ETP 3700: Equity Financing

1
ETP 3700 Equity Financing

• Mark T. Schenkel, PhD

2

Courage Risk and the Dimensions of Work  
 
Life Cycle of a Business Venture
Bootstrapping
Self, Friends and Family
Equity Financing
       
3
Sources of Equity Funding

• Strategic partners
• Lower expectations of financial returns
• Expectations of closer relationship if venture
  begins to succeed
• Know the business
• Cultures may clash

4
Sources of Equity Funding

• Angel investors
• Typical deal size is 10 - 500K
• Like to be involved at Board level
• Dont like retail
• Looking for 3-7 year pay-off
• Often provide a quicker decision than other
  equity sources
• More willing to provide seed or stage-two funding

5
Sources of Equity Funding

• Private placement
• An accredited investor
• Any national bank.
• Any corporation or business trust with assets in
  excess of 5 million.
• Any insider of the issuing company (officer,
  director, or owner).
• Any individual with income over 200,000 or
  couple with income over 300,000 (must have two
  years with income at these levels and reasonable
  expectations on continuation of this level of
  income).
• Any individual with net worth in excess of 1
  million.

6
Sources of Equity Funding

• Private placement
• Safe-harbor exemptions dictates amount that can
  be raised and be exempt from registration of
  stock.
• SEC Rule 504 applies to offerings up to 1
  million dollars. Restrictions more flexible.
• SEC Rule 505, private offerings can be up to 5
  million, but they must meet more restrictive
  requirements.
• SEC Rule 506, it is possible to raise more than
  5 million, but again the requirements are even
  more specific and restrictive.

7
Sources of Equity Funding

• Private placement
• Advertising and formal promotion is prohibited.
• Potential investors found through personal
  networking
• Time consuming process
• Information supplied must comply with all formal
  requirements
• Creates complexity for the entrepreneur
• Since transfer of stock is usually restricted,
  any shareholder problems will be long-term
• Management of the Board much for formal, complex,
  and even political

8
Downside of Equity Financing

• Dilution of ownership
• The risk of sharks
• New partners

9
Working with Equity Investors

• Initial contact
• Source of contact
• Initial meetings
• Identify comfort level and fit
• Investors expectations

10
Working with Equity Investors

• Process
• Business plan
• Confidentiality agreement
• Letter of Intent
• Modifications of shareholder agreements