Have a question for the VC Professor? Submit your question here.
Historically, most start-up companies were funded either by the offering of equity or by loans in the form of convertible promissory notes. Recently, however, there have been some hybrid instruments created to fund start-ups. Most notably, and quite popular these days, is the use of an instrument called a SAFE. “SAFE” is an acronym for “simple agreement for future equity.”
See Mintz Levin's Dan DeWolf and Sam Effron speak at Columbia Tech Ventures about Convertible Notes for Startups in this video.
The world of raising capital has been evolving over the last several years. Offerings of securities generally used to fall into two main buckets: (i) private placements under the old Rule 506 or (ii) a public offering. With the implementation of various provisions of the JOBS Act now mostly complete, the array of choices has increased exponentially and include crowd funding, crowd sourcing by general solicitation for accredited investors, IPO light under the new Reg A+ rules, and confidentially submitted initial public offerings.
If there is one common theme that entrepreneurs tend to have, it is fire – meaning, many entrepreneurs are passionate about an exciting idea that they seek to turn into a business. However, entrepreneurs often quickly realize that, in order to make their fire glow high and bright for the world to see, they need fuel – meaning, capital. While bootstrapping is a smart practice that can keep the embers burning for a period of time, even fantastic ideas will likely sooner or later need a major capital injection – thereby adding fuel to the fire – to take the venture to the next level. This is where the newly revised Rule 504 of Regulation D may be a good option for early stage companies. For qualifying companies, Rule 504 provides an exemption from the registration requirements of the Securities Act of 1933, thereby facilitating the ability of startups to raise capital. Often well-suited for friends and family or seed rounds of funding, Rule 504 provides flexibility to smaller companies seeking assistance with capital formation.
By Daniel DeWolf and Sohail Itani
In late 2015, New York City Mayor Bill de Blasio signed into law a three-year extension of NYC’s biotechnology tax credit. Generally, the biotech tax credit allows emerging biotech companies to claim an annual refundable credit of up to $250,000 for certain costs and expenses. Extension of the credit underscores the city’s continued policy of incentivizing the start-up and early-stage growth of biotech companies.
The SEC has finally provided clarity as to how an issuer of securities can conduct a private placement in a password protected web page under Rule 506(b), without it being deemed a “general solicitation” and thereby being subject to the additional requirements imposed by the new Rule 506(c). The guidance has been provided by the issuance of the Citizen VC No Action Letter (the “CVC Letter”), which request was authored by Mintz Levin.
When accepting money from outside investors, entrepreneurs are generally asked to give up some degree of control over their start-up, exchanging equity in their company for cash. In an effort to minimize the control they relinquish, upon formation of their company entrepreneurs can grant themselves equity that comes with special rights.
Most of us go through our lives down a certain path. We grow up in our house or apartment; we go to school; we get a job; and eventually we grow up (one way or another) and live out our lives: sometimes happily, sometimes not so happily, and most times a little bit of both. In the course of this journey, many of us dream about starting something new, such as a new business based on a new concept or new paradigm. For many of us it is just a daydream. But for some, it is a call to action. Time and time again, an individual figures out a new way to look at things. Then from a scrap of an idea, and against great odds, this individual begins to build a new business.
When a venture capital firm is interested in a company it will meet with the management team numerous times to understand fully the business model and to learn more about the management. At some point in the process, the venture capital firm will decide that the investment is worth pursuing and will present a Term Sheet to the company. The Term Sheet (which is a nonbinding letter of intent) sets forth the basic terms and premises upon which the venture capital firm would be willing to invest.
The way most businesses are initially funded is by the three Fs. That is, by "friends, family, and fools." After all, who else would provide the initial seed capital to start a new enterprise? But self-funding (or relying on friends and families) will only take you so far in building out your new business.
2016 promises to be another very good year to invest in start-ups because of the extension of significant tax breaks for investors who invest in early stage companies. Investors who invest in small businesses can realize exclusions on capital gains if they choose the right type of company.
One of the critical keys to a successful venture is aligning the interests of the employees and management with the interests of the shareholders/investors. After all, perhaps the greatest asset of a company is its people. Without a competent and motivated workforce, a venture is unlikely to succeed no matter how great an idea or business concept is involved.
One of the underlying tensions within a venture-backed enterprise is that the management and the venture capital firm may have divergent exit goals. For the venture capital firm, the primary goal is a return on its investment. The venture capital firm has a fiduciary duty to its own investors to maximize its returns and the manner in which a venture capital firm achieves this goal is by a liquidity event or an exit from the investment. In contrast, management's goals may include issues beyond monetary rewards. An executive may be seeking to make his or her mark as a "captain of industry" or "leader of men" or perhaps something as mundane as having a steady job.