What Are Angel Investors

Angel Investing Glen Caplan | July 10, 2008 “Starting companies are like having babies - fun to conceive but hell to deliver.” - Anonymous hutchlaw.com 2 Sources of Capital  Dilutive  Self Funding (Bootstrapping)    Angel Investors Venture Capitalists Corporate Investment (Strategic Investment) Grants, SBIR’s NIH, STTR’s, loans, etc. hutchlaw.com 3  Non-Dilutive  What do VC and Angel Investors Want?  Venture Capitalists  10X return on initial investment in 3-5 years  Angel Groups  5X-10X in 3-5 years… Some similarities to VC’s in investment return expectations  Individual Angel Investors  Make money… less requirement on multiples…positive returns are great!!! hutchlaw.com 4 Who are Angel Investors?  Individuals  Other Successful Entrepreneurs  Organized Groups   One signature for all dealings Better preparation for institutional rounds hutchlaw.com 5 Characteristics of Angel Investors  High Net Worth Individuals  High Risk Appetite  Early Stage Preference   Individuals - $25,000 - $50,000 Organized Groups - $100,000 - $500,000  Endangered species? hutchlaw.com 6 Pros/Cons of Angel Investors PROS CONS  Terms offered by Company  Follow-on investment  Speed  Less sophisticated on terms and value  Less “Value Added”  Less sophisticated on terms and value  Simpler investor relations  Issues for VC’s hutchlaw.com 7 The Life Cycle of a Venture Deal 100 Ecstasy Rejections They like the idea The Negotiated Deal Due Diligence Interest Shown Reformulate Plan All Reject Term Sheet Fun 0 Scale Agony Business Plan Last Minute Demands/ Expectation Mismatch -100 9 to 12 months hutchlaw.com 8 Types of Fundraising  Common Stock  Rarely Used  Preferred Stock  Provides special rights, preferences and privileges to investors  Convertible Promissory Note  Converts at a discount at financing hutchlaw.com 9 4 Principles of Term Sheets  Valuation   Pre-Money Valuation Option Pool Liquidation Preference Registration Rights Anti-Dilution Protection Protective Provisions hutchlaw.com  Exit Strategy    Down-Side Protection   Control  10 Disclosure Notebook     Risk Factors Term Sheet Use of Proceeds Business Plan and Financial Projections  QBV Disclosure  Certificate of Incorporation  Bylaws  Subscription Agreement  Financial Statements  Capitalization Chart  Stockholders Agreement hutchlaw.com 11 Securities Law Issues Rule 504  Raise up to $1 million  Unlimited number of investors  No required level of investor Rule 506  Unlimited dollar amount  Accredited investors only  No general solicitation or advertising     sophistication or wealth No formal disclosure documents – but antifraud provisions apply One year time period and then a 6 month quiet period No general solicitation or advertising Typically used for friends and family  No formal disclosure documents – but antifraud provisions apply FORM D  Filed with SEC within 15 days of first sale hutchlaw.com 12 Accredited Investors  Individual net worth or net worth with spouse of at least $1 million  Individual income in excess of $200,000 in each of the 2 most recent years or joint income with spouse in excess of $300,000 in each of those years and reasonable expectation of reaching the same income level in the year in which the purchase is made  Director or Executive Officer of the Company  Corporation or partnership with assets in excess of $5 million hutchlaw.com 13 North Carolina Qualified Business Tax Credit         Available to passive investors with North Carolina income A credit not a deduction on your income tax return 25% of the amount of invested Available in the year after the year in which the investment was made A $7 million aggregate limitation per year Must register with the North Carolina Secretary of State’s office Must have $5 million or less in income Must have reviewed or audited financial statements submitted to the Secretary of State each year  Certain disqualified industries – professional services, construction, retail, real estate, entertainment, recreation  Must be engaged primarily in manufacturing, processing, warehousing, wholesaling, research and development, service-related industry hutchlaw.com 14 Angel Investment Groups  Wilmington Investor Network   Wilmington, NC Piedmont Entrepreneurs Network Greensboro, NC Inception Micro Angel Fund Winston-Salem, NC WED3.org Charlotte, NC Charleston Angel Partners Charleston, SC Avansis Ventures Reston, VA  New Vantage Group  Vienna, VA Emergent Growth Fund II Gainesville, FL Startup Florida Sarasota, FL New World Angels Boca Raton, FL Springboard Capital Jacksonville, FL Savannah Angel Partners Savannah, GA        hutchlaw.com 15 Angel Investment Groups (Continued)  Atlanta Technology Angels Atlanta, GA  Seraph Group Atlanta, GA  Nashville Capital Network Nashville, TN  Angel Capital Association www.angelcapitalassociation.or g hutchlaw.com 16 … and then what? “Only one thing is certain about a new venture: It’s going to turn out very different from its business plan.” - William Congolton, Venture Capitalist hutchlaw.com 17 Hutchison Law Group 5410 Trinity Road Suite 400 Raleigh, NC 27607 Tel: 919.829.9600 Fax: 919.829.9696 hutchlaw.com Driven by Our Clients’ Success SM hutchlaw.com A 18