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ETP 3700: Equity Financing

ETP 3700: Equity Financing. Mark T. Schenkel, PhD. Courage: Risk and the Dimensions of Work. Life Cycle of a Business Venture. Bootstrapping. Self, Friends and Family. Equity Financing. Sources of Equity Funding. Angel investors Typical deal size is $10 - $500K

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ETP 3700: Equity Financing

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  1. ETP 3700: Equity Financing Mark T. Schenkel, PhD

  2. Courage: Risk and the Dimensions of Work Life Cycle of a Business Venture Bootstrapping Self, Friends and Family Equity Financing

  3. Sources of Equity Funding Angel investors • Typical deal size is $10 - $500K • Like to be involved at Board level • Don’t like retail • Looking for 3-7 year pay-off • Often provide a quicker decision than other equity sources • More willing to provide seed or stage-two funding

  4. Sources of Equity Funding Strategic partners • Lower expectations of financial returns • Expectations of closer relationship if venture begins to succeed • Know the business • Cultures may clash

  5. Sources of Equity Funding Private placement • An accredited investor: • Any national bank. • Any corporation or business trust with assets in excess of $5 million. • Any insider of the issuing company (officer, director, or owner). • Any individual with income over $200,000 or couple with income over $300,000 (must have two years with income at these levels and reasonable expectations on continuation of this level of income). • Any individual with net worth in excess of $1 million.

  6. Sources of Equity Funding Private placement • Safe-harbor exemptions dictates amount that can be raised and be exempt from registration of stock. • SEC Rule 504 applies to offerings up to $1 million dollars. Restrictions more flexible. • SEC Rule 505, private offerings can be up to $5 million, but they must meet more restrictive requirements. • SEC Rule 506, it is possible to raise more than $5 million, but again the requirements are even more specific and restrictive.

  7. Sources of Equity Funding Private placement • Advertising and formal promotion is prohibited. • Potential investors found through personal networking • Time consuming process • Information supplied must comply with all formal requirements • Creates complexity for the entrepreneur • Since transfer of stock is usually restricted, any shareholder problems will be long-term • Management of the Board much for formal, complex, and even political

  8. Downside of Equity Financing • Dilution of ownership • The risk of sharks • New partners

  9. Working with Equity Investors Initial contact • Source of contact • Initial meetings • Identify comfort level and fit • Investor’s expectations

  10. Working with Equity Investors Process: • Business plan • Confidentiality agreement • Letter of Intent • Modifications of shareholder agreements

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