Roger Royse, founder of the Royse Law Firm, discusses the various options available to entrepreneurs when it comes to funding their startup. Topics include: 1) What are the best funding options for entrepreneurs to scale their business? 2) When should entrepreneurs pursue external funding? 3) How do entrepreneurs choose the right investor? 4) What alternative sources of funding are available? 5) How and why should a founder stage their funding rounds? 6) When should a founder think about exiting? 7) How can advisors help with the funding process?

1. Idea to IPO
Funding 101 for
Tech Entrepreneurs
#startup #ideatoipo
Roger Royse
@rroyse00

2. Disclaimer
No information contained in this presentation is to be construed as legal advice. No
information contained in this presentation is intended or related to any particular factual
situation. Nothing herein forms an attorney-client relationship. If legal advice or other
expert assistance is required, the services of a competent professional should be sought.

3. Sources of Funding
• Founders – savings, IRAs, credit cards, mortgage equity
• Debt Financing
• Government Grants
• Friends and Family
• Angels or Seed Investors
• Institutional (VC or Private Equity)
• Alternative Financing:
oRewards-Based Crowdfunding
oJOBS Act Crowdfinancing
oICOs, STOs, IEOs
oRoyalty Financing

4. Source:
Fundable

5. Founders
• 77% of startups rely on personal savings for their initial funds
Source: Wells Fargo/Gallup Small Business Index

6. Debt Financing
• Bank Debt
• Security
• Personal Guarantees

7. Government Grants
• Free Money from the Government
• https://www.usa.gov/grants
• https://www.aprise.org/

8. Friends and Family
• 38% of startup founders raised money from their friends and family
• $23,000 was the average amount invested by friends and family per startup
Source: Fundable

9. Angels
• Angels
• Angel Groups
• Angel Funds

10. Securities
• Common Stock
• Convertible Notes
• SAFEs
• Preferred Stock
• Royalty Financing

11. Venture Capital

12. PwC Money Tree

13. PwC Money Tree

14. PwC Money Tree

15. PwC Money Tree

16. PwC Money Tree

17. VC or Institutional Investor
Preferred Stock
Valuation Methods
 Score Card
 Venture Capital Method
 Berkus Method
 Cayenne Calculator
 Risk Factor Summation
 Negotiation
MONEY - THE PRICED ROUND

18. MONEY - THE PRICED ROUND
 More Valuation Methods
 (Patents + People) x $1
Million
 Comparables
 Discounted Cash Flow
 Market Multipliers
 Discount to Public Companies

19. www.startuprounds.com
VC NEGOTIATIONS
 When to Mention Valuation
 Staged Investment

20. Term Sheets
• Valuation

21. Participation
• Participating preferred stock returns its investment and then shares pro
rata in proceeds of a sale
• Non-participating convertible preferred stock either gets a return of its
investment or its pro rata share of proceeds
• Participation may be capped at a multiple of the investment

22. Dividends
• Preferred will have a dividend preference.
• A cumulative dividend on preferred shares must be paid before any other
dividends on common.
o If the company can't pay out a cumulative dividend in a year, the
amount is carried forward.
o Common in private equity deals, not in venture
• Non-cumulative is only paid when as and if declared.

23. Liquidation Preference
• Who gets paid first and how much?

24. Redemption Rights
• Feature of Preferred Stock
• Right to put stock to company, usually after a period of time and over time
• Is effectively a right to force a sale of the company

25. Protective Provisions
Standard:
• Right to veto or block certain corporate
actions
• Sale of the company
• Amendment to the company’s certificate
or bylaws so as to adversely alter or
change the rights of preferred stock
• Increase or decrease in the number of
authorized shares of preferred or common
• Authorization or issuance of equity
security having a preference over, or being
on a parity with, preferred stock
• Redemption of shares of preferred stock
or common stock
• Declaration or payment of dividends
• Change in the authorized number of
directors of the company
Other:
• Hiring, firing or change in the
compensation of officers
• Any transaction with any director,
executive or employee of the company
• Incurrence of indebtedness in excess of
$[____]
• Change in the principal business of the
company or the entering into any new line
of business
• Any purchase of a material amount of
assets of another entity

26. Information Rights
• Financial statements and other information
• Thresholds

27. Registration Rights
• Requires a company to list the shares publicly so that the investor can sell
• Demand rights
• Piggyback rights
• S-3 rights

28. Observer Rights
• Right to attend
board meetings

29. Co-Sale Rights, ROFR
• Co Sale and Tag-Along Rights – right to participate in a sale
• Right of First Refusal – right of company (first) and investors (second) to
require shares to be offered to each of them before a third-party sale

30. Board Representation
• Size of board
• Founder-friendly boards

31. Founder Vesting
• Term, milestones, commencement
• Acceleration
• Single and double triggers

32. Anti-Dilution
• Broad-based weighted average
• Narrow-based weighted average
• Full ratchet

33. Exclusivity
• No-shop
• 30 to 60 days

34. Other
• Cap table
• Due diligence

35. Strategic Investors
• Management and Control
• Valuations
• Right of First Refusal, Right of First Offer, Right of First Look

36. Rewards-Based Crowdfunding
• Kickstarter, Indiegogo
• Marketing effect of offering
• Tax issues
• FTC or state law liability

37. Reg CF Equity Crowdfunding
• Crowdfunding (Title III of the JOBS Act)
o Allows companies to raise a limited amount of funds from the general public (Effective as of May
16, 2016)
o Investment must be through an intermediary broker or funding portal
• The private company issuer (aggregated with predecessors and
companies under common control) may sell up to $1.07 million of
securities in a 12-month period [adjusted for inflation]
• Individual investments in all crowdfunding issuers in a 12-month period
are limited to:
o If either their annual income or net worth is less than $107,000, then the greater of:
 $2,200 or
 5 percent of the lesser of their annual income or net worth
o If both their annual income and net worth are equal to or more than $107,000, then
10 percent of the lesser of

38. Accredited Only Equity Crowdfunding
• Rule 506 now provides for two different types of private offering:
o Rule 506(b) is essentially the same as the old Rule 506, providing an
exemption for non-public offerings but prohibiting general solicitation
o Rule 506(c) is a new exemption that allows general solicitation, but
with certain restrictions and filing requirements
• Rule 506(c): issuers can offer securities through means of general
solicitation as long as:
o All purchasers are accredited investors; and
o The issuer takes “reasonable steps” to verify the purchasers’
accredited investor status

39. Crowdfunding
Data as of 2016
• As of December 31, 2016, 169 companies had filed a Form C to offer securities
under the Title III exemption.
• The average minimum raise sought is $100,000 and the average maximum raise
is $647,000.
• The average time period has been between four and six months.
• Among the issuers, Delaware entities accounted for nearly half (81) of all filers,
with California (21) and Texas (10) entities a distant second and third,
respectively.
• Compliance rate is very low - 15%.
 By January 9, 2017, only 39 issuers had filed a Form C-U. Among those
39 filings, only 14 were filed within the five business day time period,
representing a 15 percent compliance rate.
Source: Drinker Biddle Crowdfunding Report

40. Crowdfunding
Data as of 2016
There are 21 registered funding portals
as of December 2016. Wefunder portal
continues to hold a majority of the
market share, with 70 of the year’s 169
offerings hosted on its platform. The
StartEngine portal maintained the
second spot, hosting 29 offerings in
2016.
Source: Drinker Biddle Crowdfunding Report
41.7%
17.2%
41.1%
2016 Funding Portal Market Share
Wefunder
StartEngine
Others

41. Crowdfunding
Data as of 2016
Source: Drinker Biddle Crowdfunding Report

42. Pitch Competitions
• The proposed regulations pose a number of potential problems to pitch
competitions, for example:
o The pitch could be considered a general solicitation and therefore any
presentation materials would need to be filed with the SEC
o If the pitch is amended after feedback from judges then the new
presentation would need to be filed with the SEC before the next pitch
• Issuers that break the rules are subject to a one year penalty
o Very onerous and essentially a death penalty for early stage
companies

43. Intrastate Crowdfunding
• SEC has proposed updates to Rule 147 with new exemption, and to
expand Rule 504 of Regulation D to have higher limits (up to $5M from
$1M), to facilitate the use of these new state laws
• The North American Security Administrator Association (NASAA) has
released a model rule for states to use in implementing crowdfunding
• As of late 2019, 35 states have finalized legislation granting crowdfunding
exemptions
o Others are in the final leg of passing the legislation
o Others yet in the early stages of considering legislation
o A few have rejected crowdfunding legislation

44. Intrastate Crowdfunding
• Per NASAA, these exemptions from state securities rules tend to involve:
o Qualifying for the federal intrastate offering exemption from Federal
registration (if intrastate offer to intrastate buyers, Federal securities
rules do not apply)
o Wide ranging offering caps ($100k-$5M over 12 months)
o Wide-ranging investment limits ($100-$100k, with increase for
accredited investors)
o Internet-based offerings and platforms are increasingly important to
new exemptions, as are broker-dealers
o Registration-lite and periodic reporting-lite

45. Reg. A — History
• The oldest exemption issued by the SEC
• Although it allowed non-accredited investors to invest, was rarely used,
because of high compliance costs relative to the maximum funds raised
o $5 million maximum offering
o Did not preempt state law registration, requiring registrations in many states
• The JOBS Act included legislation to create what is nicknamed “Regulation A+”,
an upgrade to Regulation A
• The new Regulation A keeps the allowance of non-accredited investors, and
features two kinds of Regulation A offerings, called “Tiers”:
o Tier 1, with a $20 M maximum, does not preempt state law registration, but has low federal
compliance burdens
o Tier 2, with a $50 M maximum, preempts state law registration, but has high federal compliance
burdens including ongoing semi-annual, annual, and current disclosures

46. Reg. A — History (cont.)
• Went into effect June 19th
• States do not like Tier 2
o Tier 2, per the JOBS Act, only preempts state registration for “qualified
purchasers” with the seeming intent to not totally preempt the states
o However, the SEC defined “qualified purchasers” to mean all Tier 2 purchasers
o State securities regulators resent this loss of power
• States have been creating a multistate single-registration process to make Tier 1
more palatable, and to show they deserve to not be preempted
• The “mini-IPO” of the new Regulation A has excited investors, and for many
companies may be better than relying on the crowdfunding exemption
o Including for offerings done via Internet portals

47. Regulation A+
Data as of 2016
• From its effective date in June 2015 through December 2016, there were
171 Regulation A offerings filed. Of these, 76 were Tier 1 offerings and 95
were Tier 2 offerings.
• The aggregate proceeds sought to be raised in the filed deals was
approximately $3 billion.
• There were 97 offerings qualified. Thus far, $238 million has been reported
sold, though more complete data will be available when issuers file their
reports in a few months.
Source: http://www.mofojumpstarter.com/2017/02/08/updated-market-statistics/#

48. Issue 506(b) 506(c) Reg. A Tier 2
State law
regulations?
Preempted Preempted Preempted
Maximum amount
raised?
Unlimited Unlimited $50 M in 12 months, up to
$15M of which from
current holders
Per investor
maximums?
Unlimited Unlimited Up to 10% of greater of
unaccredited investor’s net
worth or net income;
unlimited for accredited
Investor limitations Unlimited
accredited, and
35 sophisticated
non-accredited;
self-certification
standard
Accredited only,
and issuer must
take steps to
certify they are
accredited
Unlimited accredited (self-
certified), unlimited non-
accredited
506(b), 506(c), and Reg. A Tier 2

49. Issue 506(b) 506(c) Reg. A Tier 2
Issuer limitations No bad actors No bad
actors
Cannot be public,
shell company, bad
actor, those failing
certain SEC
compliance rules
Solicitation,
advertising
Banned Soliciting of
anyone is
allowed
Testing for interest,
soliciting OK
Initial disclosures Non-accredited: Equivalents
of what they get in
registered offering, plus
anything accredited
investor can get
For accredited, see 506(c)
Optional;
must be
available to
answer
questions
Financial statements
for past two years
disclosed, plus
offering circular with
audited financials
506(b), 506(c), and Reg. A Tier 2 (cont.)

50. Issue 506(b) 506(c) Tier 2
Ongoing disclosures Form Ds Form Ds Yes, if 300+ holders; annual,
semiannual, and current
events. But special exemption
from Exchange Act
registration until over $75M
float.
Share restriction Restricted for a
year
Restricted for a
year
Unrestricted; affiliates still
have some limits
Allowed securities? ABS not
specifically
banned
ABS not
specifically
banned
Asset backed-securities
banned
506(b), 506(c), and Reg. A Tier 2 (cont.)

51. Initial Coin Offering (ICO)
• An ICO is a fundraising mechanism in which new projects sell their underlying
crypto tokens in exchange for bitcoin and ether.
• Similar to an Initial Public Offering (IPO) in which investors purchase shares
of a company.
• Based on tech like ERC20 Token Standard
• Investors send funds (usually bitcoin or ether) to a smart contract that stores
the funds and distributes an equivalent value in the new token
• Often “pre-sold” to raise money to build the platform
• Tokens may have “utility” or security
• Traded on exchanges

52. Recent ICO Activity
0
50
100
150
200
250
300
$0
$200,000,000
$400,000,000
$600,000,000
$800,000,000
$1,000,000,000
$1,200,000,000
$1,400,000,000
Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19
Chart Title
Amount Raised Number of ICOs
Source: https://icobench.com/stats/

53. Crypto Funding: New models are replacing ICOs

54. Crypto Funding: ICOs, IEOs, DAICOs and STOs
• https://hackernoon.com/a-comprehensive-guide-to-the-next-generation-of-crypto-funding-v-ico-
ieo-daico-eto-sto-939909782da6
• ICOs
o Tokens offered to investors to participate in some aspect of a platform. All cryptocurrency is
received upfront by developers. Anyone with cryptocurrency can invest anonymously.
• IEOs
o Like ICOs but the token is sold by an exchange leading to better vetting, compliance, marketing
and liquidity.
• DAICOs
o Like ICOs, except the holders of tokens can vote to release money to developers or refund
money to shareholders over time.
• STOs
o Allows an offline regulated security to be sold on the blockchain. Can convey ownership to
shares in a company, precious metals, real estate, or debt functioning in a similar manner to a
corporate bond.

55. ICOs
• Developers create a token and sell it directly to anyone with cryptocurrency.
Investors can invest millions and be completely anonymous.
• Developers receive cryptocurrency immediately.
• Tokens are usually empowered to give the users rights to use a future platform.
• Many tokens become fully liquid on exchanges, but may have to pay listing fees.
• Used to raise billions in 2017 and 2018, but interest has significantly decreased due
to high loses for investors and regulatory action including outright bans in several
countries including China.
o https://www.bitcoinmarketjournal.com/ico-regulations/
• Can easily qualify as unregistered securities causing SEC enforcement actions:
o https://www.coindesk.com/the-sec-is-suing-kik-for-its-2017-ico

56. IEOs
• Similar to an ICO except a cryptocurrency exchange runs the token sale.
• Purchasers of the tokens must be vetted by the exchange’s AML/KYC process.
• Exchange helps with marketing, regulatory compliance and vetting of the
company.
• Provides investors with more confidence because the exchange is putting
their reputation on the line for the company. The company is also
immediately listed on the exchange.
• Most IEO platforms are located outside the U.S. and don’t want U.S.
investors. Major platforms are located in Singapore, Malta, Hong Kong and
Seychelles.

57. DAICOs
• Proposed by Ethereum founder Vitalik Buterin as a solution to the abuses of
ICOs.
• Allows ICO token owners to vote on releasing money to the project
developers based on milestones.
• In extreme cases, token owners can vote to return all money back to
investors. Thus, there is a significant risk that developers will not receive all
funds raised.
• Investors can be completely anonymous, but have more control of the
project.
• Have similar regulatory issues as ICOs.
• Abyss, a gaming platform, is one of the first DAICOs
o https://www.theabyss.com/daico

58. STOs
• Promoted by exchanges as a way to trade regulated securities on the
blockchain in compliance with all laws.
• Investors can only send/receive tokens from AML/KYC identified accredited
investors on the blockchain.
• Tokens are tied directly to real world securities held in custody by the
sponsoring exchange. Tokens can represent rights to stock, or assets such as
real estate or commodities.
• Offerings are highly supervised by and integrated into sponsoring exchange.
• Cheaper alternative to an IPO, and unlike a VC round, investors get liquidity
among other accredited investors immediately.
• https://cointelegraph.com/explained/what-is-an-sto-explained

59. Tokenization and Crypto Funding
• International Markets for IEOs, ICOs and DAICOs
o Switzerland
o Singapore
o Malta
o Seychelles
o Hong Kong
o Gibraltar
o Cayman

60. Tokenization and Crypto Funding
• Tax
o Tax perspective: Is token equity?
o Presale and SAFT
o IRS view
• Legal
o Anti-money laundering and KYC
o Patent issues
o Securities
o Federal, foreign and state laws
• Regulation
o Is my token a security?
o A currency?
o A commodity?
• Privacy
• Data Ownership

61. Is My Token a Security?
• SEC Chairman and CFTC Chairman’s February Testimony before the Committee of Banking, Housing, and Urban
Affairs: “…structures of ICOs that I have seen involve the offer and sale of securities and directly implicate the
securities registration requirements and other investor protection provisions of our federal securities laws.”
• SEC Chairman Clayton: Market professionals and gatekeepers must act responsibly and hold themselves to high
standards. In the ICO space "they can do better.”
• SEC warned against ICO Sponsors not making adequate disclosures and cautioned market participants against
promoting or touting the offer and sale of coins without first determining whether the securities laws apply to
those actions.
• Family Resemblance test (Reeves)
o Multi-factor test applied to notes
• Howey Test
o An investment of money, in a common enterprise, with a reasonable expectation of profits, and to be derived from the
entrepreneurial or managerial efforts of others.
• The Risk Capital Test
o The sale of membership to a country club was a security; substance over form
o Investors were risking their capital in expectation of receiving the benefits of club membership, which was in the control
of the issuers of the membership

62. Enforcement Actions
• The SEC’s Cyber Unit – Division of Enforcement
o focused on misconduct involving distributed ledger technology and ICOs, the spread of false
information through electronic and social media, brokerage account takeovers, hacking to
obtain nonpublic information and threats to trading platforms and works closely with the
SEC’s cross-divisional Distributed Ledger Technology Working Group
• DAO Token – model described by one of the DAO founders as similar to “buying shares in
a company and getting…dividends”
• Munchee – restaurant meal reviews
o SEC halted cease and desist – unregistered securities
o ICO targeted investors, who had an expectation of future profits, rather than users of the
products, with intention to use proceeds to develop application and future “ecosystem”, which
would increase the value the MUN token
o Marketing materials stated additional development and ecosystem would increase the price
of the MUN token and could trade on secondary market within 30 day after ICO

63. US Platform Co. Cayman ICO Co. Singapore ICO
Foundation
$
$
SAFT
$
tokens
Token Securities Compliance
Step 1
Step 3: Cash to
US Co.
$
Step 2: ICO
Issuance
1) 506 – All accredited
2) 506/Reg S foreign targeted offering
3) Non US offering
4) Foreign Utility Tokens – not a security
5) Reg A+
6) Register with SEC
7) Sec 4(a)(2) private offering
Resale
Rule 144 (12 month holding)
Section 12(g)
Rule 12g3-2(b)

64. Financial Crime Enforcement Network (FinCEN), Dep’t of Treasury letter to Senator Ron
Wyden (D-Ore.)
1) A developer that sells convertible virtual currency (i.e., bitcoin, ether, ripple, etc) including
in the form of ICO coins or tokens, in exchange for another type of value that substitutes for
currency is a money transmitter and must comply with AML/CFT requirements that apply to
this type if MSB ( and register as a MSB with FInCen - a form filed annually and disclosure of
some financial information).
2) An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency,
fiat, or other value that substitutes for currency, would typically also be a money transmitter.
3) FinCEN AML/CFT rules likely do not apply to ICO structures where (a) the tokens are offered
as securities - SEC jurisdiction and their AML/KYC requirements or (b) future interests in
commodities - CFTC jurisdiction and their AML/KYC requirements.
FinCEN February 13 Letter

65. Statement on Potentially Unlawful Online Platforms for Trading Digital Assets
Divisions of Enforcement and Trading and Markets
March 7, 2018
Online trading platforms have become a popular way investors can buy and sell
digital assets, including coins and tokens offered and sold in so-called Initial Coin
Offerings ("ICOs").
If a platform offers trading of digital assets that are securities and operates as an
"exchange," as defined by the federal securities laws, then the platform must
register with the SEC as a national securities exchange or be exempt from
registration
SEC March 7 Public Statement

66. Tax Considerations
• Equity?
• Debt?
• Capital asset?
• Barter exchange?
• Prepaid goods or services?
• Subpart F Issues: CFC/PFIC?
• Deferral?
• Open - transaction?
• Forward contract ?
• Executory Agreement to Sell?
• Information Reporting
• FATCA
• FBAR

67. • Alternative to regular loans and equity financing
• Company receives a specific amount of money from an investor in exchange
for a percentage of the company's future revenues over a certain period of
time, up to a specific amount.
• Investment can be considered an "advance" to the company, and the periodic
percentage payments can be considered "royalties" to the investors.
Royalty Financing

68. PALO ALTO
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San Francisco, CA 94105
Palo Alto Office: 650-813-9700
CONTACT US
www.rroyselaw.co
m
@RoyseLaw
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CONTACT US
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