PREPARING YOUR STARTUP FOR INVESTMENT

Transcription

1 PREPARING YOUR STARTUP FOR INVESTMENT Pam Curran Dan Lowin Jeff Robbins Andy Tataryn Draeke Weseman 2017 Messerli & Kramer P.A.

2 The Ideal Startup Opportunity Technology Value Experience Capital Luck

3 Investment Timeline Meetings Research LOI Due Diligence Purchase Agreement Closing New Management Repeat

4 How to Prepare your Startup for Investment Form a Company Maintain Records Identify & Protect IP Build a Team Raise money

5 RAISING STARTUP CAPITAL Jeff Robbins & Andy Tataryn

6 FUNDRAISING 101 WHAT IS A SECURITY?

7 WHAT IS A SECURITY?

8 WHAT IS A SECURITY? Investment of Money Common Enterprise Expectation of Profits Efforts of Others

9 CROWDFUNDING IS HERE!

10 WHAT IS CROWDFUNDING?

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13 NATIONWIDE CROWDFUNDING V1

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16 HOW IS CROWDFUNDING V1 LEGAL? Investment of Money Common Enterprise Expectation of Profits Efforts of Others

17 NATIONWIDE CROWDFUNDING V2 THE JOBS ACT

18 FOUR THINGS TO KNOW Offering Limit: $1 million in 12 months

19 FOUR THINGS TO KNOW Investor Annual Limits For All Crowdfunding Investments: Annual income/net worth < $100,000, limit is greater of $2,000 or 5% of the lesser of annual income/net worth Annual income/net worth $100,000, limit is lesser of $100,000 or 10% of the lesser of annual income/net worth

20 FOUR THINGS TO KNOW Use of Funding Portals and Brokers: Companies must sell and communicate with investors through a portal or broker Registered with the SEC and FINRA Arranges handing of funds for the company Posts company disclosure information

21 FOUR THINGS TO KNOW Company Requirements: Form C Offering Statement disclosure with MD&A discussion and annual reporting Financial information: -- tax return/financials $100, reviewed financials $500, audited financials > $500,000 (except first time reviewed financials)

22 CROWDFUNDING BY THE NUMBERS (through December 31, 2016) 163 offerings / 28 reached minimum Median/average minimum: $53,000 / $110,000 Median/average closing: $171,000 / $290,000 36% common or preferred / 20% debt / 26% SAFEs

23 STATE-BASED CROWDFUNDING

24 FOUR THINGS TO KNOW Offering Limit: $1 million in 12 months ($2 million with audited or reviewed financials)

25 FOUR THINGS TO KNOW Investor Limits: -- $10,000 per company (unless an accredited investor) -- Must be a Minnesota resident

26 FOUR THINGS TO KNOW Funding Portals: Companies must sell through a portal Registered with the State (3) Handles funds for the company Posts company disclosure information Company can register as its own portal

27 FOUR THINGS TO KNOW Company Requirements: 80% of assets and sales in Minnesota HQ in Minnesota Disclosure, but no annual reporting Balance sheet and income statement Only can direct investors to the portal

28 Two Choices Rule 506 Exempt Offerings Rule 506(b) Prohibits general solicitation to market your securities offering Rule 506(c) Allows general solicitation to market your securities offering. General Solicitation includes any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media, or broadcast over TV or radio or the internet, and any seminar or meeting where attendees have been invited by general solicitation.

29 Rule 506(b): Traditional Private Placement Unlimited Dollar Amount Unlimited Accredited Investors Maximum of 35 Non-Accredited Investors No Public Solicitation of Investors Potentially No Mandated Disclosure (BUT risk factor disclosure is important) Only a Notice Filing with SEC and states

30 The Accredited Investor Net worth > $1,000,000 (excluding primary residence) Annual Individual Income > $200,000 Annual Joint Income > $300,000

31 Rule 506(c): The New World Order Allows general solicitation but only to accredited investors Must take reasonable steps to verify status

32 Early Stage Valuation: The Robbins Rule For whatever is the right amount of capital, you will give away 25-33% of your company.

33 Networking Events Your presentation may constitute public solicitation! Talk about your business and not about financing. Follow-up only with investor prospects that you have verified are accredited investors.

34 Quarterly networking event for investors

35 Negotiable Deal Points Preemptive rights Special voting rights Board representation / observer rights Tag Along/ Drag Along rights Rights of First Refusal Registration Rights Information Rights Buy-Sell Agreements

36 A Note about Convertible Notes Equity v. Convertible Debt Common Stock Each share has equal economic and voting rights Preferred Stock Contractually defined economic and voting rights Convertible Notes SAFEs

37 FORMING A COMPANY AND MAINTAINING RECORDS Draeke Weseman

38 Clean your room!

39 Business Entity Selection Purpose Types Corporations Limited Liability Companies When & Where

40 Company Structure Shareholders / Members Directors / Governors Duties of loyalty and care Officers / Managers Employees Does not include independent contractors and consultants.

41 Maintain Records Business/Strategic Plans Written Actions and Resolutions Agreements, Contracts Financials, KPI Reports Intellectual Property Registration Marketing materials Customer lists Insurance Compensation Info Tax documents Capitalization table

42 PROTECTING INTELLECTUAL PROPERTY Pam Curran & Draeke Weseman

43 Identify & Protect IP Patents Copyrights Trademarks Trade Secrets Domain Names Confidentiality Agreements

44 Know the Difference: Patents, Trademarks, Copyrights Patents Trademarks Copyrights Right to exclude others from using your invention. Right to exclude others from using your name. Right to exclude others from copying your work of authorship.

45 Data Privacy and Cybersecurity Personally Identifiable Information Name, address, address, phone number, social security number, etc. Patchwork of federal and state laws. Must haves: Privacy Policy Terms of Use

46 BUILDING THE TEAM: EMPLOYMENT MATTERS Dan Lowin

47 Employees v. Independent Contractors Employee: Told when and where to work. Told how to do the job. Established work hours. Training. Paid at regular intervals. At-will right to quit. Independent Contractors: Perform services under a contract. Maintain a separate business with opportunity for profit and loss. Offers services to general public. Control own hours of employment. Supply own equipment, materials, and tools. Not integral to business.

48 Restrictive Covenants: Non-Competition / Non-solicitation Reference in any employment offer letter. Consider: Type of employee, Geographic area and time period of restriction, and Adequate consideration. Choice of Law/Venue Matters: Some states will not enforce.

49 Invention Assignments Cover both employees and independent contractors. Get signed at beginning of relationship and pay for it. All rights transferred (some exceptions). Exclude inventions created outside scope of relationship.

50 Equity Incentives Allows employees, consultants and directors to share in upside of business growth Aligns business objectives Can act as a golden handcuff to help in retention of key personnel May allow income (and tax) deferral to later date May convert ordinary income into capital gains (taxed at lower rates)

51 Equity Incentives Incentive Stock Options Employees only Exercise price = fair market value $100,000 vesting maximum per year Maximum 10-year term 90 days to exercise after leaving employment Non-Qualified Options Cashless Exercise Restricted Stock Section 83(b) election

52 YOUR QUESTIONS? For further information, contact: Jeffrey C. Robbins, Esq. Messerli & Kramer P.A. 100 South Fifth Street, Suite 1400 Minneapolis, Minnesota (612) office (612) cell (612) fax