View the archived webcast of this seminar.

First up: Basil Peters, of Fundamental Technologies II. View Basil’s slides.

Basil’s blog on best practices for investors and entrepreneurs: www.angelblog.net

The title of the presentation is “Your First Financing is the Most Important”. You can save a lot of time by going for friends and family first. VCs only fund about 2% of startups. Generally, $2 million is the smallest amount they’ll write a cheque for, so they have a hard time finding suitable investment that they are confident in.

Why do people invest? Expectation of financial return? Because they like the business plan? No. Real answer: because they like you.

First rounds are easiest to do, because they are small, investors usually know the entreprenuers, the business is still on paper, moods are postive. A problem is that most people who invest in Friends and Family rounds really shouldn’t. They usually aren’t able to objectively evaluate the business plan. The three keys to a solid funding round are fairness, alignment, and governance

After the board and equity allocation, the most important element is structuring. Assuming that about 50% of the value of the company is typically created at the exit, then a most fair vesting formula splits shares between the early life of the company, and when the company is sold.

Valuation is incredibly difficult, often based more on gut instinct that quantitive metrics. But there are some guidelines. If you’re a company without revenue or patents, then friends and family rounds are usually in the range of $0.5 – 1 million. Angel rounds are usually valuated at $1 – 3 million. Friends and family may be willing to pay a lot more, but don’t let them.

Keep structuring simple. Since the 90s, investors have developed a preference for ever more complicated agreements. This creates flawed relationships between entrepreneurs and investors. Today, there is a move back to common shares.

Fairness. Successful early-stage investing is always win-win. If the agreement is not fair, but seen to be fair, that will likely change over time. Alignment: that everyone is working towards the same objective. Financial interest should be the same between all parties. One easy way to do this is with common share structures to maintain alignment. Unfortunately, most VCs will still require preferred shares.

Corporate Governance is a big change for early stage companies. A real board is important from the beginning. He believes boards are more important than CEOs. All directors, except the CEO, must be fully independent of management, and they must have made a meaningful investment in the company (but, an investment shouldn’t entitle anyone to a seat on the board). It has become harder to attract good directors. The time required is related to how fast the company is changing. A lead director for an early stage, high growth tech company might need a day a week.

Director Compensation. You’re asking them to make a significant time commitment and accept real personal risk. Fairness is important. An advisory board is not the same thing as a real board. If you can’t get a good board committed, is it really fair to ask someone to invest?

He’s seen many times where companies have raised money from friends and family without any paperwork of corporate structure, share register, or subscription agreements. Some of these are legal requirements. You need legal advice before taking money from friends and family.

Second up: Steven Lukas, Fasken Martineau DuMoulin LLP. View Steven’s slides.

Initial Corporate Structuring. Best options are BC or Canadian federal companies. Investors often don’t like investing in foreign companies. Create a structure with an unlimited number of common shares, and an unlimited number of “blank-cheque” preferred shares.

Determine a roadmap for financing. How much money will you need, when you will need it. 

Securities Legislation. To distribute a security, you must file a prospectus. However, there are exemptions from prospectuses. Key exemptions: family, friends and business associates, accredited investors, private issuers, employees, permitted consultants. 

A stock option is the right ot purchase a number of shares at a predetermined price, used as an incentive for team building. Should be 10-30% of issued capital. Need to plan for growth and allocate options carefully.

Question: how onerous is it to make an offering memorandum?

Answer: Depends on the complexity of your company. Must be accurate. Will take time and effort. The goal is to not do one if you don’t have to.

Question: As a cross border company, are we still eligible for excemptions?

Answer: Each state and province will have different laws and you have to comply with them all.

This entry was posted on Wednesday, May 21st, 2008 at 7:29 pm and is filed under Seminars. You can follow any responses to this entry through the RSS 2.0 feed.