This document provides an overview and agenda for a presentation on corporate finance for early and growth stage companies. The presentation will cover topics such as shareholder loans, debt versus equity, capital structure considerations, employee incentives, the regulatory framework, non-institutional financings, and institutional private equity. It emphasizes that successful startups utilize multiple types and sources of capital and carefully manage their capital structure. The presentation aims to help companies understand key questions around financing and capitalization.

1. Show Me The Money
Corporate Finance for
Early/Growth Stage Companies
FEBRUARY 25, 2016
JESSE AHUJA & ANDREW HENNIGAR
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2. 2

3. Agenda
q Shareholder Loans
q Debt vs. Equity Generally
q Capital Structure Considerations
q Employee Incentives (Shares vs. Options)
q Regulatory Framework
q Non-Institutional Financings
q Institutional Private Equity
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4. Context – Why do we care?
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Successful startups use multiple types/sources of capital and manage their
capital structure
Key questions:
Ø What type of equities securities to issue?
Ø To whom and in what amounts?
Ø How much debt can the company attract?
Ø How much debt can it support?
Ø What mix of debt and equity should it assume?

5. Capital Structure
Senior Secured Debt
Senior Unsecured Debt
Subordinated Debt
Hybrid Securities / Preferred Shares
Common Equity
Priorityonliquidation
Stock options
Mezzanine
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6. Shareholders’ Loans
Ø Simple / common starting point when bootstrapping
Ø Promissory Note
Ø Secured vs. Unsecured
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7. Shareholders’ Loans: Advantages
Ø Easier for shareholder/lender to recover $$
Ø Rank equally with other unsecured creditors
Ø If secured, rank ahead of unsecured creditors and
other shareholders
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8. Shareholders’ Loans: Disadvantages
In some circumstances, it may be more tax efficient for
shareholder/lender to receive dividends, rather than interest
payments
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9. Debt vs. Equity: Debt
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Any obligation/liability = debt
Why distinguish between debt and equity?
Ø Effect on tax status of payments
Ø Interest is subject to limits (Criminal Code)
Ø Investor rights in bankruptcy / insolvency

10. 10
DEBT EQUITY
Obligation to repay initial investment
(principal) at some time in the future
Share in the future value of the enterprise
(no specified right to return)
Fixed rate of return (Interest), legally
enforceable independent of company’s success
No enforcement right to payment of dividends
Ranks ahead of equity in the event of
liquidation / windup (often secured)
Subordinate to debt on liquidation / windup
Extensive terms and conditions in contract
Fewer conditions (Articles, fiduciary duties of
directors and sometimes Shareholders’
Agreement)

11. Debt vs. Equity: Equity
Equity
Law: ownership interest in
incorporated entity
Finance: total assets
less total liabilities
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12. Debt vs. Equity: Equity
Key characteristics of Equity:
Ø Equity is subordinate to debt
Ø Directors owe a fiduciary duty to Shareholders
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13. Capital Structure Considerations
Ø Identity of the investor
Ø Preferred exit
Ø Balance sheet treatment
Ø Tax treatment
Ø Dilution
Ø Relationship to risk
Ø Signal to potential investors
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Key considerations for both company
and investor:

14. Employee Incentive: Shares
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100%
Founders
Incorporation Exit
60-70%
Investors
20%
Employees
10-20%
Founders

15. Employee Incentive: Shares
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Ø Aligns interest of employees/officers/directors/shareholders
Ø Maximum impact/resonance with employees
Ø FMV of shares reportable as income
Ø Shares can’t be issued for future work
Ø Escrow arrangement or call option for probationary period

16. Employee Incentive: Options
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Ø Most common mechanism for growth companies
Ø Structure
• Option Plan
• Option Agreements
Ø Typical term up to 5 years
Ø Non-transferrable (some exceptions)
Ø There is a cost to granting options

17. Regulatory Framework
B.C. Securities regulations apply to every issuance of
securities from a company in B.C. or to an investor in B.C. –
whether the issuer is public or private.
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18. Regulatory Framework
Ø Purpose: protection of investors
Ø Applies to equity and debt instruments
Ø Applies to new issuance (“distribution”) but also each
subsequent transfer between shareholders (“trade”)
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19. Regulatory Framework
Basic premise: companies must issue securities with a
prospectus and through a registered dealer, unless
distribution/trade qualifies for an exemption.
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20. Non-Institutional Financings
Ø Friends and Family
Ø Angels
Ø “Retail” Investors
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21. Non-Institutional Financings
Why we love Angels:
Ø Mentorship
Ø Connections
Ø Credibility
Ø $$
But…
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22. Non-Institutional Financings
Beware the newly-minted Angel…
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23. Non-Institutional Financings
Offering Memorandum:
Ø Prospectus “light”
Ø OM is itself a prospectus exemption
Ø Often used even if not relying on OM exemption
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24. Institutional Private Equity (VC)
Ø Angels
• Former entrepreneurs investing their own money
• Risk tolerance
Ø Venture Capital Funds
• Professional investment intermediary investing others’ money
• Often with a narrow industry focus
• Larger investments
• Fixed exit timeline
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25. Venture Capital Structures
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Ø Staging Investments
Ø Preferred vs. Common Shares
Ø Retraction Rights and Put Options
Ø Redemption Rights
Ø Dividends

26. Venture Capital Structures
Ø Anti-Dilution Provisions
Ø Conversion Rights
Ø Liquidation Rights
Ø Pre-Emptive Rights
Ø Co-Sale Rights and Right of First Refusal
Ø Drag-Along Right
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27. SR&ED – Make Your Money Go Further
Presented by Jeff Christie, Partner, Boast Capital

28. OUTLINE
I. Overview of the SR&ED Program
II. Benefits of Claiming SR&ED
III. Case Studies
IV. CRA’s Requirements
V. Do’s and Don’ts
VI. Q&A

29. I. OVERVIEW OF THE SR&ED
PROGRAM

30. WHAT IS SR&ED?

31. APPLICABLE INDUSTRIES

32. QUALIFYING CRITERIA
Must meet three criteria to qualify for SR&ED:
1. Technological Challenges
2. Technological Uncertainty
3. Technical Content or Iterations

33. ELIGIBILITY
The CRA’s 5 questions:
1. Was there a scientific or a technological uncertainty that could not
be removed by standard practice/engineering?
2. Did the effort involve formulating a hypothesis specifically aimed at
reducing or eliminating the uncertainty?
Continued…

34. ELIGIBILITY
3. Was the adopted procedure consistent with the total discipline of
the scientific method, including formulating, testing, and
modifying the hypothesis?
4. Did the process result in a scientific or technological
advancement?
5. Was a record of the hypothesis tested and results kept as the
work progressed?

35. II. SR&ED BENEFITS

36. WHO CAN CLAIM?
SMEs = defined as generating less than $500K taxable net income in the
prior fiscal year.

37. SR&ED BENEFITS
Return rates for SME CCPCs:

38. SR&ED BENEFITS
Return rates for non-CCPCs:

39. III. CASE STUDIES

40. CASE STUDY 1
§ Software company with operations
in Vancouver (CCPC)
§ 7 developers (1 front-end, 6 back-
end)
§ Salaries are $75K per year and
~58% of time is eligible

41. CASE STUDY 1
§ Front end development not typically eligible
§ Eligible expenditure pool for salaries would be ~$261K ($75K x 58% x 6)
§ Proxy overhead method and CCPC rates of return
§ ≅$167K worth of refundable investment tax credits (ITCs)

42. CASE STUDY 2
§ Oil & Gas Technology company
with operations in Calgary (CCPC,
with $900K in taxable net income)
§ 5 engineers
§ Salaries are $82K per year and
~67% of time is eligible
§ Have built and tested several
prototypes, cost $120K)

43. CASE STUDY 2
§ Eligible expenditure pool for salaries would be ~$275K ($82K x 67% x 5)
§ Proxy overhead method and non-CCPC rates of return
§ ≅$99K worth of investment tax credits (ITCs) from salaries

44. CASE STUDY 2
§ Eligible expenditure pool for materials would be ~$120K
§ non-CCPC rates of return
§ ≅$29K worth of investment tax credits (ITCs) from materials

45. CASE STUDY 2
§ Total Return is ~$127,800 in
Investment Tax Credits.
§ Approximately 58% will be non-
refundable Federal Credits (~$74K)
§ Approximately 42% will be
refundable from Alberta (~$53K)

46. IV. CRA REQUIREMENTS

47. TECHNICAL DOCUMENTATION
CRA requires that SR&ED documentation must:
§ Have been documented at the time the work was completed
§ Highlight technical obstacles or challenges
§ Be dated

48. TIME TRACKING

49. FINANCIAL STATEMENTS

50. WHEN TO CLAIM?
18 Months Past Fiscal Year End
§ Current Claim = Within 6 mo
§ Amended Claim = Within 7 to 18 mo

51. TURNAROUND TIMES
From receipt of a complete claim:
§ CCPC Current Claim – 4 months
§ CCPC Amended Claim – 8 months
§ Non-CCPC Claim – 12 months

52. CRA REVIEWS
CRA Review ≠ Tax Audit
Multiple types of Reviews:
§ Desktop
§ Financial
§ Technical & Financial
§ First Time Claimant Advisory Service (FTCAS)

53. IV. THE DO’S AND DON’TS

54. THE DO’s
Do:
§ Pay yourself and staff
§ Start time tracking and proper documentation
now
§ Incorporate your company

55. THE DON’T’S
Don’t:
§ Underestimate the importance of
documentation
§ Focus on the business opportunity
§ Leave SR&ED claims until the last minute

57. JEFF CHRISTIE
PARTNER
403 589 2809 | jchristie@boastcapital.com
BoastCapital.com | @BoastCapital | @ChristieLuge

58. Client-Centered. Responsive. Innovative.
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World-Class Experience – Our team of highly experienced and award-winning lawyers – with training and experience from internationally recognized firms in London, New
York, Toronto, Montreal, Beijing and Vancouver – provide world-class business and entertainment legal services to some of North America’s most notable companies.
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58
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59. Presenter Bios
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Call to the Bar
British Columbia, 2008
Areas of Expertise
Mergers and Acquisitions
Corporate Finance
Corporate and Commercial
Technology
Start-up Companies
Venture Capital / Private Equity
Education
B. Arts, Queen’s University, 2003
LLB, University of Ottawa, 2007
Jesse Ahuja (jahuja@meplaw.ca; (778) 329-9038)
Senior Associate
Jesse Ahuja is a Senior Associate at MEP Business Counsel. Jesse’s practice focuses on mergers, acquisitions and dispositions, joint ventures, the formation and
financing of private companies, strategic transactions and general commercial matters.
Jesse has a particular interest in the technology sector and is passionate about assisting tech companies through all stages of development: from incorporation, to
financing, commercialization and exit.
Jesse has advised public and private corporate clients on mergers, asset and share acquisitions and divestitures, corporate restructurings, limited partnerships,
general corporate matters and corporate governance. Jesse has also assisted issuers, agents and underwriters with public and private financing, including IPOs,
short and long form prospectus offerings, private placements and rights offerings. He has advised public issuers on regulatory compliance matters, corporate
governance and continuous disclosure obligations, including ongoing securities law compliance advice to TSX and TSX-V listed issuers.
Prior to joining MEP Business Counsel, Jesse practiced corporate and securities law in the Vancouver offices of Stikeman Elliott LLP.
Selected Representative Work
• Represented a group of investors led by Roger Hardy Capital Corporation in their successive acquisitions of all of the shares of each of Seattle-based Onlineshoes.com,
Vancouver-based SHOEme.ca and St. Louis-based Shoes.com.
• Represented Thunderbird Films Inc., a Vancouver-based film and television production company, in connection with its successive acquisitions of all of the shares of Great
Pacific Media Inc. and Soda Pictures Limited.
• Represented a Vancouver-based television production company in connection with the sale of a 49% equity interest to one of the world’s largest media and entertainment
companies.
• Acting as co-counsel to Asian Coast Development Ltd. in respect of the development of a destination casino in Vietnam including advising on multiple debt and equity
financings, management relationships, corporate governance, construction and regulatory matters.
• Advised a private equity fund in connection with a financing by way of convertible debentures in a private technology company.
• Advised an online retailer in connection with a cross-border asset-based lending facility collateralized against accounts receivable and inventory.
• Representing a cloud computing/custom software/mobile application development company in connection with a national cloud computing joint venture.
• Represent a media technology start-up (music; internet) in connection with corporate structuring, series A financing, and ongoing corporate and commercial matters.
• Represent a media technology start-up (film and television; internet) in connection with corporate structuring, series A financing, internet and mobile transactions,
confidentiality and non-competition agreements, services agreements and ongoing corporate and commercial matters.
• Represent an electronic payment (B2B and B2C) technology company in connection with structuring, financing and commercial matters.
@meplaw.ca
Jesse Ahuja

60. Presenter Bios
60
Call to the Bar
New York, 2007
British Columbia, 2012
Areas of Expertise
Mergers and Acquisitions
Corporate Finance
Corporate and Commercial
Technology
Start-up Companies
Venture Capital / Private Equity
Education
B. Comm, McGill University, 2003
J.D., University of Toronto, 2006
Andrew Hennigar (ahennigar@meplaw.ca; (604) 891-1184)
Senior Associate
Andrew’s practice focuses on mergers & acquisitions, private equity and venture capital transactions, corporate finance (both public and private)
and general corporate and commercial matters. Andrew represents a broad range of clients, including start-ups, growth stage companies and mature
private and public companies. Andrew has experience in share and asset purchases, divestitures, equity offerings, spin-outs, restructuring
transactions, shareholder matters, securities law and TSX/TSX-V compliance and corporate governance. Andrew has also represented purchasers of
assets through both Canadian and US bankruptcy proceedings.
Prior to joining MEP Business Counsel, Andrew practiced in the securities group of the Vancouver office of Blake, Cassels & Graydon LLP and in
the mergers & acquisitions group of the New York office of Paul, Weiss, Rifkind, Wharton & Garrison LLP.
Selected Representative Work
§ Represented Shoes.com Technologies Inc. in its acquisitions of all of the outstanding shares of Shoes.com, Inc. from a subsidiary of Calares
Inc., and Richer Poorer, Inc. from its founders.
§ Represented an Alberta-based construction management company in its acquisition of all of the outstanding shares of a Vancouver-based,
family owned construction management company.
§ Represented Thunderbird Films Inc. in its acquisition of all of the shares of Atomic Cartoons Inc.
§ Represented Viable Healthworks (Canada) Corp. in its acquisition of the AIM Health Group.
§ Represented Cardiome Pharma Corp. in its cross border acquisition of Correvio LLC.
§ Represented Webtech Wireless Inc. in the sale of its NextBus division to Cubic Transportation Services Inc.
§ Represented LM Ericsson and the “Rockstar Consortium” in its acquisition of Nortel Networks’ patent portfolio.
§ Represented LM Ericsson in its acquisition of the assets of Nortel’s CDMA and GSM businesses.
§ Represented Webloyalty Holdings, Inc. in connection with the share for share merger with and into a subsidiary of Affinion Group Holdings,
Inc.
§ Represented Shoes.com Technologies Inc. in its non-brokered private placement of common shares for gross proceeds of $45 million.
§ Represented General Atlantic LLC in connection with its preferred equity investments in Peixe Urbano, Inc., Gilt Groupe, Inc., Red Ventures
LLC and others.
@meplaw.ca
Andrew Hennigar