Discussion of sources of capital for funding a startup, from Kickstarter to venture capital financings.

1. FROM KICKSTARTER TO IPO:
RAISING CAPITAL
Roger Royse
Royse Law Firm, PC
Palo Alto, San Francisco, Los Angeles
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2. Sources of Capital
• Savings/friends and family
• Donation-based crowdfunding (e.g. Kickstarter and Indiegogo)
• Equity-based crowdfunding
– Title III of the JOBS Act
– Funding portals
• Traditional venture capital financings
• Initial Public Offerings (IPOs)

3. Donation-Based Crowdfunding
• Businesses seek donations in exchange for rewards
• Kickstarter statistics:
– $1.4 billion raised
– 73,000 projects funded
– Over 7 million backers
• At the high end, some projects receive over $1 million in funding
• Rewards often constitute the product or service for which the project
was raising funds

4. Donation-Based Crowdfunding
• Why so popular?
– No loss of equity
– Easy to set up
– Low regulatory barriers
– Can fund development/production of the product (a form of pre-sales)
• Considerations
– Sales tax obligations if shipping tangible goods
– Timing problems e.g. all the income may be received late in the
year before expenses are incurred leading to large tax bills in the
year of receipt
– May want to form a legal entity before commencing fundraising
– Potential legal disputes – while there is little regulation in this area,
states may prosecute if they suspect fraud

5. Equity-Based Crowdfunding:
Title III of the JOBS Act
Exemption from Registration
• Private companies may sell up to $1 million of securities in a 12-month
period
• Amount sold to a single investor in any 12-month period cannot
exceed:
o The greater of $2,000 or 5% of annual income or net worth if
annual income or net worth is less than $100,000; or
o 10% of annual income or net worth (up to a maximum of $100,000)
if annual income or net worth is greater than $100,000
• Not yet in effect – still awaiting final regulations from the SEC
• Likely to prove expensive and overly burdensome

6. Equity-Based Crowdfunding:
Title III of the JOBS Act
• Investment must be through an “intermediary” broker or funding portal
o Intermediary must register with the SEC
• Issuer disclosure requirements
o File business plan with SEC
o File financial statements
 Audited if offering exceeds $500,000
 Reviewed by an independent CPA if offering is between
$100,000 and $500,000
o Annual SEC filings and annual reports

7. Equity-Based Crowdfunding:
Title III of the JOBS Act
• Post-fundraising
o Securities cannot be resold within 12 months (unless to an
accredited investor)
• Private right of action for material misstatements/personal liability
• High number of unsophisticated investors
o Fiduciary duties to all investors
o Could be a concern for VCs in future fundraisings

8. Equity-Based Crowdfunding:
Funding Portals
Private Placements
• General prohibition on general solicitation of investors
• No definition of “general solicitation,” however the SEC has released two no-action
letters implying that issuers can use internet funding portals to raise funds
• Access to the portal must be restricted to “accredited investors”
– Broadly, accredited investors are (a) individuals with income of more than
$200,000 in each of the past two tax years or with net worth over $1 million
not including their primary residence; (b) partners, officers or directors of the
issuer; or (c) certain employee benefit plans and trusts.
• Can have up to 35 non-accredited investors
Publically Solicited Issuances
• Issuer can advertise and publicly solicit the sale of its securities
• All eventual investors must be accredited investors
• Increased Form D reporting

9. Traditional Venture Capital Financings
• Typical financing process
– Negotiation of terms and signing term sheet
– Due diligence
– Draft Stock Purchase Agreements and other legal documentation
– Execute transaction documents
– Deal “closes” when investors provide funding and company provides stock
certificates
– Post-closing matters such as securities filings and filing amended articles of
incorporation
• Investors usually acquire preferred stock (series A, series B, etc) and insist on
certain additional rights and privileges such as:
– Guaranteed board seats
– Liquidation preferences
– Anti-dilution protection
• Expensive - financing requires involvement from accountants, lawyers, and
other financial advisors

10. Initial Public Offering
• The first sale of private company stock to the public
• Why seek an IPO?
– Raise cash
– Easier to issue more stock in the future
– Creates a liquid market for the stock which helps with stock options and
other equity incentive plans for employees
• Must file a registration statement with the SEC and include:
– Financial statements
– Management structure
– Market challenges/threats
– Legal issues
• “Lock up period” for company officers and employees preventing them selling
their stock for at least three months after the IPO

11. RoyseLaw Incorporator.com
Royse Law Incorporator: Designed to help you incorporate
and structure your company in Delaware or California.
RoyseUniversity.com
Royse University: Providing business, tax, and personal
finance ideas to founders and executives.
RoyseLink.com
RoyseLink: Connecting founders with investors and service
partners.
RoyseLaw Legal Wizard
Royse Law Legal Wizard: Offering legal document
templates and more.

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