ul></ul><ul><ul><li>Knows the difference between being an employee and being a shareholder </li></ul></ul>
    15. 15. The Ingredients-Strong Management Team <ul><li>Characteristics Include: </li></ul><ul><ul><li>Honesty/Integrity/Competence/Discipline </li></ul></ul><ul><ul><li>Have specific domain experience </li></ul></ul><ul><ul><li>Ability to self-assess </li></ul></ul><ul><ul><li>Motivated </li></ul></ul><ul><ul><li>“ Fire in the belly” </li></ul></ul><ul><ul><li>Plans and communicates effectively </li></ul></ul><ul><ul><li>Develops appropriate MIS </li></ul></ul><ul><li>Caveat-beware the “family ties” </li></ul>
    16. 16. The Ingredients-Technology/Core Competence <ul><li>Ability to define and enunciate what it is </li></ul><ul><li>Ability to relate core technology-/competence to a variety of significant market applications-(must be balanced by focus) </li></ul><ul><li>Strong “in house” R&D capability with the mechanisms to fund it. </li></ul><ul><ul><li>Equity/loans </li></ul></ul><ul><ul><li>Customer Pays (direct or through margins) </li></ul></ul>
    17. 17. The Ingredients-The Business Model <ul><li>Implies having a well defined business model that says, “I know who my customers are, what they need, how I will meet their needs, how I will reach them, how I will service them, how I will continue to best my competition and how I will make money. </li></ul><ul><li>Avoid “if we build it they will come!” </li></ul>
    18. 18. Ingredients-The Value Proposition <ul><li>Why will/do our customers buy or product? </li></ul><ul><ul><li>Ease the Pain </li></ul></ul><ul><ul><li>Improve Revenue/ Productivity/Profitability </li></ul></ul>
    19. 19. The Ingredients-The Strategic Alliance <ul><li>A “must” for most emerging companies </li></ul><ul><ul><li>distribution </li></ul></ul><ul><ul><li>product development (perhaps) </li></ul></ul><ul><li>Can accelerate success or hasten demise </li></ul>
    20. 20. Venture Capital Valuation & Pricing Internal Rate of Return (IRR)
    21. 21. VC Investments and IRR
    22. 22. VC Target IRR <ul><li>Seed </li></ul><ul><li>Startup </li></ul><ul><li>First stage </li></ul><ul><li>Second stage </li></ul><ul><li>Bridge </li></ul><ul><li>Restart </li></ul><ul><li>IRR>80% </li></ul><ul><li>50-70% </li></ul><ul><li>40-60% </li></ul><ul><li>30-50% </li></ul><ul><li>20-35% </li></ul><ul><li>?? </li></ul>
    23. 23. What are they prepared to pay for? <ul><li>In later stage companies VC’s can value the “cake” as well as the “ingredients”. This is a luxury they do not have in funding emerging technology companies. </li></ul><ul><li>The “cake” represents companies with demonstrable and sustained patterns of growth in revenue (30%+/annum compounded) and profitability (commensurate) </li></ul><ul><li>In early stage companies VC’s have to value the ingredients and estimate what the “cake” might look like in 3 to 5 years! </li></ul><ul><li>sGood CEO is the most critical element </li></ul><ul><li>“ Knowing what you don’t know” and locating the resources to fill the gaps </li></ul><ul><li>Having a strong board of directors with good mix of skillsets/properly motivated, i.e. financial </li></ul><ul><li>Having a strong & motivated management team </li></ul><ul><li>Having a strong core technology/competence applicable to variety of market applications </li></ul><ul><li>Building the right strategic alliances in the right way </li></ul>
    24. 24. Why so High? <ul><li>Base IRR =risk free rate </li></ul><ul><li>Plus premiums </li></ul>
    25. 25. Why so High? <ul><li>Systematic risk in capital markets </li></ul><ul><li>Unsystematic (unique) risk diversified away </li></ul><ul><li>VC firms more vulnerable to market swings </li></ul>
    26. 26. Why so High? <ul><li>Liquidity premium </li></ul><ul><li>4-7 year investment time horizon </li></ul><ul><li>Not easy to liquidate investment </li></ul>
    27. 27. Why so High? <ul><li>Value added premium </li></ul><ul><li>Recruitment of key personnel </li></ul><ul><li>Strategy </li></ul><ul><li>Board of Directors </li></ul><ul><li>Network </li></ul><ul><li>Deep pockets </li></ul>
    28. 28. Why so High? <ul><li>Portfolio average return </li></ul><ul><li>2-6-2 rule </li></ul>
    29. 29. Valuation and Pricing <ul><li>Magnitude of investment </li></ul><ul><li>Staging of investment </li></ul><ul><li>Syndication </li></ul><ul><li>Target IRR </li></ul><ul><li>Investment time horizon </li></ul><ul><li>Terminal value of firm </li></ul><ul><li>% ownership required </li></ul><ul><li>Deal structure </li></ul><ul><li>Future financing and dilution – “The Venture Capital Method” </li></ul>
    30. 30. Magnitude of Investment <ul><li>Typically >$1.0 million for institutional </li></ul><ul><li>Small deals too costly </li></ul><ul><li>Typically less than $10 million in Canada </li></ul><ul><li>Based on business plan pro forma </li></ul>
    31. 31. Staging of Investment <ul><li>All up front </li></ul><ul><li>Two or three tranches </li></ul><ul><li>Contingent on meeting milestones/targest </li></ul><ul><li>Option to abandon </li></ul>
    32. 32. Syndication <ul><li>Sharing the deal with other VC firms </li></ul><ul><li>Diversify the risk </li></ul><ul><li>Broaden the network </li></ul><ul><li>Increase size of portfolio </li></ul>
    33. 33. Target IRR <ul><li>25-80 % </li></ul><ul><li>Stage of company </li></ul><ul><li>Use of funds </li></ul><ul><li>Deal structure </li></ul>
    34. 34. Investment Time Horizon <ul><li>4-7 years </li></ul><ul><li>How long will it take to create value? </li></ul><ul><li>Years to cash flow breakeven </li></ul>
    35. 35. Terminal Value of Firm <ul><li>Projected earnings at exit </li></ul><ul><li>Price/earnings ratio (PER) </li></ul><ul><li>Projected TV=Projected Earnings x PER </li></ul>
    36. 36. % Ownership Required <ul><li>Magnitude of investment </li></ul><ul><li>Duration of investment </li></ul><ul><li>Target IRR </li></ul><ul><li>Terminal value of firm </li></ul><ul><li>Room for future investment? </li></ul>
    37. 37. VC Investments and IRR
    38. 38. % Ownership Required
    39. 39. Deal Structure <ul><li>Shares </li></ul><ul><li>Shares and subordinated debt </li></ul><ul><li>Shares and convertible subordinated debt </li></ul><ul><li>What is the upside? </li></ul><ul><li>What is the downside? </li></ul><ul><li>Does the structure affect the risk to the VC? </li></ul>
    40. 40. Typical Investment Structures <ul><li>Early Stage </li></ul><ul><ul><li>Common Shares- Maybe “Put” requirement or “Forced Sale” provision on commons if no exit within 5 to 7 years </li></ul></ul><ul><ul><li>Preferred Shares-convertible into common or with warrants attached, frequently with cumulative dividend- 5 yr. term </li></ul></ul><ul><ul><li>%tage of equity required tied directly to valuation and amount of capital being sought </li></ul></ul>
    41. 41. Typical Investment Structures <ul><li>Later Stage Investments (Mezzanine) </li></ul><ul><ul><li>Convertible Debentures/Debentures with Warrants </li></ul></ul><ul><ul><li>Debentures with nominal cost equity </li></ul></ul><ul><ul><li>Debentures may be unsecured or secured (back of the bus) and usually carry an interest coupon </li></ul></ul><ul><ul><li>Straight debentures may or may not be sinking fund ” </li></ul></ul>
    42. 42. Deal Structure Spreadsheets Three Scenarios <ul><li>$1.0 m VC investment </li></ul><ul><li>5 year time horizon </li></ul><ul><li>Target IRR 40% </li></ul><ul><li>Terminal value $11.25 m </li></ul><ul><li>Three different deal structures </li></ul><ul><li>Varying % ownership </li></ul>
    43. 43. Scenario A
    44. 44. Scenario B
    45. 45. Scenario C
    46. 46. The Venture Capital Method Step 1 <ul><li>Given the VC investment, the target IRR and the investment time horizon, determine the future value of the VC investment </li></ul><ul><li>FV = PV(1+i)^n </li></ul><ul><li>i = target IRR </li></ul><ul><li>N = time horizon to exit </li></ul><ul><li>Eg. FV = $1.0m(1+0.35)^5 = $4.5m </li></ul>
    47. 47. The Venture Capital Method Step 2 <ul><li>Given the projected earnings at exit and an appropriate Price Earnings ratio (PER) for the company, calculate the projected terminal value of the company at exit </li></ul><ul><li>Eg. TV = $1.0m(15) = $15m </li></ul>
    48. 48. The Venture Capital Method Step 3 <ul><li>Determine the % ownership required by dividing the required future value of the investment at exit by the projected terminal value of the company at exit </li></ul><ul><li>Eg. FV= $4.5m/TV$15m = 30% </li></ul><ul><li>Or divide the VC investment by the present value of the projected terminal value of the company at exit </li></ul><ul><li>Eg. PV=$15m/(1+0.45)^5=$3.33m ; $1.0m/$3.33m=30% </li></ul>
    49. 49. The Venture Capital Method Step 4 <ul><li>Determine number of new shares (NS) to be issued to VC. </li></ul><ul><li>Find number of shares outstanding before investment (old shares (OS) eg. 1.0m) </li></ul><ul><li>VC % Ownership = NS/(NS +OS) </li></ul><ul><li>Eg. 30% = NS/(NS + 1.0m) </li></ul><ul><li>NS= 430,000 </li></ul><ul><li>Price per share = $1.0m/430,000 = $2.33 </li></ul>
    50. 50. The Venture Capital Method Step 5 <ul><li>Determine pre and post-money valuation </li></ul><ul><li>If 30% of the company is acquired for a $1.0 VC investment, this implies a post-money valuation of $1.0/0.30 = $3.33m </li></ul><ul><li>Give a post-money valuation of $3.33m and an investment of $1.0m, the pre-money valuation is $2.33m </li></ul><ul><li>Does this valuation make sense? Is it realistic? </li></ul>
    51. 51. The Venture Capital Method Step 6 <ul><li>Assess future dilution due to issuance of additional shares prior to exit. </li></ul><ul><li>Shares to management, future investors </li></ul><ul><li>Estimate retention ratio = 100% - % of ownership issued to others in future </li></ul><ul><li>Eg. If a future investor negotiates a 10% ownership, the retention ratio is 100%-10%=90% </li></ul>
    52. 52. The Venture Capital Method Step 7 <ul><li>Calculate adjustment to required ownership % due to expected future dilution </li></ul><ul><li>Adjusted ownership % = % ownership without dilution divided by retention ratio </li></ul><ul><li>Eg. Adjusted % = 30%/90% = 33.3% </li></ul><ul><li>If VC owns 33% after investment and gets diluted by 10% before exit, the final ownership % will be 30%, ie. the required ownership % to realize target IRR given projected terminal value </li></ul>
    53. 53. Venture Capital Method Spreadsheet
    54. 54. The Venture Capital Method Multiple Rounds of Financing <ul><li>Often subsequent rounds of financing are anticipated before the round 1 VC investor plans to exit </li></ul><ul><li>Each subsequent round will negotiate an ownership position based on their own magnitude of investment, target IRR and investment time horizon </li></ul><ul><li>The round 1 VC investor has to anticipate these future investments and adjust required ownership % for expected future dilution </li></ul><ul><li>Typically future investments have a lower target IRR </li></ul><ul><li>The round 1 investor retention ratio is 100% minus the % owned by future round investors at exit </li></ul>
    55. 55. Sensitivity Analysis <ul><li>Terminal Value </li></ul><ul><ul><li>Future Earnings (Sales, Expenses, Profits) </li></ul></ul><ul><ul><li>PER </li></ul></ul><ul><li>Target IRR </li></ul><ul><ul><li>Risk </li></ul></ul><ul><ul><li>Deal Structure </li></ul></ul><ul><ul><li>Liquidity </li></ul></ul><ul><li>Dilution </li></ul><ul><ul><li>Future Rounds (Amounts, IRR, Horizon) </li></ul></ul><ul><ul><li>Management incentives </li></ul></ul>
    56. 56. The VC-Company Relationship <ul><li>VC Fees </li></ul><ul><li>The Shareholder’s Agreement </li></ul><ul><li>Corporate Governance </li></ul><ul><li>Exit </li></ul>
    57. 57. VC Fees <ul><li>Commitment fee </li></ul><ul><li>Termination fee </li></ul><ul><li>Due diligence expenses </li></ul><ul><li>Legal expenses </li></ul><ul><li>All paid by company </li></ul>
    58. 58. Shareholder’s Agreement <ul><li>Defacto control over critical decisions </li></ul><ul><ul><li>Hiring/firing key management personnel </li></ul></ul><ul><ul><li>Budgets and capital expenditures </li></ul></ul><ul><ul><li>Financing </li></ul></ul><ul><ul><li>Strategic changes </li></ul></ul><ul><ul><li>Veto rights </li></ul></ul><ul><ul><li>Dispute resolution </li></ul></ul>
    59. 59. Shareholder’s Agreement <ul><li>Exit Provisions </li></ul><ul><ul><li>“ Put”/ “Call” Rights </li></ul></ul><ul><ul><li>“ Drag Along” Rights </li></ul></ul><ul><ul><li>“ Tag Along” Rights </li></ul></ul><ul><ul><li>“ Right of First Refusal” Rights </li></ul></ul><ul><ul><li>Valuation formula/process </li></ul></ul>
    60. 60. Shareholder’s Agreement <ul><li>Corporate Governance </li></ul><ul><ul><li>Board of Directors </li></ul></ul><ul><ul><li>Independent members </li></ul></ul><ul><ul><li>Swing vote to independents </li></ul></ul><ul><ul><li>Help create value </li></ul></ul>
    61. 61. Corporate Governance <ul><li>No interference in day-today operations </li></ul><ul><li>Regular reporting (monthly) </li></ul><ul><li>Regular Board meetings </li></ul><ul><li>Annual audits </li></ul><ul><li>Performance assessment </li></ul><ul><li>Help out when needed </li></ul>
    62. 62. Exit Alternatives <ul><li>Sale to company treasury </li></ul><ul><li>Sale to equity partners </li></ul><ul><li>Sale to owners/management/employees </li></ul><ul><li>Sale to third party (VC shares or all) </li></ul><ul><li>IPO </li></ul><ul><li>Hold and “milk” </li></ul><ul><li>Liquidate </li></ul>
    63. 63. The Initial Public Offering (IPO) <ul><li>Address capital needs beyond limits of VC’s </li></ul><ul><li>Liquidity for VC’s </li></ul><ul><li>“ Quiet period” </li></ul><ul><li>“ Lock up” period </li></ul><ul><li>Legal, accounting and investment banking fees </li></ul><ul><li>Prospectus and road show </li></ul><ul><li>Public scrutiny </li></ul><ul><li>Focus on stock price, short term results </li></ul>
    64. 64. What Should You Expect From Your V.C? <ul><li>An investment in size, scope and structure consistent with the execution requirements of your business plan </li></ul><ul><li>Ability to bring other V.C.’s and financiers to the table </li></ul><ul><li>Active, value adding board of directors involvement </li></ul><ul><li>Access to network and other resources </li></ul><ul><li>A fair deal that creates a win/win for everybody and recognizes the value of monetary and non monetary contributions of key stakeholders </li></ul><ul><li>Ongoing financial support where business case warrants </li></ul><ul><li>Do your homework, v.c. money is not homogeneous </li></ul>
    65. 65. Realities of the Current Market <ul><li>Financing based on “Napkin” business plans is “out” </li></ul><ul><li>Fundamentals are back “in” </li></ul><ul><li>Companies must show more evidence of market acceptance of product, value proposition and business model before funding </li></ul><ul><li>Tough with no sales </li></ul><ul><li>Valuations are down 50-75% </li></ul><ul><li>V.C.’s are staying closer to home </li></ul>
    66. 66. Investors Active in Atlantic Canada ACF Equity Atlantic Inc. BMO Capital BDC Venture Capital Group Canadian Science and Technology Group Roynat Manulife EDC CDP – Accés Capital CDP - Sofinov Genesys Capital Partners Latitude Partners Ventures West Management Inc ETSIF Skypoint RBCP.

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