Chapter 2 - Where Should I Look for Seed Capital?

Joseph W. Bartlett, Special Counsel, McCarter & English LLP, Co-Founder of VCExperts

McCarter & English LLP

2002-08-02

Assuming a founder is content that his product is technically feasible and marketable; the chore of raising capital is paramount. The founder's problem is twofold: first, can the money be raised at all, and secondly, if the money is raised, is there enough money left in the deal for the founder. The sources of investment capital are numerous, ranging from commercial banks making fixed-rate, secured loans to individual investors (so-called angels) willing to provide risk-equity capital in hopes of a spectacular return down the road. A number of guidebooks list the types of capital sources a founder may use, and others specify the name, address, and telephone number of particular firms. The discussion in this chapter will concern: potential sources, the legal constraints, and some of the problems and opportunities involved in hiring capital for an emerging company.

Topics

Introduction to Venture Capital and Private Equity Finance

1
Chapter 1 - What Is All The Talk About?
- 1 .1
  What Is Venture Capital?
- 1 .2
  How Venture Capitalists Talk
- 1 .3
  Should You Start Your Own Company?
- 1 .4
  You Can Make It ... Will Someone Buy It?
- 1 .5
  What are My Exit Options as a Public Benefit Corporation?
2
Chapter 2 - Where Should I Look for Seed Capital?
- 2 .1
  Angel Networks: Frequently Asked Questions
- 2 .2
  Angel Investors
- 2 .3
  Venture Capital Firms: East Coast vs. West Coast
- 2 .4
  State Aid
- 2 .5
  Federal Grants And Loans
- 2 .6
  Commercial Banks
- 2 .7
  Placement Agents
- 2 .8
  Venture-Capital Clubs
- 2 .9
  Concept IPOs
- 2 .10
  Three Basic Rules: Dilution, Dilution, Dilution
- 2 .11
  Who's Who of Angels
- 2 .12
  Multiple-Round Strategy
- 2 .13
  Case Study In Finding Money: A Reality Check
3
Chapter 3 - Valuing the Privately Held Business
- 3 .1
  Valuation And Pricing
- 3 .2
  Portfolio Management
- 3 .3
  Unconventional Comparables
- 3 .4
  When In Doubt on Pre-Money Valuation, Smart Guys Procrastinate
- 3 .5
  The Three Basic Letters - IRR
4
Chapter 4 - What Legal Form Works Best For You - Selecting The Form Of The Organization
- 4 .1
  S Corporations
- 4 .2
  Limited Liability Companies (LLCs)
- 4 .3
  Corporation Versus Limited Liability Company
5
Chapter 5 - What Will My Corporation Look Like - Corporate Bylaws, Charters, And Other Legalities
- 5 .1
  Corporate Charter
- 5 .2
  Payment For Stock
- 5 .3
  Statement of Purpose
- 5 .4
  Miscellaneous Charter Provisions
- 5 .5
  Restrictions On Transfer in the Facebook Age
- 5 .6
  Preferred Stock Provisions
- 5 .7
  Preemptive Rights
- 5 .8
  Bylaws
- 5 .9
  Other Organizational Documents
- 5 .10
  State Of Corporate Domicile: Delaware Or Somewhere Else?
6
Chapter 6 - Tax Discussion For The Non-Lawyer - Minimizing Taxes In The Early Stages
7
Chapter 7 - Drafting the Business Plan and the Placement Memo - Avoidance of Liability For Misstatements or Omissions
- 7 .1
  Risk Factors
- 7 .2
  The Business Plan And Private Placement Memo
- 7 .3
  Business Plan
- 7 .4
  What Not To Say in a Business Plan
- 7 .5
  Management
- 7 .6
  The Marketing Section
- 7 .7
  The Bull's-Eye Theory Of Forecasting: Shoot High
- 7 .8
  The Promissory Nature Of The Forecast
- 7 .9
  Composite Table of Contents of Business Plan
8
Chapter 8 - Investor's Terms - The Venture Capital Term Sheet
- 8 .1
  What Will VC's Want For A Security: Common Stock? Preferred Stock? Debt? Warrants?
- 8 .2
  Common Stock
- 8 .3
  Warrants
- 8 .4
  Preferred Stock
- 8 .5
  Participating Preferred
- 8 .6
  Antidilution Protection For Investors
- 8 .7
  Who Controls the Startup: Me Or Them?
- 8 .8
  Note On Registration Rights
9
Chapter 9 - I Have A Letter of Intent: What's In The Contract?
- 9 .1
  Stockholders (Investor Rights) Agreement
10
Chapter 10 - Selling Stock, Privately... And Legally
- 10 .1
  If Regulation D Is Not Available?
11
Chapter 11 - Compensating Your Key Executives - The "Carrot" Approach: Equity Incentives
- 11 .1
  Stock Options
- 11 .2
  Incentive Stock Options (ISOs)
- 11 .3
  Nonqualified Stock Options (NSOs)
- 11 .4
  Restricted Stock: Grossing Up
- 11 .5
  Miscellaneous Items
- 11 .6
  The Carrot-And-Stick Approach: The Employment Agreement
- 11 .7
  Restrictions On Post-Employment Behavior: Noncompetition, Nondisclosure, And Work-For-Hire
12
Chapter 12 - How To Go To The Promised Land - Whether Or Not To Go Public
- 12 .1
  Preparation For The Public Offering
- 12 .2
  Liability
- 12 .3
  Lock Ups And Other Obstacles To Liquidity
13
Chapter 13 - Financing with Strategic Investors: Joint Ventures - Negotiating Strategic Partnerships
- 13 .1
  Typical Business Contexts
- 13 .2
  Basic Negotiation Points
- 13 .3
  The Duty Of Candor
- 13 .4
  Corporate Opportunity And Self-Dealing