Various Ways to Raise Capital

Guest post by Daniel DeWolf, Megan Gates, and Kaoru Suzuki – Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo PC

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.  No one size fits all and issuers, bankers, and legal counsel should look carefully as to the context of the situation to determine which format makes the most sense for a particular offering.  We thought it might be helpful to provide a chart of the various alternatives for offerings now available.

Click on the chart to see full size.


Daniel I. DeWolf, Member Chair, Technology Practice Group, Co-Chair, Venture Capital and Emerging Companies

Daniel is Co-chair of the firm’s Venture Capital & Emerging Companies Practice Group and Chair of our Technology Practice Group. In addition to his active legal practice, he is an adjunct professor of law at the NYU Law School and he has a wealth of experience in private equity and venture capital, having co-founded Dawntreader Ventures, an early stage venture capital firm based in New York.


Megan N. Gates, Member

Megan is a member of the Firm’s Policy Committee and Co-chair of the Securities & Capital Markets Practice Group. She concentrates her practice on providing counsel to public companies with respect to public and private equity financings, merger and acquisition transactions, and compliance and disclosure obligations under the Securities Exchange Act of 1934.


Kaoru Suzki, Associate

Kaoru’s practice focuses on representing public and private clients on general corporate and securities matters, including mergers and acquisitions, venture capital, private equity, and securities transactions. He also counsels his clients on compliance with federal and state securities laws. Kaoru represents both funds and companies across various industries, including energy and clean technology, life sciences, high tech and information technology.



What Makes a Good Business Plan?

Guest post by Daniel I. DeWolf  – Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

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.

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Seniority Matters

Guest post by Daniel I. DeWolf  – Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

There is little doubt that activity in the trading of secondary shares of private companies remains robust. Private companies are staying private longer and there seems to be an unlimited demand to buy into the newest “Unicorn” anointed each week.  As the market for secondary shares stays strong, valuations seem not to matter much to most buyers. Additionally, many buyers seem to pay little attention to whether they are buying senior preferred stock at the top of the stack, as compared to junior securities or common stock sold by many former employees.  But as we all know, things that can’t go on forever, don’t.  And, as Warren Buffet once famously said:  only when the tide goes out do you discover who has been swimming naked.

At some point a number of these Unicorns will become Unicorpses.  We recently saw this with the sale of Good Technology to Blackberry at a huge discount to valuations achieved only weeks prior to the sale. And when these companies are forced to sell (often in order to survive), where a stockholder stands in the stack is of critical importance.

In a sale of a company, after the payment of deal expenses and any carve out for management, the senior preferred stockholders receive their money back first. After holders of the senior preferred get paid, then holders of the junior preferred are paid.  Lastly, the residual proceeds if any, is paid to the common shareholders.   In many sale situations, particularly if a sale is the only alternative to survival, the common shareholder walk away with zero.   The closer you are to the top of the stack, the more likely you will at least receive your money back.  The closer you are to common, the greater the chance you will receive back less than your basis.

In an era where investors are making wild bets on companies that often lack meaningful profit margins or even meaningful revenues, and doing so relatively blindly without receiving  the normal financial information generally available to investors in the public markets, it really does matter that you are as close to the top of the equity stack as possible. For when the market turns just a little bit South, as it inevitably will, you really don’t want to be the one swimming naked.

Daniel I. DeWolf, Member Chair, Technology Practice Group, Co-Chair, Venture Capital and Emerging Companies

Daniel is Co-chair of the firm’s Venture Capital & Emerging Companies Practice Group and Chair of our Technology Practice Group. In addition to his active legal practice, he is an adjunct professor of law at the NYU Law School and he has a wealth of experience in private equity and venture capital, having co-founded Dawntreader Ventures, an early stage venture capital firm based in New York.



How Angel Investors Help Startup Firms

By Marianne Hudson, Angel Capital Association Executive Director

The Angel Capital Association has appreciated the work of leading academics on assessing the impact of angel investors on promising entrepreneurs.  A recent blog by Laurent Blasie in the March Digest of the National Bureau of Economic Research does a particularly good job of summarizing the study:

Firms which are backed by angel investors are more likely to survive, create more jobs, and have a greater chance of successfully exiting the startup phase than otherwise comparable firms without this support.


Angels — wealthy individuals who often are actively involved in the startups they back, and who typically are not professional investors — have surpassed venture capitalists as a funding source for startup enterprises in the United States. They are estimated to have had $24.1 billion of capital deployed in 2014, up from $17.6 billion in 2009. Investments by angels and angel groups grew even faster in other countries during this period, nearly doubling in Europe and tripling in Canada, starting from a much lower level.

Angel investors, like venture capitalists, fund early-stage entrepreneurs and serve as mentors or outside directors of startups. They are often more idiosyncratic than venture capitalists and uniquely focused on the firms they back.

According to research by Josh LernerAntoinette SchoarStanislav Sokolinski, and Karen Wilson presented in The Globalization of Angel Investments: Evidence across Countries (NBER Working Paper No. 21808), angels are beneficial to the growth, performance, and survival of startups, even if they are located in economies that are not friendly to entrepreneurs. Startups that have angel backing are at least 14 percent more likely to survive for 18 months or more after funding than firms that do not. Angel-backed firms hire 40 percent more employees, and angel backing increases the likelihood of successful exit from the startup phase by 10 percent, to 17 percent. In countries other than the United States, angel-funded firms are also more likely to attract follow-on financing.

The researchers studied 13 angel investment groups in 12 nations — Argentina, Australia, Belgium, Canada, China, Germany, Italy, Mexico, New Zealand, Switzerland, the United Kingdom, and the U.S. They gathered data on 295 startups funded by these angel groups and 1,287 that they did not fund. These startups were based in the nations for which the authors had information on angel groups, as well as nine other nations. The average firm in the sample had 10 employees and was seeking to raise $1.2 million. Four in 10 firms were already generating revenue.

By using regression discontinuity analysis and comparing firms that had similar ex ante likelihood of receiving angel investor support, but that differed in their ex post funding outcomes, the authors determine not only whether angel investors add value but also how their impact and the types of transactions they undertake vary with the development of a nation’s venture market. The authors note that because their data on angel investors is likely to come from comparatively prominent and organized groups, their findings may reflect an upper bound of angel-investor impact.

Across nations, firms that attracted a high level of interest among angel investors were more likely to grow, issue patents, win new rounds of funding, and have a successful exit from the startup phase. In nations with below-average venture activity, the startup firms had greater struggles, but the impact of angel interest was again positive. In countries with less conducive entrepreneurial environments, companies seeking angel funding appeared to be older and larger on average and usually were already generating revenue compared to applicants in more entrepreneurship-friendly countries. Yet despite their apparent greater maturity, the firms in these markets sought smaller amounts of funding. The researchers suggest that firms seem to “self-censor” when they apply to angel groups in the less venture-friendly markets, reflecting the fact that the angel investors themselves are more risk-averse or less experienced in assessing very-early-stage investments.

Having a robust angel community appears to be an important predictor of startup success. It is important to note that in many countries the level of angel investment is very small, so it might not be a panacea for larger problems of unemployment and slow economic growth. Nonetheless, the researchers conclude, “the positive impact of angel financing on the development of portfolio firms remains consistent across the nations…regardless of the level of venture activity and the entrepreneur-friendliness of the environment.”

Laurent Belsie

The Angel Capital Association (ACA)

ACA is a collective of accredited angel investors, North America’s most prolific early-stage investment class.  The association is the largest angel professional development organization in the world.  ACA provides an insider perspective that can help you make smart investment decisions.

National Bureau of Economic Research (NBER)

Founded in 1920, the NBER is a private, non-profit, non-partisan organization dedicated to conducting economic research and to disseminating research findings among academics, public policy makers, and business professionals. NBER-affiliated researchers study a wide range of topics and they employ many different methods in their work. Key focus areas include developing new statistical measurements, estimating quantitative models of economic behavior, and analyzing the effects of public policies.


OTOY- Virtual Reality Company Gets Real Money

There is no denying that the Virtual Reality industry is taking off, with Magic Leap being valued at over $3 Billion & Oculus being acquired for $2 Billion, the space is heating up and the investments into these companies are anything but augmented. One company that has flown under the radar is OTOY, investment details are scarce so we wanted to provide a little insight into what we have found so far.

virtual-reality-otoy (1)

You can find more financing details for these companies and thousands more with our Intelligence Database. It’s free to create an account – so what’s stopping you?

Negotiating a Series A Round

Joseph W. Bartlett

Herewith a Case Study of a transaction involving a Series A round of investment in Newco, Inc., a hip, emerging growth “gazelle” as David Birch liked to call U.S. companies running hard on the trip, as I put it, “from the embryo to the IPO.”

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