Angel Investing Glen Caplan July 10 2008

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) § Non-Dilutive § Grants, SBIR’s NIH, STTR’s, loans, etc. hutchlaw. com 3

What do VC and Angel Investors Want? § Venture Capitalists § 10 X return on initial investment in 3 -5 years § Angel Groups § 5 X-10 X 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 § Follow-on Company investment § Speed § Less sophisticated on terms and value § Simpler investor § Less “Value Added” § Less sophisticated on terms and value § Issues for VC’s relations hutchlaw. com 7

The Life Cycle of a Venture Deal They like the idea 100 Due Diligence Ecstasy Fun 0 Scale Agony Rejections Business Plan Interest Shown Reformulate Plan All Reject The Negotiated Deal Term Sheet 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 § Exit Strategy § Liquidation Preference § Registration Rights § Down-Side Protection § Anti-Dilution Protection § Control § Protective Provisions hutchlaw. com 10

Disclosure Notebook § § Risk Factors Term Sheet Use of Proceeds Business Plan and Financial Projections § Financial Statements § Capitalization Chart § QBV Disclosure § Certificate of Incorporation § Bylaws § Subscription Agreement § Stockholders Agreement hutchlaw. com 11

Securities Law Issues Rule 504 Rule 506 § Raise up to $1 million § Unlimited number of investors § No required level of investor § Unlimited dollar amount § Accredited investors only § No general solicitation or 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 advertising § No formal disclosure documents – but antifraud provisions apply FORM D § Filed with SEC within 15 days of first sale family 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 WED 3. 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

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