Technology Commercialization

Raising Capital

What are my options?

After forming a company, early expense items that will require cash include facilities rent, utilities, office expenses and potentially salaries. You’ll also most likely incur attorney fees related to the company incorporation and, potentially for other services such as the provision of contract templates for Employment Agreements, Confidentiality Agreements, etc. With regard to legal, and potentially accounting services, you may be able to negotiate to have these expenses deferred until your first major financing.

Where do you get the needed cash?

Ideally, you’d like to raise as much cash as possible in a manner that does not require an exchange of company stock or options...


SBAThis would be referred to as “non-dilutive” financing, where current shareholder percentage ownership is preserved. A good example would be receiving a grant from either a government agency or a private foundation.

For more information on this topic, go to SBIR Grants & Proposal Tips.

Another non-dilutive funding option is in the form of a contract with a prospective customer, where they agree to pay you now for the future delivery of products or services, or to finance non-recurring product development costs in exchange for a variety of future payback options. It should be noted that this form of non-dilutive cash is not typically available to early-stage startup companies with little progress to demonstrate.

More commonly, the first source of cash for start-up expenses comes from the founders’ savings, and sometimes from friends or family members. That’s why the first financing is commonly referred to as the “Friends and Family” round.

The first financing is commonly referred to as the “Friends and Family” round...


Even though you will be confident you are offering friends and family an opportunity for a great investment, be careful in your verbal promises, written materials, etc. regarding the likely timeline for specific company milestone achievements, or any prediction of specific investment outcome.

This is especially important if these individuals are unsophisticated investors (i.e., not used to making high-risk investments where they could lose everything).

“Well meaning, but inexperienced, entrepreneurs often treat their friends and family investors unfairly and cause considerable damage to their startup and future opportunities”, according to this posting at AngelBlog. Visit this site to learn how to avoid startup financing pitfalls.

Make sure to have your attorney prepare the appropriate paperwork needed for such transactions.  Sometimes this early money is structured as a “convertible promissory note”, which is basically a loan that will either be paid back with interest or converted to stock at a later time.  Sometimes it is structured as an actual equity transaction, where stock is purchased at a specific price.  Since it is very difficult to assign a value to the company’s stock at this early stage, convertible promissory notes are preferred.

What are “Angel” investors?

If you need more cash than you can raise from family and friends, it might be time to reach out to private investors, particularly those referred to as “Angels.”  An Angel is typically a wealthy individual who invests their own money (as opposed to a venture capital firm, which invests money raised from its limited partners), and will invest anywhere from $10,000 to $100,000 in a given company.

There are various organized groups of Angels, and most large cities known for technology innovation will have some form of organized Angel network.  A typical amount that one should be able to raise from an organized Angel network is $500K – $1.5M, although there are many examples on both sides of that range. The preferred mechanism for angel investments are various forms of Convertible Debt or Convertible Equity agreements, as is discussed in this 2012 techcrunch.com blog post.

You may also want to look into opportunities for online, accredited investor fundraising through AngelList. This site also provides a good FAQ on current regulations regarding public fundraising.

What is the company “Valuation”, and how is it calculated?

The percentage of the company’s stock that you will have to offer prospective investors in any round of private financing varies greatly, but ultimately is in relation to how much money you are raising in comparison to the current “valuation” of your company.  This term refers to the total value of the company, first defined (often subjectively) by the original outside investors, and subsequently re-defined by each new group of investors in negotiations with the company over financing terms.

In attempts to reach agreement on the valuation of the company during subsequent financings, negotiations typically include the selection of “comparable” deals that may have taken place in the same industry within a reasonable time proximity, and which may have involved similar technologies and/or business opportunities.

The valuation of the company can be calculated by multiplying the total number of shares outstanding by the current price per share of the common stock...


stock-photo-79327031-red-calculator-close-upFor startup companies, however, first investors more typically determine subjectively their overall view of the company value — then derive the per-share price by dividing this perceived value by the total number of shares outstanding.

The value that professional investors will place on your company will depend upon the stage of development of your product/service, the quality and completeness of your management team, market opportunity, projected profitability, degree of intellectual property protection, etc.

Should I consider “Equity Crowdfunding” ?

Crowdfunding, in its simplest form, is the collection of funds through small contributions from many parties in order to finance a particular project or venture.

Crowdfunding can also refer to the funding of a company by selling small amounts of equity to many investors. This form of crowdfunding was approved in late 2013 through congressional legislation in the form of Title II of the JOBS Act, which allows for a wider pool of small investors with fewer restrictions.

Title II allowed businesses that file in advance with the SEC their intention to generally solicit investments, to talk openly about their fundraising offerings and connect with accredited (high net worth) investors beyond their existing network of private investors.

Securities-And-Exchange-Commission-logoOn October 30, 2015, the SEC adopted final rules regarding Title III Equity Crowdfunding, which now allows companies to raise capital in exchange for private securities offerings with non-accredited (average) investors. These rules and forms became effective May 16, 2016.

Some say the major flaw in SEC "Regulation Crowdfunding" is burdensome financial reporting requirements...


Others believe it will be the answer to poor capital access for small businesses in regions not well served by Angel or VC investors.

Regulation Crowdfunding Rules define the parties involved in securities transactions as Issuer, online Intermediary (funding platform), and Investor, as title-iii-breakdown-iDisclosedepicted here in a schematic from iDisclose, one of the new online legal services firms formed to provide assistance in the drafting and filing of a Private Placement Memorandum and Title III Form C disclosure documents.

As you might expect, there are numerous Title III restrictions for companies, including the $1million annual maximum fundraising allowed through this financing vehicle; however, legislative efforts are reportedly underway in the House of Representatives that could raise this ceiling significantly in the near future, possibly to the levels associated with a typical Series A financing.

As indicated above, experts in the world of equity financing have mixed opinions about this new fundraising mechanism, so you should do some diligence on the pros and cons of its potential use in circumstances similar to your own.

For a simplified breakdown of the 600+ pages of Title III regulations, and to review the perspective of two popular blog sites, visit Crowdfund Insider and Early Investing.

For a review of the leading online equity crowdfunding platforms (Intermediaries), including information on each organization’s favored industry sectors, visit this page at Money Crashers.

What if I need to raise several million dollars?

If you need to raise greater than $2M, this is more than you can expect from even a large Angel network.  Your focus then should become the venture capital community of investors, commonly referred to as “VCs”.  But, it is very difficult to get their attention.  Cold-calling will most likely fail, even if you have a novel, attractive opportunity.

It’s difficult to get the attention of a VC...


The best approach to a VC is through a “warm” introduction by a respected colleague known by both parties.

If your attorney was selected because of his/her experience with startups, that should be a good place to start. An experienced law firm will typically have a relationship with several venture capital firms, and can initiate referrals to this community.

Another approach is to attend a networking event where one or more VCs are speaking, or at least attending. Good luck cornering one, but if you do, make sure you have your “elevator pitch” ready. If you know of another entrepreneur who has been funded by a VC, this is another good source for a referral, especially if the VC’s investment in that individual resulted in a positive outcome.

If you are fortunate enough to secure a meeting with an Angel group or VC, be sure to have ready a polished and well-rehearsed presentation. Seeking the guidance of a local start-up support organization, or start-up advisor, can help with this effort. Your presentation should cover the management team, the market need and opportunity, your product/service and sustainable competitive advantage, competition, go-to-market strategy, and pro forma financials. For more details, see Commercial Opportunity Assessment.

Typically a VC likes to co-invest with another VC and share in the investment analysis, or “due diligence” effort. They might ask if you are talking with others who might be interested in joining a syndicate of investors, or instead they might contact preferred VCs with whom they have participated in previous investments.

Be prepared for the due diligence phase...


horsejockeypicVCs will investigate all aspects of the product and market opportunity, including relevant competition. They will also conduct background checks on the management team.

At some point during this due diligence phase, they might produce a “term sheet”, which is a non-binding document that lays out the basic terms of a proposed financing transaction. This would include elements such as the amount to be raised, their view of the current (or “pre-money”) valuation, liquidation preferences, vesting schedules, use of funds, etc. You would, of course, have an opportunity to negotiate these terms, and once they are agreed upon by both parties, you will be asked to sign it.

This term sheet might include a “no shop” clause, which states that, for a certain period of time you will not contact any other potential funding source (seeking better terms). This gives the VC confidence that their due diligence efforts will not be wasted, at least during this defined period of time.

Seeking money from both Angels and VCs is a very time-consuming and somewhat lengthy process. Angel groups can reach a decision to fund in as little as a couple of months if there are no serious complications. VCs usually take longer, because they typically do a “deeper dive” during due diligence, so expect the process from initial contact to funding to take a minimum of six months.

About The Proof of Concept Institute, Inc.

The Proof of Concept Institute, Inc. is a California 501(c) (3) non-profit corporation, whose mission is to develop educational materials and programs for research scientists, clinicians, and engineers that will facilitate more efficient transfer of public-funded (university and federal laboratory) technology and intellectual property to the private sector, where products and services can be developed for the common good and to support U.S. global competitiveness.

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