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ASBDC Technology Counselors Certification – Prep Session #1 June 9, 2010 Fall 2010 Andrew J. Sherman, Esq. Jones Day 51 Louisiana Avenue, N.W. Washington, D.C. 20001 202-879-3686 ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 2963375 Andrew J. Sherman – Today’s Moderator Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,400 lawyers worldwide. He is the author of 17 books on business growth, capital formation and the leveraging of intellectual property. His eighteenth (18th) book, Road Rules Be the Truck. Not the Squirrel. (http://www.bethetruck.com) is an inspirational book which was published in the Fall of 2008. He has appeared as a guest and a commentator on all of the major television networks as well as CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First Business,” and Bloomberg’s “Small Business Weekly.” He has appeared on numerous regional and local television broadcasts as well as national and local radio interviews for National Public Radio (NPR), Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and technology development. He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA) programs at the University of Maryland for 22 years and at Georgetown University for 14 years where he teaches courses on business growth strategy. He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since 1987. In 2003, Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc. magazine named him one of the all-time champions and supporters of entrepreneurship. ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 2 2963375 Topics for Today’s Call • Goals of Certification Program • Exam Overview / Process • Evaluation of Business Plans • Sources of Growth Capital • Protecting Intellectual Capital • Technology Licensing Strategies Overview ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 3 2963375 Goals of the Certification Program • ASBDC believes that a certification program should exist for ASBDC Counselors offering advisory services to its technology-driven and rapid-growth clients. • To facilitate knowledge transfer, demonstration of a counselor’s competency shall be measured through submission of previous course work attributable to this field as well as successful accomplishment and study of related ASBDC certified courses. • ASBDC wants to facilitate an examination and certification process that recognizes existing candidates possessing a wide range of pre-test knowledge derived from a variety of sources and methods. ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 4 2963375 The Exam Structure Below is the structure for the 2008 Examination for Cohort #1 in Chicago. • Multiple Choice – 32 Questions worth ½ point each – 16% of exam total • Short Essay – 3 Questions worth 8 points each – 24% of exam total • Case Studies – 2 Questions worth 30 points each – 60% of exam total • We will utilize a very similar approach for this examination. • The examination style reflects real world situations and a “from the trenches” approach. • The case studies and short essays especially focus on the “what would you suggest as their advisor” approach. ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 5 2963375 The Exam Structure (cont’d) The goal of the exam is to learn if your counseling ability and application of core knowledge is primed for client application. That is why the vast majority of the test is based on what you write, and how convincingly you write it. Supporting your positions is key. Even if we disagree with the approach, your interpretation and ability to support it is what matters. ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 6 2963375 The Exam Process In 2008 the exam was all handwritten over a four hour period. In 2010, the exam will be given at a test center and will be electronic. The testing software will be ExamView and will be comprised of two sections. • The multiple choice section will be its own independent section • The short essay and case study areas will be typed in to a computer and submitted at the end of the test. More detailed information will come out by August to best prepare you for the process. ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 7 2963375 The Exam Process (cont’d) The goal of the exam is to learn if your counseling ability and application of core knowledge is primed for client application. That is why the vast majority of the test is based on what you write, and how convincingly you write it. Supporting your positions is key. Even if we disagree with the approach, your interpretation and ability to support it is what matters. ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 8 2963375 Business Planning Evaluation ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 9 2963375 How Are Technology Company Business Plans Different? • Competitive Go to Market Analysis • Capability • Distribution Channels • Strategic Partnering • Intellectual Property • Branding • Duration of the Invention (Short to long term) • Competitive R&D Landscape Assessment • Global Interaction – Potential Int’l Alliances • Experienced Management Leadership is rare ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 10 2963375 Technology Start-Up’s – Viability Decisional Funnels Seed Capital Early Stage Financing Inflection Point Growth Strategies Staffing and Recruitment Partnering and Alliances Launch or Not? Contemplation Customer Acquisition and Retention Implementation Time and Evolution of the Company ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 11 2963375 Sources of Growth Capital For Technology Companies ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 12 2963375 Sources of Growth Capital $ Equity • Angels/ Bands of Angels • Private Placements • Venture Capital Funds • Strategic Investors Hybrids • Bootstrapping • Alliances & Joint Ventures • Employee Financing • Customer Financing • Consortiums Risk of Default and Obligation to Repay Dilution and Control ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED Debt • Commercial Banks • Governmental Lending and guaranty programs • Commercial Leasing & Equipment Finance • Factoring & Specialty Lenders • Vendor Financing & Trade Credit 13 2963375 Types of Capital To Be Raised (Allocation of Proceeds) Fudge Factor (because Murphy’s Law is a law) Opportunity Capital (take advantage of unforeseen opportunities) Debt Repayment (as approved) Capital Raised Day-to-Day Operating Capital R&D Capital Project-Specific Capital ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 14 2963375 Balancing Competing Interests Is Key THE DEAL (meeting of the minds/compromise) INVESTOR WANTS/ NEEDS ENTREPRENUER WANTS/NEEDS • Maximum return • Maximum capital/valuation • Mitigate risk/downside protection • Avoid dilution/control • Input on future and growth of the business/control • Affordable cost of capital COMMON OBJECTIVES • Growth in the value of the business • Additional rounds of $ at more favorable valuations • Mutually beneficial exit strategy ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 15 2963375 What Are Equity Sources of Capital (all types) Really, Really Looking For In An Early Stage Technology Company and Its Team? • Is your mindset/governance truly open to investors (and their desired covenants)? • Clear understanding as to who is the customer and what are they buying and why are they buying it at this price • Ability to cross-sell and up-sell a base of strong and loyal customers • Ability to extend product lives and build brand • Ability to increase prices and widen margins • Strong and effective sales and marketing team (beyond the founder) • Ability to check your ego at the door • Will the “dog eat the dog food?” (Do customers truly value your proposed solution?) ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 16 2963375 How Will The Early-Stage Technology Company Be Perceived By The Source Of Capital? Great Concept, Wrong Team Wave of the Future (But Not Yet Ripe) Keep Us Posted Right Place, Right Time (Here & Now) Fill In Gaps Yesterday’s News vs. ___________ Market Passed You By (Dead in the Water) (Term Sheet Imminent) ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED Interesting But Not Our Niche vs. Ask for Referral Interesting But No $ To Be Made (Business Model Flaws) (Ask for Another Look In A Few Months) 17 2963375 Developing An Overall Capital Formation Strategy For Technology Companies • Debt vs. Equity vs. Hybrid • Market Conditions • Proposed Allocation of Proceeds and Sensitivity Analysis • Analysis of Current Balance Sheet • Development and Analysis of Forecast and Growth Projects • Needs Analysis/Timetable (Openness to Staging and Milestones) ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 18 2963375 Types of Angels • Angels come in different shapes and sizes and often invest for very different reasons. Some are motivated by something much larger than financial return—a good thing, since it is hard to convince someone with a net worth of $125 million that your deal will make them rich. • The three primary categories include: “checkbook angels,” usually friends, neighbors and others who typically invest $5,000 to $25,000 on a passive basis hoping to get in early on the next Google! ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 19 2963375 Types of Angels (Cont’d) • Then there are “capital-A” angels who typically invest $50,000 to $250,000 on a more active basis and who may insist on some advisory or mentoring role as a condition to their commitment. • Finally, there are the “Superangels,” the cashed-out multimillionaires and even billionaires who have the capacity and the guts to invest $500,000 to $2 million in an early-stage enterprise in a deal that may look more like a venture-capital transaction (from a legal paperwork and control perspective) than like a deal made in heaven! ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 20 2963375 The World of Angel Investing Understand the motivation of an angel: • Part mentoring • Part venture capital • Part psychic reward • Part adventure Note: You are filling a need in their life and it may not necessarily be financially-driven ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 21 2963375 Debt Capital • Commercial Banks • Trade Credit/Vendor Financing • Non-Bank Sources of Debt Financing/ Specialty Lenders • Factoring • Equipment Leasing • Credit Unions ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 22 2963375 Important Questions to Ask When Seeking Debt Capital • How much capital do you need? • How will you use the money? • Why will this type of capital benefit your business? • When can you pay it back? • How will you pay it back? ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 23 • Why are you and your company (or this proposed transaction) a good credit risk? • What if the business (or company you acquire) fails or you can’t repay the loan? • Is your company growing too fast or in a manner that will jeopardize your ability to repay? 2963375 Key Elements of the Loan Proposal (Cont’d) • The loan proposal should include the following categories of information, many of which you can borrow or modify from your business: • SUMMARY OF THE REQUEST. An overview of the history of the company, the amount of capital needed, the proposed repayment terms, the intended use of the capital, and the collateral available to secure the loan. • BORROWER’S HISTORY. A brief background of your company; its capital structure; its founders; its stage of development and plans for growth; a list of your customers, suppliers and service providers; management structure and philosophy; your main products and services; and an overview of any intellectual property you own or have developed. ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 24 2963375 Key Elements of the Loan Proposal (Cont’d) • MARKET DATA. An overview of trends in your industry; the size of the market; your market share; an assessment of the competition; your sustainable competitive advantages; marketing, public relations and advertising strategies; market research studies; and relevant future trends in your industry. • FINANCIAL INFORMATION. Multi-scenario financial statements (best case/expected case/worst case), federal and state tax returns, company valuations or appraisals of key assets, current balance sheet, credit references, and a two-year income statement. The role of the capital requested in your plans for growth, an allocation of the loan proceeds, and your ability to repay must be carefully explained, and a discussion of your ability to make your loan repayments on a timely basis must be supported by a three-year projected cash-flow statement broken out in a monthly format. • SCHEDULES AND EXHIBITS. As part of the loan proposal, you should also assemble certain key documents such as agreements with strategic vendors or customers, insurance policies, leases, and employment agreements to be attached as exhibits. Résumés of your company’s principals, recent news articles about the company, a picture of your products or site, and an organizational chart should also be appended as exhibits to the loan proposal. ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 25 2963375 The Most Common Reasons Loan Proposals Are Rejected • • • Unrealistically low expense forecasts • Lack of adequate collateral • Poor communication skills Lack of a completed loan proposal • Inability to take constructive criticism • Underestimated capital requirements • Little or no experience in the business field • Overstated revenue projections • Attempts to play one lender against another ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED Cash-flow projections that do not demonstrate an ability to repay the loan • Cash-flow projections without adequate supporting documentation • Lack of understanding of the loan proposal and approval process 26 2963375 Protecting Intellectual Property ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 27 2963375 Branches of Intellectual Property Law IP Patents Trademarks & Brands Copyrights Trade Secrets Trade Dress ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 28 2963375 Overview of Technology Licensing Strategies ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 29 2963375 Intellectual Assets Drive Growth Strategies and Generate Revenues Protectable Intellectual Property Spin-off new companies Joint ventures, strategic partnerships & alliances Technology & software licensing Outright sale of new technology Co-branding Franchising Enter new markets Develop new products Brand-extension licensing Technology transfer Cooperatives, consortiums, federations Training & consulting services International expansion Government contracts Patents Trademarks Copyrights Trade dress & trade secrets Distribution channels Show-how & know-how Databases & customer info. Software & proprietary algorithms Customer & partnerships Proprietary processes & systems Knowledge & technical workers Exclusive licenses/access to technology ©COPYRIGHT 2010. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 30 Possible Market Opportunities and Revenue Sources 30 2963375