Raising Capital - Practical and Legal Considerations. Presentation to lawyers at CLE seminar January 2010.

2. Where is the MoneyTree?
ABC 01/27 reporting on PwC MoneyTree report
— VC invested in Atlanta firms down 27.5% in 2009 vs 2008
— Nationally VC down 37% year over year
— Georgia companies received $302 million in 2009
— Average VC check (Georgia):$6.9m in 2009, $5.2 in 2008
— Energy and Software hot sectors - $112m, $42.6m
— All companies stages down, except later stage up 50%
2 www.360vlaw.com

3. Where to go pick up your check?
— Founders, Friends & Family
— Angels
— Venture Capital firms
— State programs
— Federal grants and loans
— SBA – Small Business Admin
— SBIR – Small Business Investment Companies
— Commercial Banks
— Specialty banks (SVB, Comerica, RBC)
3 www.360vlaw.com

4. Business Plan
Does yours answer:
— What you do?
— Who you are like?
— Your competitors are?
— Who you do it to?
— Size and growth rate of market?
— How can you defend? – proprietary technology,
business model
— Management team? Have one!
— Use of Proceeds
4 www.360vlaw.com

5. Executive Summary
— Obvious – grammar, spelling
— Format!
— Visually appealing
— Easy to find sections, data
— Draws attention to main points
— PDF – send using Adobe PDF
— 1 pager?? – I am not a believer
— Well laid out, not cramped
— Images, graphs, white space
— Content – tailor your highlights, bullet points to your
audience.
5 www.360vlaw.com

6. Every securities offering is either:
• Registered
• Exempt
• Illegal
Illegal is L Bad!
6 www.360vlaw.com

7. Securities Act of 1933
Drafted while looking in a mirror
— Every securities offering must be registered with
the SEC except:
— Section 3 – Exempt Securities
— Section 4 – Exempt Transactions
7 www.360vlaw.com

8. Help is on the way
— Regulation D, promulgated pursuant to Section
4(2) of the Securities Act of 1933
— 3 safe harbors: J Good
— Rule 504
— Rule 505
— Rule 506
8 www.360vlaw.com

9. Reg D – Rule 506
— Unlimited offering amount
— Unlimited number of “Accredited” investors
— No more than 35 (sophisticated) UN-accredited investors
— No specified disclosure format if all offerees Accredited
— If UN-accredited offerees – big disclosure
— No general advertising
— No general solicitation
9 www.360vlaw.com

10. No General Advertising
Issuer Cannot: (ie L Bad!)
— advertise in any media (i.e. newspapers, TV,
radio, or the Internet)
— engage in a mass mailing (snail or email)
— conduct informational meetings with potential
investors
— issue a press release that discusses the existence of
the private placement
10 www.360vlaw.com

11. No General Solicitation
— SEC staff’s view is that there must be a nexus between the
solicitor and his targets.
— A “substantial pre-existing” relationship.
— all offerees should be people with whom your company,
or any licensed selling agents has a substantial and pre-
existing relationship.
— Sufficient to enable the Company to determine the
financial well-being and investor sophistication of the
offeree.
11 www.360vlaw.com

12. Best Defense – keep good records
— How do you “prove”:
— no general solicitation or advertising?
— You had sufficient knowledge of their financial
condition? Sophistication?
12 www.360vlaw.com

13. Best Defense – keep good records
— Use an Investor Questionnaire, require it to be
completed
— Numbered PPMs/Exec Summaries
— Lots of (self serving) disclaimers
— This is not an offering
— If it is, it is being done only to accrediteds
— You must burn after reading
— Control Sheet to track above
— Due Diligence file archived for transaction
13 www.360vlaw.com

14. Reg D – Rule 505
— Up to $5,000,000
— Unlimited number of “Accredited” investors
— No more than 35 UN-accredited investors (can be UN-
sophisticated)
— No specified disclosure format if all offerees Accredited
— If UN-accredited offerees – big disclosure
— No general advertising
— No general solicitation
— Not a “covered security” under NSMIA, so no state
preemption.
14 www.360vlaw.com

15. Reg D – Rule 504
— Can issue up to $1,000,000
— To qualify, Newco:
— must not already be registered with SEC
— Aggregate of ALL securities sold in last 12mos > $1m
— General solicitation and advertising is permitted if offering is
registered under a state reg that permits.
— Not a “covered security” under NSMIA, so no state
preemption.
— Sounds good on paper, rarely used in practice.
15 www.360vlaw.com

16. Summary of Regulation D
— Rule 506 = J Very Good!
— Rule 505 = ehhh
— Rule 504 = not so much
— Section 4(2) = in a pinch
16 www.360vlaw.com

17. UN-accredited investors – are they
worth the hassle?
— Non-accredited investors trigger a larger
disclosure obligation (more time and money)
— Non-accredited investors tend to be more hostile
than accredited investors
— Non-accredited investors can hinder an
acquisition
— ANSWER: NO
17 www.360vlaw.com

18. Form D – E-File is Here
As of March 16, 2009, all Form D fillings with the SEC
must be made on a new form that includes new
disclosures.
• Annual Amendment
• “Date of First Sale” now defined. Must file within 15
days
• New disclosures:
• List expected exemption
• whether BD or finder used
• issuer revenue range.
18 www.360vlaw.com

19. Section 4(2) – Exempted Transactions
— 4(2) “transactions by an issuer not involving a
public offering”
— Reg D is a safe harbor for 4(2). Provides clarity.
— BUT Reg D specifically provides that it is not
exclusive
19 www.360vlaw.com

20. Section 4(2) – Exempted Transactions
— Why use an old school 4(2)?
— Classic limited private placement - to 1 or 2
institutional investors. If compliance with Reg
D is considered a bother.
— After-the-fact justification - client comes to you
after 18 months of sporadic capital raising by
“any means necessary”.
20 www.360vlaw.com

21. Blue Sky – Georgia Style
— Georgia Uniform Securities Act of 2008
(effective July 1, 2009)
— Supersedes the Georgia Securities Act of 1973
— Georgia became 15th State to adopt the Uniform
Securities Act of 2002 (promulgated by NCCUS)
21 www.360vlaw.com

22. GA Limited Offering Exemption
The exemption formerly known as OCGA 10-5-9(13)
is now found in OCGA 10-5-11(14).
• Keeps the prohibition on general
solicitation/advertising
• Keeps 15 Georgia purchaser maximum
• New prohibition on paying commissions
• “purchase for investment” statement no longer
required but the issuer must reasonably believe all
GA purchasers are purchasing for investment
22 www.360vlaw.com

23. Employee Benefit Plan Exemption
— Prior GA Law OCGA 10-5-9(7) and 10-5-9(9)
limited the registration exemption to employees
or the issuer or the issuers affiliates.
— NEW OCGA 10-5-11(21) allows grants to
consultants and advisors, so long as:
— Advisors are natural persons
— Advisors are providing services to issuer at time
of offering.
23 www.360vlaw.com

24. Recap
— A few, large, experienced investors =
JGood!
— Lots of small, novice investors, from
multiple states = L Bad!
24 www.360vlaw.com

25. Practice Tip: Convertible Notes
Short Version:
— Starts as an investor loan
— Investor gets a convertible promissory note that will
convert into stock on the next (first) round of
funding
— No immediate dilution to founders, no shareholder
to babysit
— Investor gets a financial spiff for being early, typically
a conversion discount or warrant coverage
25 www.360vlaw.com

26. Convertible Notes
Why?
— Kicks the can down the road on valuation
— Keeps the capital structure cleaner
— Can be seen as win-win
— Usually easier & less contentious to negotiate
(less time and money)
26 www.360vlaw.com

27. Convertible Note
But wait, maybe not so simple
— Is the note secured? By real property, other hard assets,
intellectual property?
— Is there a personal guarantor?
— What is the term?
— Is there a price cap?
— Can the Newco prepay? What happens to the conversion?
— Holder’s discretion? Company discretion? Or automatic?
— What if Newco is purchased before maturity or conversion
(“Liquidity Event”)?
27 www.360vlaw.com

28. Convertible Note: Qualified Financing
— Type of Stock - An equity financing selling Series
A Preferred stock
— Amount - Aggregate receipts to the company of
at least $1,000,000
— One or more transactions
— By certain date
28 www.360vlaw.com

29. Convertible Note: Conversion Discount
or Warrant Coverage
Conversion? At a “discount”?
— $100K Note. 20% Conversion Discount
— Series A comes in at $1 per share.
— So, Note holder will pay $0.80/share
— $100K in Note turned in for shares at $0.80 a
piece = 125,000 Series A shares
29 www.360vlaw.com

30. Convertible Note: Conversion Discount
or Warrant Coverage
Warrant Coverage?
— $100K Note. 25% Warrant Coverage.
— So, Note Holder received penny warrants to
purchase Series A shares equal to $125K.
— Series A comes in priced at $1 per share.
— Note Holder exercises Warrants and receives
125,000 shares.
30 www.360vlaw.com

31. The Holy Grail – A Venture Deal
Transaction Docs
— Securities Purchase Agreement
— Restated Certificate of Incorporation or Certificate of
Designation
— Investor Rights Agreement (reg rights, affirmative and
negative covenants, preemptive right)
— Voting Agreement (board seats, drag along rights)
— Right of First Refusal and Co-Sale Agreement (founders give
company, then investors ROFR or allows investors to sell
into proposed purchase)
31 www.360vlaw.com

32. Series A Deal Terms
— Dividends
— Liquidation Preference (participating, non-participating)
— Conversion: optional (at holders request), mandatory
(QIPO)
— Anti-Dilution Protection: structural (splits, recaps), price
protection:
— Weighted average = (reasonably) J Good for company
— Full Ratchet = (ridiculously) L Bad for company
— Pay to Play provisions
32 www.360vlaw.com

33. Series A Deal Terms
Control terms - Under GA law (and DE), preferred stock
votes with common stock on an as-converted basis unless
otherwise provided.
— Protective Provisions (aka blocking rights)
— Issuance of any other securities or any authorization or increase
— Liquidation of company, sale of all or substantially all
— Exclusive license
— Declaration/payment of dividends
— Incur debt over $xyz______
— Any amendment to shareholder agreement, charter, etc.
33 www.360vlaw.com

34. Series A Deal Terms
Governance
— Investors to demand right to appoint certain
number of directors, probably majority, e.g.
Common nominates and elects 2, Series A
investors nominate and elect 3
— Observer rights
— Information rights
34 www.360vlaw.com

35. Series A Deal Terms
— Registration Rights
— Demand Rights
— Piggyback rights
— Redemption – rarely (ever?) exercised, used as
leverage for investor
35 www.360vlaw.com

36. Series A Deal Terms
Agreements with Founders/Management team
— Restricted stock – retroactive vesting
— Option Plan
— Employment Agreements
— Invention Assignment
— NDA
— Non-solicit, non-recruit
36 www.360vlaw.com