On Friday, July 24, the BCTIA held its weekly Grub in the Hub lunch and learn event, entitled Financing Options for Growth. The presentation was delivered by Jane Murdoch and Colin Ground, Partners with prominent law firm Cassels Brock and Blackwell LLP, which has worked with numerous high-profile tech companies.
The first thing you as a founder need to determine, explained Ground, is if in fact money is really what you need to grow your business.
“Often, with a technology business or startup, you’re thinking that you really need money to grow your business,” Ground said. “Often that’s the case, but sometimes it’s not just money that’s going to improve your current situation, so I think the first question you have to ask about your business is, ‘Is money what we really need, or is it better product, better leadership, improvement in services in some way, shape, or form, or do we need to go and make sure that what we’ve built, there’s actually a market for it?”
After determining that financing is indeed what is required to drive growth, a founder should understand the options, including, but not limited to, debt financing, equity financing, and public markets.
When it comes to equity financing, there is a typical path companies follow, beginning with the founders own stakes and seed money from friends and family, which may be followed by progressively sophisticated angel investors, venture capitalists, private equity firms, and public offerings. Each have their own characteristics, and require preparation and planning in order to meet the interests of both founders and investors.
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Regarding seed money sourced from family and friends, Ground started by mentioning a caution. When discussing investment with high-net worth family members, some founders will say, “I’m only willing to take money from you that you’re prepared to lose.” A start-up is high risk, after all; an exploration of product and market that may not end before the cash runway does.
Ground said, “Hopefully that will never happen in any of the businesses that you’re founding and growing, but when you’re talking about friends and family, they’re close and you want to make sure that they’re not going to be overly disappointed. The other thing they need to understand is if they’re early into the business, they may want a 10% interest in the company, but they need to understand that if you’re going to be a growing company, their 10% interest will be reduced over time,” as later stage investment comes in.
Angel investors will be looking for share ownership and likely options to acquire more shares of the company down the road. Angel investors can provide, in addition to money, intangible benefits that justify the founder’s relinquishment of equity.
“What I found is that if you find the right angels, they can really be a great benefit to the company, and what they’re really looking for is meaningful participation, whether it’s as an advisor or a board member,” Ground explained. “They’ll want to know that you’re going to reach out to them for strategic guidance and help in building your business. That’s really why they’re there. Their money is one thing. It’s helpful. But if you find the right angel, it’s someone who can really help grow your business because they know your product, know your market segment, and they’ve got contacts within the industry who can help you build your business.”
With venture capital financing, a founder can expect due diligence to be conducted, especially on the team and intellectual property. VCs may also expect liquidation or dividend preference, redemption rights that provide them with the right to exit at some determined stage, anti-dilution protection, and other protective provisions.
In exchange for financing, founders can expect VCs to require veto rights, the institution of an Employee Stock Option Plan to use as currency to attract talent, or formal employment agreements with C-suite employees that include non-competition, non-solicit covenants, terms that may make founders a queasy when thinking about the hypothetical events that could make these clauses relevant.
The BCTIA Grub in the Hub will break for the month of August, returning in September.