James Goulka

Managing Director Arizona Tech Investors

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You Profits OPM

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Savings Sweat Equity

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Reward for doing what you do Use it to: Reinvest in the business to grow it Buy a Lamborghini

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You get cash You incur obligations

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Grants Debt Equity

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+ Keep 100% control of business + Keep 100% ownership of business + No repayments; no recurring costs - Specific qualifications - Paperwork to apply - Paperwork to report after grant

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Local: Flinn Foundation ($25,000) State: Innovation Challenge ($250,000) Federal: SBIR ($2,000,000)

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Credit Cards Personal Loans Bank Loans Leasing Alternative Debt Structures

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Personal Obligation Affects Your Personal Credit Score Crazy Interest Rates Bad for Your Family 10

Better Rates than Credit Card Debt You are on the Hook, Not Your Business Your Family is at Risk Schedule of Repayment of Principal + Interest

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Character: Personal; credit history Capacity: Probability that the bank will be repaid from company cash flow Capital: How much have you contributed to equity in the company to cushion any losses Collateral: Assets that can be sold to satisfy the bank debt Conditions: Purpose of the loan. Are you an attractive customer (other business, high interest rate, big shot) 12

You want to borrow $100,000 @5% interest Day 1: Bank make you a loan + 19 others of $100,000 each Day 365: 1 loan goes bad = $100,000 loss 19 borrowers pay $5000 interest = $95,000 = Portfolio Lost Money

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Banks are Not in the Business of Taking Risk IF you qualify for a loan: Required repayments; No Permanence Covenants Priority Use of Your Cash, Not Business Low Cost of Capital

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Alternative Funding Source Focused on Capital Equipment Sources: Leasing Companies + Bank Leasing Departments + Equipment Providers’ Leasing

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Benefits: 100% financing of equipment Various tax advantages No disposal problem Obligations: Still a loan of capital Covenants You Don’t Own the Assets Higher cost of funding (pre-tax)

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Privately arranged transactions Uniquely customized to the needs of the borrower and lender

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Legitimate Banks Commercial Finance Companies Private Individuals Sourced Through Intermediaries Not So Legit

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Same as Any Other Debt: Required repayments; No Permanence Priority Use of Your Cash, Not Business Covenants Plus: Lien on Assets More Expensive than Simple Debt Equity Give Up (Smaller) Personal Guaranties?

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The Profound Shift: You No Longer Make All of the Decisions Get Cash Give Up a portion of the ownership of the company 20

Give Up a portion of the ownership of the company Investors Have Powers: Expect to Be Partners

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Context: SEC Rules Securities issued to the public Securities issued to private investors

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Angels: $ Their own money

VCs: $$ Other people’s money

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Sheet1

Friends & Family1100

Angels502000

Venture Capital10010000

Debt etc500020000

Friends & Family1100Angels502000Venture Capital10010000Debt etc500020000

Sheet2

Friends & Family100

Angels2000

Venture Capital100,000

Debt & Otherunlimited

Net worth of $1 million or more

Or

Income for each of last 3 years › $200,000 pa if single › $300,000 pa if married

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No liquidity Unproven management Unproven technology Unproven markets Unknown competitors lurking in the

bushes No predictability

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Able to assess and absorb the risk Invests own money Invests brainpower

› Due diligence on investment › Board or Advisor › Know-how

Invests time Opens contact database

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All over Some in press (individuals and groups) Some are known only to domain

experts (eg franchising) Established Angel Groups ™ Harder for Some Domains Than Others

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Can make smaller investments ($25,000)

Leverage from multiple brains Leverage from single center Shared due diligence Aggregated capital = better terms Multiple ways to invest Multiple ways to participate Fun

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Pension Funds

Endowments

Wealthy Individuals

Family Offices

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Entrepreneurs are not the VC’s

customers: the investors are

Entrepreneurs are means to an end

Compete for limited partners based on performance

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Limited: 7 years (longer for pharma)

Exits are means to evaluation

Since the capital belongs to the Limited Partners, returns are distributed to them and not reinvested

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Angels $250,000 to $2 million

VCs $2 million to $100 million

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Medium Size $500 million

Investment partners: 5 people

Partner Portfolio: 10 companies

Avg deal size $10 million

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Angels Own money IRR Driven Modest amounts Easy reinvestment Minimal costs VCs Limiteds’ money Multiple Large investments Driven No reinvestment High costs to limiteds

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Valuation

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2 equal sized investments Target Return for portfolio: 25% p.a. At the end of year 1:

› 1 fails: complete loss › Need 50% p.a. on the other one

Critical Problem: Don’t know which is which

Therefore expect 50% p.a. on all

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Assumptions:

-10 investments -$10 million each -All on same day -All are exited on same day in 5 years

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1 returns 10x = $100 million 8 return 1.1x = $ 88 million 1 complete loss = $(10) million Total Cash Return = $178 million IRR = 16%

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Deal Terms

Due diligence

Taking care of the team: Option Pool

Governance 40

Terms matter God or the devil is in the details Investors expect management to

negotiate as hard as they do—Almost You’re not the only fish in the sea Experienced lawyer is essential

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Rule #1: Do not run out of money

Rule #2: People don’t throw around millions: it takes time to do a deal. Assume: 3 months for angels 9 months for VC

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98 Arizona individual investors Entrepreneurs, Technology Executives,

Accountants, Lawyers, Investment Bankers, Consultants

54 companies $15 million invested Direct and through ATIF Sidecar Funds

Partner with Desert Angels & Others

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Software & SaaS Semiconductors & Sensors New Materials Medical devices Diagnostics Capital efficient green tech

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Where › Arizona (44 of 54) › Southwest (CA, CO, UT, TX)

Size: $250,000 - $1,500,000

Stage

› Prototype or Alpha customer › Revenue not required (but nice) 45

300 Inquiries

150 Applications

30 Semifinalists

15 Presenters

4-10 Investments 46

JOBS Act: Enable more people to invest in early stage companies.

Intention: Great Execution: Devil in the Details

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Indiegogo Kickstarter Rewards & gift based fund raising platforms Not purchase of securities Not regulated by SEC

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For issuance of securities Regulated by SEC Issuers & Platform report to SEC Investors report to Platforms

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Rules for Issuer:

Rules for Investor: If income or greater of NW $100K 10% of either max of $100K

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Rules for Platform: A new form of securities dealer Registered with SEC Defined anti-fraud provisions

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Must provide investors with Education Information about issuers Ongoing communications channel Must not provide investors with Investment advice Solicitations for purchases or sales Holding cash and securities

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Funding Your Business3 Sources of FundingFunding by YouFunding by ProfitsFunding by OPM3 Kinds of OPMGrants: Lightest ObligationsGrants: ExamplesDebt: Fixed ObligationsDebt: Credit CardsDebt: Personal DebtDebt: Bank Loan – Can You Get One? – 5 Cs of CreditDebt: Bank EconomicsBank Debt: Your ObligationsDebt: LeasingLeasing: Your ObligationsDebt: Alternative DebtAlternative Debt SourcesAlternative Debt: �Your ObligationsOPM: Equity: Investors Owning a Share of Your Company�Equity: Your Obligations�Equity: Selling Stock�Early Stage InvestorsWhere Angels PlayAngel Investor: SEC DefinitionWhy This Definition?Angel Investor:�Operative DefinitionAngel Investors: �Where Do You Find Them�Why Angel GroupsVC Fund Investors: The LPsVenture Capital BusinessLife of Venture FundsDeal ScaleFund Scale�Return ParametersWhat Matters Most �to Angels & VCsInvestor ArithmeticPartner Portfolio EconomicsPortfolio ResultsWhat Matters 2nd Most: Derisking the DealDerisk by Deal TermsDerisk by Lead TimeATI Who We AreATI Domains We LikeATI FocusATI Deal Funnel ~ OthersCrowdsourcing: �New Sources of CapitalCrowdsourcing: Source #1: Non-Securities PlatformsCrowdsourcing: Source #2: Securities PlatformsCrowdsourcing: Source #2: Securities PlatformsCrowdsourcing: Source #2: Securities PlatformsCrowdsourcing: Source #2: Securities PlatformsCrowdsourcing: Source #2: Securities Platforms���Arizona Tech Investors (ATI)���James Goulka�Managing Director�jegoulka@arizonatechinvestors.com�602-463-0844