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LEXPERT MAGAZINE | MAY 2019 19 does very well). Moreover, if the company is not doing well (but is sold) and the pre- ferred shareholders get their money back, they do so before the common shareholders are paid even a penny. Another preference for the Series A Shares is that if the company is not doing very well, and (instead of being sold) it is- sues additional shares at a price per share less than what the venture investor paid, then without having to pay more for its original Series A Shares, the venture in- vestor would receive more of those shares at no additional cost (the actual amount depends on how much money was raised at the lower price per share). Again, this so-called "anti-dilution protection" is a feature not extended to the holders of common shares (the commons would be diluted on a so-called "down round" of subsequent investment). e holders of Series A Shares will also be given various other preferences over the common shares; for example, there will be certain actions, such as the payment of dividends, that will require the approval of the Series A Shareholders, even if the Board votes in favour of the measure. Moreover, the Series A Shareholders will typically have a seat or two on the Board itself. In short, if you issue shares of your company to a venture investor, they will invariably rank well ahead of you on your balance sheet. The True Cost of Venture Capital Before agreeing also to an investment by a venture capital firm, you, as the founder of your company, also need to understand clearly what the "cost" is of this in- vestment. Primarily, this is determined by calculating what per- centage of the equity you will be giving up for the investment, and what that dilution represents when it comes time to sell the company or take it public in an initial public offering of shares ("IPO"). is in turn requires you to also model what you think the likely purchase price (or IPO issue price, and subsequent share price in an IPO) will be. None of this can be done with absolute precision (mod- eling the future in the tech space is an inex- act science for sure), but at least you should get a sense of what you are looking at as an order of magnitude. For example, I have been at more than one closing dinner, celebrating the sale of a tech company, where the founder leans over to me and says, "You know, for my 12 % of the sale proceeds, that was an awful lot of risk and tension". In other words, the founders regret giving up as much of the equity of the company as they did. Put an- other way, the cost of the Series A Share in- vestment was actually, in retrospect, quite expensive. (On the other hand, assuming the founder does end up with only 12 % of the final sale price – if the enterprise value of the company is very large, and that was a function of the assistance of the venture capital firm, then the cost of the Series A Shares was much lower). You get the idea. Venture Debt For all these reasons, in order to maximize the value derived from your balance sheet, in addition to considering venture equity capital, you should give serious thought to your debt financing alternatives. at is, in- stead of issuing equity shares of your com- pany to an investor (who thereby becomes a co-owner of the company), you borrow money as debt, and issue a promissory note that requires you to repay the principal of the debt, along with an interest payment on the outstanding principal. We`ll call this "venture debt", although there are multiple sources for this kind of lending, including banks, so-called mezzanine lenders, and in- creasingly some companies who specialize in venture debt, such as Espresso Capital. Venture debt comes in several different "flavours and sizes", and as with venture capital equity financing, you need to ap- proach a number of prospective lenders to truly understand what alternatives are available to you. For example, some venture debt lenders amortize the repayment of the loan; that is, on a monthly basis you are pay- ing an amount that includes both interest and a portion of the principal. Other ven- ture debt lenders, such as Espresso Capital, require you to pay only a monthly interest amount, with the principal being repaid in a lump sum at the end of the loan period. Are Warrants Warranted? Another difference between various lend- ers to tech companies is whether they insist on being issued warrants or not. You'll re- call it was noted above that one of the big potential benefits of venture debt is that it can be non-dilutive; that is, the debt does not represent an equity ownership in your company – therefore, when you (for ex- ample) sell your company, you will repay the principal (and the accrued interest) of the debt, but then the lender will not also participate in the growth in the value of your company – all that growth will accrue to you and the early stage equity investors, such as any co-founders, "first" employees, and friends and family who may have in- vested upon the incorporation, or in the seed round, of the company. ere is, however, an exception to this re- sult with venture debt, namely, if the lender "But now you could use $10 - $ 15 million to open those foreign offices, hire some senior sales people (selling enterprise software into the financial services sector is hard, and experience is expensive), and enhance the product offering with some additional customer facing features."