Attorney Walter Wright on The Spectrum Of Financing Options

Legal Series: Financing Issues - Stops
Along the Investment Food Chain
Mass Technology Leadership Council

The Spectrum of Financing Options
Walter A. Wright, III, Esq.

Trinity Law Group LLC
781.329.0008
wwright@trinitylg.com


Many sources of money …series of stops?
a food chain? …financing is a relationship
spectrum
• Like all successful relationships, must be structured
and managed properly
• Understand entrepreneur goals and limitations
• Understand company goals and limitations
• Understand investor goals and limitations
• Be certain the investor understands the company,
and that there is a fit between company and investor

Trinity Law Group LLC www.trinitylg.com


Sources of Capital
Entrepreneur
Friends and Family
Angels
Venture Capital
Company
Commercial Banks
Quasi-Government Agencies
Public Capital Markets
Operations



The Entrepreneur
• Should be initial source of company funds
• Obvious limitations on amount of money available
• Entrepreneur needs to show commitment to company
– doesn‟t mean you need to tie up your entire net worth
• As company grows, it may be necessary to turn to
outside sources
• The appropriate type of investor and investment varies
according to type and stage of company



Friends and Family

• Members of immediate and extended family; friends
and friends of friends; business acquaintances
• Can be evidence of „first believers‟ in what you‟re doing
• Limitations on amounts available
• Consider affects on personal relationships
• Securities law issues



Placement Agents?
• Small investment banks will serve as “finders”
• Will act as agents - not as principals
• Can provide advice and introductions - but not capital
• Will take a success fee - some funds don‟t like to pay
• Be careful of being locked up; finders often require
– Rights of participation in future offering
– Warrants with negligible exercise price



Angel Investors
• Become more organized, with professional managers
who manage investments on behalf of the individuals
• As personal portfolios have declined in value, the
amount available for investment has decreased
• Initial funding for product development, putting
management team in place, leasing office space,
initial equipment purchases, getting the beta, the first
sale, etc.



Institutional Investors
• Commercializing product, creating a sales and
distribution network, creating administrative
infrastructure requires more substantial capital
• Three common sources of growth capital are:
traditional venture capital firms, commercial banks
and quasi-government agencies
• As company grows, it may be appropriate to raise
capital in public capital markets

Trinity Law Group LLC


Venture Capital: The Bright Side

• Will take equity - no regular debt service requirement
– preferred stock may carry redemption rights with coupon
• Time horizon for liquidity event is beginning to
lengthen again, after shrinking over the last few years
• Access to experienced board members and mentors
• Ability to leverage investor relationships
• Acceleration



Venture Capital: The Dark Side
• Valuations are depressed
• Founders give up a substantial piece of the company
– Become especially pronounced over the last 12-18 months
• Restrictions on operations, future financings and
corporate transactions
• Control at risk
• Managing Investors



Commercial Banks
• Commercial banking business model not designed
for early stage companies with limited or no tangible
assets or cash flows
• There are a limited number of banks who will loan to
entrepreneurial tech companies
• Some banks have formed dedicated entities to focus
on entrepreneurial companies
• May be appropriate source of expansion capital once
operations are up and running



Commercial Banks: The Bright Side
• Usually not required to give up an equity stake
– some warrant coverage usually required
• As cash flow becomes available from operations or
other financing sources, can retire debt
• Establish financial reporting procedures, credit history



Commercial Banks: The Dark Side

• Must service debt through regular payments of
principal and interest
• Security interest in company‟s assets
– commercial banks rarely subordinate
• Personal guarantees by founders frequently required
– gets back to problem of exposing founders‟ personal assets
• At some point, the bank will expect repayment




• Subset of venture capital
• Generally strictly limited by enabling legislation
– Geographic focus
– Industry
– Size of company
– Form of investment
– Amount of investment in one company



A few examples:
• U.S. Small Business Administration
– www.sba.gov
• Massachusetts Capital Resource Co.
– www.masscapital.com
• Massachusetts Technology Development Corporation
– www.mtdc.com



Public Equity: Initial Public Offering
• Timing is critical
• VC investors can provide invaluable guidance and
introductions in process
• Sizes of company and offering determine purchasers
– if too small, many institutional purchasers will shy away or be
prohibited from participating by their investment criteria
• „Public Venture Capital‟ is attractive, but dangerous
– investment banks in this space frequently lack resources or
commitment to provide aftermarket support



Public Equity: Merger with Public Shell
• Bright Side:
Compressed Timetable
Reduced Expenses
More Ways To Raise Money
• Dark Side:
With no underwriter to support the stock with research and
trading, company becomes an orphan
Can end up with worst of both worlds
– Illiquid stock with price dictated by intermittent trades
– No ability to value based on company‟s story
– Added compliance cost and exposure to liability



Operational Alternatives

• Funds from operations –plowback
• Equipment leasing
• Vendors
• Customers
• Strategic Partners



Equipment Leasing
• Financing for „big ticket‟ tangible asset purchases
• Usually provided by third party leasing company,
but may also be available from equipment vendor
• Subject to same requirements as traditional loans
– credit checks, security interest, possibly
personal guarantees
• Option to buy at end of lease



Strategic Partners & Vendors
• Industry players can be sources of financing or
other resources
• Usually only for a specific functional area, such
as product or service development
• In return, partner will get rights in the product or
service, e.g., license, distribution, ownership
• May have to agree to exclusive relationship



Building Successful Financing Relationships

• Like all successful relationships, must be structured
and managed properly
• Understand entrepreneur goals and limitations
• Understand company goals and limitations
• Understand investor goals and limitations
• Be certain the investor understands the company,
and that there is a fit between company and investor


Trinity Law Group is a greater Boston corporate law firm which practices the broad range of
business law throughout Massachusetts, the United States and the world with well-recognized
attorneys of stellar academic and professional accomplishment. Trinity Law Group is founded on
the three pillars of strategy, technology and relationships that are transforming the practice of
business law.

Walter Wright has represented and counseled a broad spectrum of companies, investors,
entrepreneurs and executives. Walt Wright has been named by Massachusetts Super Lawyers in
Boston magazine as one of the top 100 attorneys in Massachusetts. The list compiles the 100
lawyers who received the highest total of points in the Massachusetts Super Lawyers nomination,
research and blue ribbon review process based on surveys of over 35,000 lawyers across the state.
Walt Wright specializes in business and corporate law; leads a law and strategic counseling practice
intensely focused on the organizational, venture capital financing, operational and transactional
requirements of entrepreneurs, emerging technology, marketing and information companies as well
as representing major venture capital funds and angel groups in investment transactions and
executives in transition.

Walt Wright’s law and strategic counseling practice intensely focuses on the organizational, venture
financing, operational and transactional requirements of entrepreneurs, emerging technology and
information companies as well as representing venture capital funds and angel groups in investment
transactions and executives.

Walter A. Wright, III Attorney Trinity Law Group LLC wwright@trinitylg.com 781.329.0088

Attorney Walter Wright on The Spectrum Of Financing Options

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Attorney Walter Wright on The Spectrum Of Financing Options