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Insights

Joe Bartlett on the role of VC Experts and Private Market Data

Joe Bartlett, a Co-Founder of VC Experts, speaks with ACE General Counsel Jason Behrens on the company’s origins, mission, and importance. In particular he focuses on the role of comparable data in facilitating efficient market decisions and the unique niche VC Experts fills in providing that data.

For another video with Joe see his discussion on Fundraising post JOBS Act

VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries.

Placement Agent Indemnification Agreements & Their Effect on PE & VC Funds

Joe Bartlett, of VC Experts, weighs in on indemnification provisions within the role of placement agents raising capital for alternative funds and speculates that they really just foster a circular flow of funds when exercised. This logic begs the question: Does the way these provisions are constructed render them meaningless?

The fund raising process for most of the private equity funds…venture, leveraged buyout, secondary and others…is an arduous business. Alan Patricoff remarked several years ago that after he split from Apax to form Greycroft it took him, a Hall of Fame venture capitalist, three years (as I recall) to reach a final closing on the fund he was sponsoring. Accordingly, it is customary for funds to employ experienced placement agents to assist in the fund raising process.
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7 Fundraising Tips for Startups Pursuing VC Money

In this article you will find  a collection of fundraising advice geared towards pitching a traditional Venture Capital Firm.  Most of Joe’s advice, however, would apply just as well when using an Online Portal or pursuing other fundraising avenues. To summarize the efforts in relation to online portals: find the right Portal with the right investor base for your offering, present the material in an easily digestible and engaging format, follow through, and don’t stop your other complimentary efforts. If you think your company is right for VC Funding then here are Joe Bartlett’s seven key pieces of advice:

Rule #1: Pitch the Appropriate Audience

VC funds collect huge sums of cash, and managers must put it to use within four or five years, or risk losing it. Despite their vast resources, venture funds’ staffing is generally lean and mean — managers cannot afford to look at investments that involve, from their perspective, trivial amounts of funding. If you’re looking for very early-stage funding (the so-called “angel round”) or financing under, say, $5 million, don’t go to a professionally managed venture-capital fund. Find angel investors instead. They specialize in taking a company from inception to the next round of financing. Read More

An Introduction to the Global Start-Up

Start-Ups have been around for a long time. Traditionally, they have been local enterprises run by small business entrepreneurs. Today, however, thanks to the Internet’s global reach, entrepreneurs have the ability to tap networks and establish Start-Up operations all across the world.

Recognizing the potential of international markets, global IT development teams and other types of human capital, Start-Ups are emerging in areas beyond the typical US breeding grounds of Silicon Valley, Boston, New York, Washington, D.C. and Dallas. An increase in technical innovation and start-up activity is now also being seen in cities such as Bangalore, Helsinki, London, Shanghai, Singapore, Sydney, Tel Aviv, Toronto and Zurich.

No matter what the geographic origin, decisions made by Start-Ups at their earliest stages are likely to be among the most critical – as these decisions will impact their future ability to raise funds, engage in mergers or other business transactions, as well as impact their tax position and that of their outside investors.
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Everything You Want to Know about Private Equity

This is a comprehensive set of answers to many of the typical questions investors have regarding private equity. The answers are roughly organized into sections along these lines: General questions/background, legal questions, performance questions, due diligence questions, and exit questions. That said, there is overlap between the answers.  The author’s originally published this article for VC Experts, while most of the information is current (and all of it is informative) there have been some changes with the Dodd Frank Act. In particular this is true of the information related to the investment adviser registration. We will add some updated information to that section in the near future. Read More

A Checklist for Your New Joint Venture

The following post consists of a comprehensive “Equity Joint Venture” Checklist prepared by Gene Barton, a Principal in the Boston office of Fish & Richardson P.C. The purpose of this checklist is to ensure that you cover all of your bases when considering a Joint Venture to ensure there are no surprises. It originally appeared in VC Experts ‘Intellectual Property and Joint Ventures’ Reference book.
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What to Look for in a Term Sheet – An Attorney’s Perspective

VC Experts has teamed up with Aspatore Books to reprint some of the more salient sections of Alex Wilmerding’s Deal Terms, The Finer Points of Venture Capital Deal Structures, Valuations, Term Sheets, Stock Options and Getting Deals Done. This excerpt features an interview with a leading legal expert in the private equity arena, James M. Crane, who has served as counsel at the Boston law firm of Testa, Hurwitz & Thibeault, LLP.

Jim’s perspective is representative of the candid, forthright demeanor that entrepreneurs and venture professionals look for in counsel. And it’s a fascinating look at what a seasoned lawyer thinks you should look out for term sheet. Read More

Employee Incentive Plan Alternatives After a Down Round

Employee Incentive Plans for Privately-Held Companies

Despite the recent improvement in capital markets activity, many small, privately-held technology companies continue to face reduced valuations and highly dilutive financings, frequently referred to as “down rounds.” These financings can create difficulties for retention of management and other key employees who were attracted to the company in large part for the potential upside of the option or stock ownership program.

When down rounds are implemented, the investors can acquire a significant percentage of the company at valuations that are lower than the valuations used for prior financing rounds. Lower valuations mean lower preferred stock values for the preferred stock issued in the down round, and as preferred stock values drop significantly, common stock values also drop, including the value of common stock options held by employees.

Consequently, reduced valuations and “down round” financings frequently cause two results: (i) substantial dilution of the common stock ownership of the company and (ii) the devaluation of the common stock, particularly in view of the increased aggregate liquidation preference of the preferred stock that comes before the common stock. The result is a company with an increasingly larger percentage being held by the holders of the preferred stock and with common stock that can be relatively worthless and unlikely to see any proceeds in the event of an acquisition in the foreseeable future.

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Your Deal But My Terms – A Primer on Private Market Terms & Conditions

In this episode of Insights, ACE Portal’s Co-Founder and CFO, Carl Torrillo, discusses deal terms and conditions with Ross Barrett, Co-Founder and CEO of VC Experts.  The interview drills down into areas of interest for private market investors.

Specific topics covered include:

  • Anti-dilution provisions
  • Valuation considerations
  • Maintaining management incentives (the law of unintended consequences)
  • Dividend rates (accrued or not)
  • Covenants and Board Rights

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Figuring Out Your Equity Compensation at a Startup

In our travels, we’ve talked with many folks who work at startups and two common threads have emerged:

  • Startup employees don’t have sufficient avenues for liquidity, and 
  • Startup employees don’t have a clear understanding of how they are paid.

The former is a primary reason why EquityZen does what it does and the latter is the topic of this post.  We will break down the basics of incentive compensation at startups, survey tax considerations, and identify key points to raise with employers during compensation negotiations.
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Where are All the General Solicitation Deals?

This post by Robert Fisher, the CEO of Fisher Tanner Associates, originally appeared in VC Experts Daily Buzz. In it, Fisher talks about pitfalls to the implementation of 506(c) General Solicitation provisions under the JOBS Act and why we are not seeing an explosion in deals marketed under the 506(c) provision. Basically, the article looks to answer the question, ‘Why aren’t we seeing deals being marketed more broadly now that it is legal to do so?”

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With speed approaching perilously close to that of light itself, recent deregulation has freed huge and heretofore inaccessible pools of private monies to fund new investment and unshackle innovation…

Just kidding – that didn’t happen. Would have been nice, eh? One could argue it wasn’t for lack of good legislative intention. As part of the JOBS act – Congress did indeed instruct the SEC to remove the ancient prohibition against General Solicitation and Advertising under Regulation D. The concept: make it easier for start-ups to cast a wide net when seeking investors. You may recall good ol’ Reg D which provides exemptions from SEC registration. The Reg D exemption relied on by most private investors – now called 506(b) continues the solicitation ban. The new exemption since last September – 506(c) – eliminates the ban but not without a new gotcha of its own.

What are the hidden ‘gotchas?’
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Founders & Startup Employees Need to Understand 83(b) Stock Elections

This article, published originally by our partner VC Experts, goes in depth on how to avoid one ugly tax scenario as a founder or early-stage employee.

Entrepreneurs founding startup companies are often unaware of a potentially significant tax liability that can rear its ugly head with respect to stock issued to founders and employees.

Emerging business founders often acquire their stock through a restricted stock purchase arrangement providing for time-based vesting. However, this common structure may set the stage for an unwelcome and unexpected tax bill down the road. An 83(b) election can, in the right circumstances, provide a relatively simple and effective way to avoid the tax. Read More

Early-stage Startup Funding Depends on Solutions & Not Ideas

This article, by James F Coffey, a partner at Nutter McClennen & Fish LLP, discusses the key principles an early-stage startup requires to move from an interesting concept to a company worthy of securing angel funding. Perhaps even more interesting is the overall concept that a company’s value lies not in its idea, but in it’s actual solution, or execution to a given problem.  Read More

Evaluating Private Equity Performance: Looking Beyond IRR

How do you best evaluate the performance of a private equity fund? Is there one right way? Why is the popular Internal Rate of Return  popular and potentially flawed? How do you truly gauge a manger’s performance and compare it to others? How do you select the best PE Fund Manager? The answers to these questions not only take you beyond that IRR but also beyond the spreadsheets and all the numbers. This guest post, originally from Private Equity International and featured in VC Experts’ Guide to Private Equity, investigates how science and art meet in evaluating private equity  performance.

 

A High IRR Gets Attention

“Just look,” smiles the placement agent, “at those IRRs. These guys know how to deliver serious returns.” The head of private equity investment looks at the memorandum on his desk and can’t help but revisit the chart showing annualised IRRs for the private equity firm’s previous funds. The numbers look impressive. And that’s one reason why IRRs matter so much in private equity: a high IRR figure for your fund has been shorthand for saying that you’re very good at making money. When you’re out fund raising, competing for the attention of an investor who is wary of taking a meeting and quick to remind you how busy they are, an eye-catching IRR is a great attention grabber. “Sure you’ll have investors telling you that IRR doesn’t mean anything to them, but you still find them sniffing round the number as soon as the conversation starts,” says one general partner at a UK buyout firm who regularly pitches to investors.

To declare that IRR is an empty formulation would be wrong, but to suggest that it has been significantly compromised in the eyes of many investors is not.
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Growth of Private Company Investing: An ACE Portal Event

An ACE Portal hosted and VC Experts moderated panel on “How Integrating Platforms, Data, and Analytics Will Define Private Company Investing.”

Panelists will include representatives from IPREO, Crowdnetic, ACE, VCE, and TAAPS.

The panel will be followed by a visit to the NYSE Trading floor to see the Closing Bell ring.  After the Closing Bell, there will be a Cocktail Hour with a select audience of family offices, institutional investors, and leading investment banks.

 

 

The Financial Decisions Throughout the Start-Up Life Cycle

This post was written by Steven Eliach, a Principal of Marks Paneth & Shron LLP. and Jeanne P Goulet, CPA, a tax specialist at the firm. It originally appeared in VC Experts guide on PE and VC under the title “Road Map of a Start-Up and the Entrepreneur.” In this article Steven, the principal -in-charge of his firm’s Tax Practice, walks through the importance of sound financial planning in various stages of a startup’s life cycle. His summary brings up a comprehensive list of issues to be aware of including IP strategy, jurisdiction and corporate structure questions, structuring of equity splits for founders, and the operational realities of running a business.  As if this was not enough, the post also highlights the issues employees must be aware of related to their non-cash compensation. This article is highly recommended for entrepreneurs at any stage of growing their business.

 

The Financial Decisions & the Start-Up Life Cycle

A start-up venture is not just about product development, marketing and sales. It is a constant search for a business model that ultimately will result in a great product market fit.

During the course of this endeavor, the financial needs of both the entrepreneur and the business can be complex. The financial needs of the entrepreneur and the business model run on two parallel paths and can change substantially over the life cycle of the venture.

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Investing Directly as an LP or via Fund of Funds?

This article, penned by Igor Sill, a Managing Director of Geneva Venture Management, was originally penned in the uptick following the 2008 crisis when investor interest in Venture Capital again started taking stage amidst high-profile names such as LinkedIn, Facebook and Twitter. It seems apt to re-air Igor’s discussion of how investors can approach investing in private companies and early-stage companies in light of the recent explosion of online portals (of which ACE is one) and the re-imaging of direct investing in a fee-free model. Read More

Strategies for Small and Midsized Businesses Seeking Capital

This original version of this article  appeared in VC Experts, Private Equity and Venture Capital Articles. It was written by Christopher S. Connell of Stradley Ronon LLP. While the macroeconomic context has improved somewhat since it was penned, these deceptively simple tips remain extremely relevant in making sure your business can weather any financial storm. All small or medium sized business owners that are looking to access capital or ensure their business is on sound financial footing should take a quick look.

The financial crisis facing the United States is front-page news on a daily basis. Although the tone of the message has improved in recent weeks, we can’t escape the reminders of the financial pressures on all levels of our economy. Homeowners are experiencing decreased buying power due to the housing downturn, high unemployment and tightened credit standards. Local governments are dealing with budget cuts and lower tax revenues. Small-business owners, those who are most likely to stimulate the economy by growing their businesses and hiring more employees, are having difficulty obtaining the capital necessary to drive that growth.

But why is it that so many solid businesses can’t get their hands on the capital they so desperately need? And how should these businesses approach the current lending environment to enhance their chances of success? Let’s first take a look at some of the basic reasons the financial markets have tightened so much.

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Top Ten Sources of Data, News, and Research on Alternatives

As the Alternative Asset Class continues to mature and evolve, the increased interest and scrutiny on the sector has led to more transparency.  But data is still more difficult to come by than it is for the public securities. As a result, professionals rely on certain key information resources on an almost daily basis.

From our perspective at the DTCC – Alternative Investment Products Division, we are constantly analyzing and evaluating these informational news digests and data feeds in depth.  We have found that there are many pretenders, and only a few resources that have stood the test of time (or show promise). What follows is our/my go-to list for real value-add information for news, research, and data.

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Reasonable Steps to Verify Accredited Investor Status

This article first appeared in VC Experts’ excellent comprehensive summary of the JOBS Act on March 31, 2013. While over a year old, the guidance below still stands to the best of ACE Portal’s knowledge. You can also see Joe’s video interview discussing the topic as well as the video from Dan Gorfine of the Milken Institute.

The following discussion fleshes out a checklist of ‘safe harbors’ when the issuer and its counsel are faced with a requirement that they take “reasonable steps to verify” accredited investor status. The pending SEC Regulations on the JOBS Act, Title II may list a safe harbor or two; but, if so, the same are not likely to be exclusive. Hence, my personal contribution.

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Fundraising for Emerging Growth Companies Post JOBS Act

ACE General Counsel, Jason Behrens, interviews Joe Bartlett, a Co-Founder of our partner VC Experts and Special Counsel to McCarter and English on the fundraising environment for Emerging Growth Companies following the passage of the JOBS Act.

In the video they first discuss nuances of the current legal environment with respect to IPOs relative to the entire JOBS Act. They then focus on whether the overall JOBS Act, which encourages companies to stay private longer, will have a greater impact than the IPO on-ramp provision found in Title 1 of the Act. Will the end result will be more IPOs or fewer?

The second half of the video focuses on the change to the maximum number of shareholders and the potential for secondary trading and new liquidity programs in this new environment as well as the role of registered (and unregistered) finders in the capital raising process.

For more video interviews with Joe see:

VC Experts provides powerful data on the financing of private companies, along with industry-leading content on fundraising. We conduct exhaustive analyses of all state and federal regulatory filings by private companies. Information gathered by VC Experts includes valuations, share prices, terms and conditions, board members, and behind the scenes details for improved deal context. We maintain an online library of 6,000 articles and more than 300 downloadable forms commonly used to construct private equity investment agreements. VC Experts has become an indispensable resource for entrepreneurs, investors, lawyers, and various services provides in the venture capital and private equity industries.

The Dividing Line Between Public and Private Markets Has Been Breached

This article, originally titled “The 180 Degree Turnaround in the U.S. Equity Markets: The Dividing Line Between Public and Private Has Been Breached” first appeared in the “Jumpstart our Business Startups Act (JOBS ACT) Guide compiled by VC Experts

Public and Private Market Divisions Blurring

For 75 years, the rules in this country governing capital formation for high growth enterprises have not changed. There are two categories … (i) public companies which float equity securities e.g., common stock in public offerings with shares publicly traded on various exchanges; and (ii) private companies financed by placements to a limited group of investors pursuant to exemptions from federal and state registration requirements, the shares changing hands infrequently until and unless the company goes public.

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The Original JOBS Act: A Summary

This Post originally appeared on the VC Experts Buzz Feed and was written by Lane T. Watson and Bion Piepmeier of Day Pitney LLP shortly after the passing of the JOBS Act. It provides a very well crafted snapshot of the originally passed JOBS Act and does not reflect any subsequent updates. For a review of the JOBS Act in the two years since it has passed see this interview.

After a comparatively brief debate in Congress, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) on April 5, 2012. The JOBS Act enjoyed an unusual level of bipartisan support in the hope that the new law’s provisions streamlining the initial public offering process for emerging companies, enhancing the private placement market and leveraging the Internet to raise capital for small companies will result in the creation of new jobs. In this alert we consider the three provisions of the JOBS Act dedicated to facilitating nonpublic offerings of securities: Title II, which allows for public solicitation in connection with certain Rule 506 and Rule 144A offerings; Title III, which creates a new private placement exemption for crowdfunding via the Internet; and Title IV, which may breathe new life into the otherwise little used Regulation A offering exemption. For a comprehensive overview of these changes to the Private Markets see the ACE Portal White Paper.

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Using A Placement Agent in Early-stage Rounds

This article first appeared in the “Introduction to VC and PE Finance” Encyclopedia by VC Experts

Should I use a Placement Agent to Raise Money

Founders, who are desperate for financing, debate whether the faucet will turn on if they engage a placement agent. This is a question to be addressed in a real-world context. In the first place, the great majority of first-round financing is not economically interesting to an investment-banking firm. The fee for a placement is usually in the range of 2 to 5 percent of the amount raised. Assuming a $1 million first-round financing, a fee of $20,000 to $50,000 is not likely to attract many takers in the investment-banking fraternity, when fees for acting as financial adviser in contested merger-and-acquisition transactions run into eight figures. There are exceptions to this, as in any other proposition. Encore Computer, because of the splendid reputation of its founders, attracted a high degree of interest from major-bracket investment bankers in the seed round; William Poduska, on leaving Apollo Computer and organizing Stellar, was able to titillate investment-banking appetites to a fever pitch. (Neither firm, it should be noted, remains as an independent entity.) However, the traditional founder is wasting his time beating down the doors of the elite investment bankers to help raise money in the early rounds. Smaller investment-banking houses sights are set lower than Morgan Stanley or Goldman Sachs, are more likely candidates, but even they are not enthusiastic about hitting the pavement to arrange a first-round investment because the amount of work is enormous and the payoff is often uncertain.

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Defining the Types of Angel Investors

This article first appeared in the VC Experts comprehensive “Introduction to VC and PE Finance” Encyclopedia. 

Angel groups [1] have grown significantly in the last decade, as more and more organizations have been established and more individual angels have joined the groups. Angel groups now exist in nearly every American state and Canadian province, and they offer accredited angel investors the opportunity to invest in and help build successful companies–while also having a good time. Every group is different in terms of investment strategy and culture, but ACA member groups offer interested investors a variety of benefits. Most angel groups are looking for new investors to join their group. [2]

Other than “having a high net worth,” no one-size-fits-all description of an angel investor exists. The levels of experience and particular interests of angel investors vary widely. But certain overall classifications can be useful if you’re hoping to match your capital needs with the right kind of investor.

Types of Angel Investors

Wondering what kind of angel is right for your kind of investment opportunity? Here’s a guide to the many different types of angels:

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Talking Like An Angel Investor

This article, which first appeared in the VC Experts ‘Buzz Feed, features Joe Bartlett explaining some basic terminology on the VC and angel industry.

Considering an angel investment?

Before you take the plunge, learn to talk shop like a professional VC.

Angel investing is an increasingly common practice among high-net-worth individuals. But many would-be angels lack a true insider’s vocabulary – and the savvy that goes with it. Do you know the difference between a “burn rate” and a “burn out”? The pros do, and so should you if you’re looking to invest in a start-up. For a summary of “types” of angels see this post.

What then, in plain English, are all these venture capitalists talking about?

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Valuation Intangibles – Influencing Risk and Exit Strategy

Effects of the Financing Environment and Intangibles

The supply of and demand for capital play an important but measured role in the valuation a company is likely to command. Capital is most restricted or expensive and valuations under greatest pressure during and following a period involving a sudden market correction or a downturn in the economy. None of us has a crystal ball for future economic growth; pricing is therefore more a function of the current or most recent nature of the marketplace.

During periods of economic softening or market correction, the public markets, as well as the market for mergers and acquisitions, are in flux and directly affect venture investors’ valuation analyses. Venture investors look to the prices established in the marketplace to put a prospective exit value on their investments. The values investors are willing to pay in a public offering and the values corporations are willing to pay to make acquisitions come under pressure and typically decline during a market correction or economic downturn. There is consequential downward pressure on valuations during these periods and, at times, a disconnect between a company’s expectations with respect to valuation and those of investors. As a result, the feeling in the marketplace is a tightening of sources of capital.
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Investor Verification Versus Suitability on Direct Investments

In this interview, ACE Portal General Counsel, Jason Behrens, interviews Joe Bartlett, the Co-founder of VC Expert and Special Counsel at McCarter & English. Their conversation focuses specifically on the difference between investor accreditation and suitability, which is a vital but often obscure topic for capital raisers. The conversation also narrows in on suitability in a post-JOBS Act context. Jason and Joe’s conversation is a nice precursor for listening to Dan Gorfine of the Milken Institute discuss the future of suitability in this post. or diving into Joe’s more in-depth written pieces on what steps to take to verify an investor’s status.

Asset Allocation into Alternatives

The appropriateness of alternative assets in an investment portfolio has been in the news a lot lately. The August 16-17th edition of the Wall Street Journal, alone, had two articles on the subject. One, Do Hedge Funds Belong in a 401(k)? by Jason Zweig presents arguments by experts who have differing views on the subject. The other, Is Your Portfolio Too Diversfied? by Walter Updegrave answers the title’s question by preaching moderation. That is, Updegrave counsels that although diversification is appropriate, taking it to an extreme can be counterproductive. Both articles are worth a read.

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