AlphaTakes – Convertible Debt Financing Term Sheets

In this AlphaTakes video, you will learn about convertible debt financings for an emerging technology company and the key terms that are typically negotiated in a convertible debt term sheet. You will learn about the financial and procedural terms and how they will impact you and your emerging technology company.

Convertible debt financings are a common type of bridge financing for emerging technology companies. In this AlphaTakes video, Matt Storms discusses term sheets for convertible debt financings for an emerging technology company. He provides a summary of the common key financial and procedural terms that are typically negotiated.

Here are the key takeaways from this video:

(1) The convertible debt term sheet for an emerging technology company should be relatively simple and short

(2) The key financial term in a convertible debt transaction is typically the size of the discount off the next round’s price or the warrant coverage amount

(3) The key procedural terms in a convertible debt transaction typically include the definition of a “Qualified Financing” and the ability to change the transaction documents with less than unanimous approval of the noteholders

AlphaTakes – Liquidation Preferences

So, what is a liquidation preference? A liquidation preference is a right to all or a portion of the assets of a company upon its sale over the rights of others. The liquidation preference can be a basic preferential right like that of preferred stock over common stock, or the liquidation preferences can be very complex with multiple layers of preferences and priorities with several series of preferred stock.

In this AlphaTakes video, Matt Storms discusses the basics concerning liquidation preferences. He provides a summary of the different types of liquidation preferences that are typically negotiated in emerging technology company transactions. He also provides a spreadsheet illustration of the effects of the different types of liquidation preferences.

Here are the key takeaways from this video:

(1) A liquidation preference is a right to all or a portion of the assets of a company upon its sale over the rights of others

(2) The three most common types of liquidation preferences for an emerging technology company are

(a) non-participating preferred (most common in early stage deals)

(b) participating preferred

(3) Liquidation preferences are important

Capital Saving and Raising at the Brink

At the Capital Saving and Raising at the Brink event held as part of the 2011 Forward Technology Festival, the tech community collaborated on best capital saving ideas, discussed experiences related to capital raising, and gave short pitches on new ideas.

The Capital Saving and Raising at the Brink event held Monday, August 22, 2011 as part of the Forward Technology Festival was a success! Entrepreneurs, investors, government representatives, and others interacted and shared ideas in a collaborative forum.

Capital Saving

In the Capital Saving segment led by Troy Vosseller, attendees were divided into six teams, and each team collaborated to identify the ways in which they have saved capital in their businesses. Teams simultaneously entered their ideas in different tabs of a GoogleDocs workbook. Team captains pitched their team’s top two ideas, and attendees voted electronically on the top two ideas. The winning ideas were: Continue reading →

Finders under Fire

Small businesses often have challenges with raising capital from investors. Recent government enforcement actions and commentary from regulatory agencies, however, emphasize some of the risks associated with working with unlicensed finders to raise equity capital.

Small businesses often have challenges with raising capital from investors. Gaining access to equity capital can be difficult and complying with a myriad of rules and regulations when seeking help in raising funds can be very confusing. When raising equity capital, many entrepreneurs seek assistance from unlicensed “finders” for introductions to potential investors. Recent government enforcement actions and commentary from regulatory agencies, however, emphasize some of the risks associated with working with unlicensed finders.

So . . . What do Finders Find?

Generally, finders make introductions between investors and companies, but do not actually sell securities or close transactions on behalf of the companies selling the securities. If a finder is providing anything more than a simple introduction or access to contact information, or is receiving a fee based on the completion of a transaction, then the finder needs to be licensed as a broker-dealer. Continue reading →

Bridge Financing Documents

One of the sets of documents that we have automated at AlphaTech Counsel is the bridge financing documents for an emerging company. Attached is a sample of the documents.

One of the sets of documents that we automated at AlphaTech is the bridge financing documents for an emerging company. Attached is a sample of the documents: Convertible Note and Subscription Agreement

Instead of just using form documents as most law firms do, robust automation allows us to deliver common document sets for emerging companies in a more efficient manner. So what else does “robust automation” yield? It improves document accuracy, provides a valuable knowledgebase from which to draw, and enables us to deliver common document sets to our clients quickly. It also frees up time of our lawyers to enable them to spend less time on basic contract drafting and more time on activities that afford our clients higher value. Continue reading →

Paper Stock Certificates: A Thing of the Past?

As public companies are increasingly opting out of providing paper certificates to shareholders in favor of providing electronic registration, most private companies and their shareholders have yet to follow suit. Issuing uncertificated shares is allowed under most states’ laws, and, as many on the public company side can attest, numerous cost and time efficiencies can be gained by going paperless with shares.

As public companies are increasingly opting out of providing paper certificates to shareholders in favor of providing electronic registration (a movement known as “dematerialization”), most private companies and their shareholders have yet to follow suit. Issuing uncertificated shares is allowed under most states’ laws, and, as many on the public company side can attest, numerous cost and time efficiencies can be gained by going paperless with shares. As we accept electronic statements to represent our public company holdings and exhibits to Operating Agreements to note our LLC ownership interests, do we really still need as evidence of our private company ownership a hokey, bordered piece of paper with an eagle on it?

Disadvantages of Issuing Paper Stock Certificates

Consider the inefficiency and chances for errors in the typical cumbersome process to issue paper stock certificates: Continue reading →

LLC Choice of Entity for Emerging Technology Companies

The recent $1 Billion Qualifying Therapeutic Discovery Project Credit program should be a real boon to many area companies. A surprise to many though when reading the fine print of the program is that limited liability companies that have a tax-exempt organization as an owner, as many university biotech spinoffs do, are not eligible for a grant under the program. While there is a cumbersome fix for this, the “LLC issue” for emerging companies extends well beyond this grant program, however.

The recent $1 Billion Qualifying Therapeutic Discovery Project Credit program will be a real benefit to many area small life science and medical device companies. A surprise to many though when reading the requirements of the program is that limited liability companies (LLCs) that have as an owner a tax-exempt organization are not eligible for a grant under the program. Having a tax-exempt organization as an owner is more common than one might think. Many university technology transfer offices, such as the Wisconsin Alumni Research Foundation (WARF), are tax-exempt organizations and frequently hold an equity interest in the startups to which they license patents. As a result, those LLC biotech licensees are not eligible for a grant under the program. As the CEO of an LLC with which I work (but did not set up) said earlier this week about being excluded from eligibility, “Ouch! That stings! Another painful learning experience.”

LLCs are Typically Not the Best Choice of Entity for Emerging Technology Companies

The “LLC issue” for emerging companies extends well beyond this grant issue for therapeutic companies. I say this even though many attorneys recommend LLCs for virtually all contexts. Sure, LLCs have their place. I frequently advocate using them as holding companies, investment vehicles, and joint venture entities. Among other situations, it also can be appropriate to use them when there is a limited, small group of owners actively participating in the business or when the owners want to have a certain allocation of profits and losses that cannot be accomplished when using an S or C corporation. But for many emerging companies that have or plan to have outside investors, the LLC is often not the best choice of entity. Continue reading →