Access to Finance - Positioning Your Start Up to Come Out on Top


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Access to Finance - Positioning Your Start Up to Come Out on Top by Michael Macaulay & David Lee

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Access to Finance - Positioning Your Start Up to Come Out on Top

  1. 1. Access to Finance Positioning Your Start Up to Come Out on TopPresented by: Michael Macaulay & David LeeThursday, March 7, 2013
  2. 2. AgendaAccess to Finance Positioning Your Start Up to Come Out on Top A. Venture Capital Trends in Canada and British Columbia B. Attracting Investors C. Transaction Preparedness D. Alternative Sources of Funding
  3. 3. VC Investments in Canada Canada VC Investments in Canada • Canadian VC Investments in Q1 of 2012 1600 (monetary-wise) slowed significantly from 2011, but picked up substantially in Q2 of 1400 2012 and has maintained 2011 levels 376 through Q3. 1200 Number of companies receiving VC Investments in Canada 160 234 1000 135 386 140 363 ($ millions) 126 124 122 118 114 800 120 262 108 104 100 88 600 374 80 444 347 60 400 40 200 376 297 291 20 0 0 Q1 Q2 Q3 2010 2011 2012 2010 2011 2012 Q1 Q2 Q3 Q4Source: Industry Canada citing Thomson Reuters Canada; CVCA
  4. 4. VC Investments in Life Sciences, IT, and Energy & Enviroment Canada 250 VC Investments in Canada by Industry Sector IT Life Sciences • Life Science investment Energy and Environment from quarter to quarter 200 has been consistent • IT investment has varied 150 but is generally ($ millions) consistently over $100 million per quarter 100 • Energy and Environment 50 investment dipped substantially in Q1 of 2012 and has not 0 rebounded 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 $438 million in VC investments were made in Q2 of 2012 alone, suggesting substantial increases in investments in these sectorsSource: Industry Canada citing Thomson Reuters Canada
  5. 5. VC Trends in British Columbia Number of companies Vancouver Observer Article entitled “BC receiving VC Investments in outpacing rest of Canada in attracting BC investment”20 19 “BC is outpacing the rest of the nation in investment attraction, 17 according to a new report which shows that investment activity rose by 71 per cent in the second quarter compared to 2011. 15 1515 Vancouver is currently the second-largest economic centre in 14 14 Canada to receive venture-capital investment, second to Toronto. 13 12 The report, prepared for the Canadian Venture Capital and Private Equity Association by Thomson Reuters, shows that investment activity in BC rose by 71 per cent in the second quarter (Q2) this year compared with 2011. This represents the largest investment10 gain in the country with BC attracting more than 20 per cent of all 8 venture capital invested in Canada. "This report speaks to the great confidence that investors currently have in British Columbia. Our government has been working hard to create a low-tax, stable-investment climate, which, combined with5 initiatives like the BC Renaissance Capital Fund, is growing our economy and creating jobs," SAID Minister of Jobs, Tourism and Innovation Pat Bell in a release.” [posted: August 21, 20120 Source: Q1 Q2 Q3 outpacing-rest-canada-attracting-investment ] 2010 2011 2012Source: Industry Canada citing Thomson Reuters Canada
  6. 6. VC Trends in British Columbia British Columbia VC Investments in British Columbia 100 93 87.6 • B.C.’s D-Wave attracted $35.9 million 90 in investment (largest in Canada for Q2 80 65 in 2012) 70 58 ($ millions) 60 51 48 53 2010 44 43 VC Investments across Canada in 2012 50 2011 40 2012 60 30 53 20 48 10 50(Percent invested per region) 45 0 Q1 Q2 Q3 40 31 • Despite having 13% of Canada’s 30 population, B.C. attracted 18% in Q1, 20 22 20% in Q2, and its proportionate 18 19 BC 20 share per capita in Q3 of the total AB 12 SK/MB sum of VC Investments in Canada 10 7 5 4 4 4 ON 2 3 2 1 QC • Vancouver attracted almost all of 0 Atlantic Q1 Q2 Q3 the VC Investments made in B.C. for H1 in 2012Source: Industry Canada and Thomson Reuters
  7. 7. Attracting InvestorsWhat investors look for: • Team: Is the team capable of executing their vision? • Plan: Does the team share a single vision? Is it well articulated? • Market: Worth going after, but not too big to bite off? • Gross margin: Can the business be profitable? • IP – What makes your IP better than what is out there? Is it protected?
  8. 8. Transaction PreparednessGeneral • Have an idea what the company is worth - evaluating IP is difficult and “x times net assets” or “y times sales” is a trap • Our focus: Legal aspects of transaction preparedness • Don’t lose sight of management issues either
  9. 9. Transaction PreparednessReview Material Contracts • Review all material contracts to confirm any rights of first refusal, consents or notifications that may be needed • Take the time to establish a virtual data room or upload material documents to a server in a well organized fashion to facilitate efficient due diligence
  10. 10. Transaction PreparednessShare Structure • Clean up your structure - Limit classes of shares • Consider number of issued and outstanding shares • Use stock options with vesting mechanisms to keep founders and key management onboard • Even non-voting shares can vote sometimes - If employees have stock options, consider setting up voting trusts
  11. 11. Transaction PreparednessIntellectual Property • Intangible property derived from creations of the mind, that provide enforceable rights against others • Typically, the key asset for technology companies • Generally forms 70% of its market value • IP is a key factor for investors • Well managed IP will attract investors • Poorly managed IP will lose financing deals • Important to regularly perform IP Audits
  12. 12. Transaction PreparednessWhy is IP your key asset? • Competitive edge • Allows you to monopolize your technology • Deters 3rd parties from market entry • Commercialization • Make/use/sell your technology • License to others • Transfer/assign IP rights
  13. 13. Transaction PreparednessIntellectual Property – Start with an IP Audit • First understand the big picture • Identify your IP assets • Identify which IP assets have been secured • Confirm that IP assets in good standing
  14. 14. Transaction PreparednessIntellectual Property • IP Audit (cont’d) • SWOT analysis • Strengths, Weaknesses, Opportunities, and Threats • Assess commercial value of the IP • Repeat process at regular intervals
  15. 15. Transaction PreparednessIntellectual Property Pat • Patents • Trade Secrets TS • Trade-marks • Copyright • Industrial Designs (C) ID TM
  16. 16. Transaction PreparednessIntellectual Property - Patents • A statutory right of exclusivity that prevents others from making, using, constructing, or selling a new, non-obvious, and useful “invention” • Not all technologies are patentable • Having a patent does not necessarily mean freedom to practice the technology • Non-inventor applicants must appoint a patent agent to prosecute the patent application • Tip: Retain reputable patent counsel from the beginning to prepare, prosecute, and manage your patent portfolio
  17. 17. Transaction PreparednessIntellectual Property – Trade Secrets • Any information that • is or may be used in trade or business • is generally unknown in that trade or business • has economic value because it is “secret” • are the subject of reasonable efforts to maintain its secrecy • Recipes, manufacturing processes, client lists, marketing data • Potentially infinite in duration, but volatile
  18. 18. Transaction PreparednessIntellectual Property – Trade Secrets (con’t) • Protect your Trade Secrets • Only disclose sensitive information to key personnel on a need-to-know basis • Have IP counsel review outgoing disclosures and provide NDAs • Control 3rd party access to premises • Implement and enforce “best practice” directives
  19. 19. Transaction PreparednessIntellectual Property – Patent or Trade Secret? • Why use a Patent? • Commercialization: provides a clearly identifiable asset that may be marketed, sold or licensed • Trade-secret protection may be unfeasible • technology can be reverse-engineered, or independently discovered through legitimate means • Why use a Trade Secret? • Not time limited – can be infinite in duration • Immediate protection and lower upfront costs • Some innovations are not patentable
  20. 20. Transaction PreparednessIntellectual Property – Trade-marks Trade-marks: • A recognizable “mark” that distinguishes goods and services of a particular source from those of others • Do you have a brand? • Is it registered? • Are you relying on your reputation? • Tip: Have counsel perform a trade-mark clearance search before investing money into your brand, and register your trade-marks
  21. 21. Transaction Preparedness
  22. 22. Transaction PreparednessIntellectual Property - Copyright Copyright • The exclusive right to reproduce, publish and sell a work • Literary, dramatic, artistic, and musical works • Very broad subject matter • Software code • Instruction manuals, product documentation • Website designs • Beware: copyright considerations of open-source code • Tricky ownership issues for consultants • Is it registered?
  23. 23. Transaction PreparednessEmployees • Don’t leave it in the hands of the Judges! • Obtain written agreements assigning IP rights from Employees to the company • Non-competition clauses • Confidentiality of proprietary information • Assignment of inventions • Recent BC case law – Century 21 Canada Limited Partnership v. Rogers Communications Inc., 2011 BCSC 1196 (CanLII) Tip: have reputable legal counsel prepare employment agreements and IP assignments
  24. 24. Transaction PreparednessIndependent Contractors • Presumption that an independent contractor owns the Copyright for the works he/she creates • Don’t leave it to the Judges! • Obtain written agreements assigning IP rights from Contractors to the company • Non-competition clauses • Confidentiality of proprietary information Tip: have reputable legal counsel prepare independent contractor agreements and IP assignments
  25. 25. Transaction PreparednessSecurities Compliance • Registration and prospectus likely not required, but make sure exemptions are available for your transaction in all applicable jurisdictions • Typical Exemptions (BC): • Private issuer • Accredited investor • (More than…) $ 150,000 exemption • Offering memorandum exemption • If certain exemptions are relied on, it must be reported to applicable securities regulators and resale restrictions may apply
  26. 26. Alternative Sources of Funding• Founders’ Capital• Friends and Family• Angel Investors• Debt Financing / Bank Loans• SR&ED• Crowdfunding• Grants
  27. 27. Coming Out on TopTake Away Being prepared and positioning your company well can help your start up make the most of opportunities and efficiently complete financings so you can focus on growing your business
  28. 28. Michael Macaulay David Lee Associate Associate Tel: (604) 891-2758 Tel: (604) 891-2277 david.lee@gowlings.commontréal  ottawa  toronto hamilton  waterloo region  calgary vancouver beijing moscow  london 28