access to finance - positioning your start up to come out on top

Access to Finance

Positioning Your Start Up to

Come Out on Top

Presented by: Michael Macaulay & David Lee

Thursday, March 7, 2013

Agenda

Access to Finance Positioning Your Start Up to Come Out on Top

A. Venture Capital Trends in Canada and British Columbia

B. Attracting Investors

C. Transaction Preparedness

D. Alternative Sources of Funding

VC Investments in Canada

Canada • Canadian VC Investments in Q1 of 2012

(monetary-wise) slowed significantly from

2011, but picked up substantially in Q2 of

2012 and has maintained 2011 levels

through Q3.

Source: Industry Canada citing Thomson Reuters Canada; CVCA

297 376

291

347

374 444

262

386 363

234

376

0

200

400

600

800

1000

1200

1400

1600

2010 2011 2012

($ m

illio

ns)

VC Investments in Canada

Q1 Q2 Q3 Q4

104

122

108

118

135

124 126

114

88

0

20

40

60

80

100

120

140

160

Q1 Q2 Q3

Number of companies receiving VC Investments in Canada

2010 2011 2012

VC Investments in Life Sciences, IT, and Energy & Enviroment

Canada

• Life Science investment

from quarter to quarter

has been consistent

• IT investment has varied

but is generally

consistently over $100

million per quarter

• Energy and Environment

investment dipped

substantially in Q1 of

2012 and has not

rebounded

Source: Industry Canada citing Thomson Reuters Canada

$438 million in VC investments were made in Q2 of 2012 alone, suggesting substantial

increases in investments in these sectors

0

50

100

150

200

250

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

2011 Q3

2011 Q4

2012 Q1

2012 Q2

2012 Q3

($ m

illi

on

s)

VC Investments in Canada by Industry Sector

IT

Life Sciences

Energy and Environment

VC Trends in British Columbia

Source: Industry Canada citing Thomson Reuters Canada

12

17

8

19

13

15

14

15

14

0

5

10

15

20

Q1 Q2 Q3

Number of companies receiving VC Investments in

BC

2010 2011 2012

Vancouver Observer Article entitled “BC

outpacing rest of Canada in attracting

investment”

“BC is outpacing the rest of the nation in investment attraction,

according to a new report which shows that investment activity rose

by 71 per cent in the second quarter compared to 2011.

Vancouver is currently the second-largest economic centre in

Canada to receive venture-capital investment, second to Toronto.

The report, prepared for the Canadian Venture Capital and Private

Equity Association by Thomson Reuters, shows that investment

activity in BC rose by 71 per cent in the second quarter (Q2) this

year compared with 2011. This represents the largest investment

gain in the country with BC attracting more than 20 per cent of all

venture capital invested in Canada.

"This report speaks to the great confidence that investors currently

have in British Columbia. Our government has been working hard to

create a low-tax, stable-investment climate, which, combined with

initiatives like the BC Renaissance Capital Fund, is growing our

economy and creating jobs," SAID Minister of Jobs, Tourism and

Innovation Pat Bell in a release.”

[posted: August 21, 2012

Source: http://www.vancouverobserver.com/world/canada/bc-

outpacing-rest-canada-attracting-investment ]

http://www.cvca.ca/

http://www.cvca.ca/

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http://www.cvca.ca/

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http://www.cvca.ca/

http://www.cvca.ca/

http://www.cvca.ca/

http://www.cvca.ca/

http://www.cvca.ca/

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http://www.vancouverobserver.com/world/canada/bc-outpacing-rest-canada-attracting-investment











VC Trends in British Columbia

Source: Industry Canada and Thomson Reuters

British Columbia

• B.C.’s D-Wave attracted $35.9 million

in investment (largest in Canada for Q2

in 2012)

• Despite having 13% of Canada’s

population, B.C. attracted 18% in Q1,

20% in Q2, and its proportionate

share per capita in Q3 of the total

sum of VC Investments in Canada

• Vancouver attracted almost all of

the VC Investments made in B.C. for

H1 in 2012

0

10

20

30

40

50

60

70

80

90

100

Q1 Q2 Q3

44

93

53 58

48

65

51

87.6

43

($ m

illio

ns)

VC Investments in British Columbia

2010

2011

2012

0

10

20

30

40

50

60

Q1 Q2 Q3

18 20

12

2 2 4

3

7

4

53

45

48

19

22

31

5 4

1

(Pe

rce

nt

inve

ste

d p

er

reg

ion

)

VC Investments across Canada in 2012

BC

AB

SK/MB

ON

QC

Atlantic

Attracting Investors

What investors look for:

• Team: Is the team capable of executing their vision?

• Plan: Does the team share a single vision? Is it well

articulated?

• Market: Worth going after, but not too big to bite off?

• Gross margin: Can the business be profitable?

• IP – What makes your IP better than what is out there?

Is it protected?

Transaction Preparedness

General

• Have an idea what the company is worth - evaluating

IP is difficult and “x times net assets” or “y times sales”

is a trap

• Our focus: Legal aspects of transaction preparedness

• Don’t lose sight of management issues either


Review Material Contracts

• Review all material contracts to confirm any rights of

first refusal, consents or notifications that may be

needed

• Take the time to establish a virtual data room or

upload material documents to a server in a well

organized fashion to facilitate efficient due diligence


Share Structure

• Clean up your structure - Limit classes of shares

• Consider number of issued and outstanding shares

• Use stock options with vesting mechanisms to keep

founders and key management onboard

• Even non-voting shares can vote sometimes - If

employees have stock options, consider setting up

voting trusts


Intellectual Property

• Intangible property derived from creations of the

mind, that provide enforceable rights against others

• Typically, the key asset for technology companies

• Generally forms 70% of its market value

• IP is a key factor for investors

• Well managed IP will attract investors

• Poorly managed IP will lose financing deals

• Important to regularly perform IP Audits


Why is IP your key asset?

• Competitive edge

• Allows you to monopolize your technology

• Deters 3rd parties from market entry

• Commercialization

• Make/use/sell your technology

• License to others

• Transfer/assign IP rights


Intellectual Property – Start with an IP Audit

• First understand the big picture

• Identify your IP assets

• Identify which IP assets have been secured

• Confirm that IP assets in good standing



• IP Audit (cont’d)

• SWOT analysis

• Strengths, Weaknesses, Opportunities, and Threats

• Assess commercial value of the IP

• Repeat process at regular intervals



• Patents

• Trade Secrets

• Trade-marks

• Copyright

• Industrial Designs (C)

TM

ID

TS

Pat


Intellectual Property - Patents

• A statutory right of exclusivity that prevents others from

making, using, constructing, or selling a new, non-obvious,

and useful “invention”

• Not all technologies are patentable

• Having a patent does not necessarily mean freedom to

practice the technology

• Non-inventor applicants must appoint a patent agent to

prosecute the patent application

• Tip: Retain reputable patent counsel from the beginning to

prepare, prosecute, and manage your patent portfolio


Intellectual Property – Trade Secrets

• Any information that

• is or may be used in trade or business

• is generally unknown in that trade or business

• has economic value because it is “secret”

• are the subject of reasonable efforts to maintain its

secrecy

• Recipes, manufacturing processes, client lists,

marketing data

• Potentially infinite in duration, but volatile

Intellectual Property – Trade Secrets (con’t)

• Protect your Trade Secrets

• Only disclose sensitive information to key personnel on

a need-to-know basis

• Have IP counsel review outgoing disclosures and

provide NDAs

• Control 3rd party access to premises

• Implement and enforce “best practice” directives



Intellectual Property – Patent or Trade Secret?

• Why use a Patent?

• Commercialization: provides a clearly identifiable asset

that may be marketed, sold or licensed

• Trade-secret protection may be unfeasible

• technology can be reverse-engineered, or independently

discovered through legitimate means

• Why use a Trade Secret?

• Not time limited – can be infinite in duration

• Immediate protection and lower upfront costs

• Some innovations are not patentable


Intellectual Property – Trade-marks

Trade-marks:

• A recognizable “mark” that distinguishes goods and

services of a particular source from those of others

• Do you have a brand?

• Is it registered?

• Are you relying on your reputation?

• Tip: Have counsel perform a trade-mark clearance

search before investing money into your brand,

and register your trade-marks


http://www.businessinsider.com/the-most-valuable-brands-in-the-world-2012-5?op=1



















Intellectual Property - Copyright

Copyright

• The exclusive right to reproduce, publish and sell a

work

• Literary, dramatic, artistic, and musical works

• Very broad subject matter

• Software code

• Instruction manuals, product documentation

• Website designs

• Beware: copyright considerations of open-source code

• Tricky ownership issues for consultants

• Is it registered?


Employees

• Don’t leave it in the hands of the Judges!

• Obtain written agreements assigning IP rights from

Employees to the company

• Non-competition clauses

• Confidentiality of proprietary information

• Assignment of inventions

• Recent BC case law – Century 21 Canada Limited

Partnership v. Rogers Communications Inc., 2011 BCSC

1196 (CanLII)

Tip: have reputable legal counsel prepare employment

agreements and IP assignments

http://canlii.org/en/bc/bcsc/doc/2011/2011bcsc1196/2011bcsc1196.html






Independent Contractors

• Presumption that an independent contractor owns the

Copyright for the works he/she creates

• Don’t leave it to the Judges!

• Obtain written agreements assigning IP rights from

Contractors to the company

• Non-competition clauses

• Confidentiality of proprietary information

Tip: have reputable legal counsel prepare independent

contractor agreements and IP assignments


Securities Compliance

• Registration and prospectus likely not required, but

make sure exemptions are available for your

transaction in all applicable jurisdictions

• Typical Exemptions (BC):

• Private issuer

• Accredited investor

• (More than…) $ 150,000 exemption

• Offering memorandum exemption

• If certain exemptions are relied on, it must be reported

to applicable securities regulators and resale

restrictions may apply

Alternative Sources of Funding

• Founders’ Capital

• Friends and Family

• Angel Investors

• Debt Financing / Bank Loans

• SR&ED

• Crowdfunding

• Grants

Coming Out on Top

Take Away

Being prepared and positioning your company

well can help your start up make the most of opportunities and efficiently complete financings so you can focus on growing your business

28 montréal ottawa toronto hamilton waterloo region calgary vancouver beijing moscow london

Michael Macaulay

Associate

Tel: (604) 891-2758 [email protected]

David Lee

Associate

Tel: (604) 891-2277 [email protected]

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