 But cast is now starting. All attendees are in listen only mode. Okay, so welcome back everyone or for first time participants welcome to the economic development webinar series. My name is Ben Kennedy. I'm with the regional programs and engagement branch of the Ministry of Jobs Trade and Technology and I'll be providing technical support and facilitating today's webinar. I'm located in Victoria BC on the unceded Coast Salish territory of the Lekwungen people known today as the Esquimalt and Songhees First Nations. Today's webinar is one of a series we'll be running to help people raise their knowledge of investment capital which is a key part of attracting investment to your community. I'm first going to go over some housekeeping then I'll talk a little more about the series introduce our speakers and then we'll get into it. So on your attendee control panel you'll see the orange arrow which lets you shrink the panel to the side of the screen. It automatically shrinks if you don't do anything for a while. Below that the orange microphone shows you that you're muted that is fixed to mute for this webinar. The blue box lets you expand the whole webinar interface to full screen. Below that little hand it can be clicked to notify me that you want to speak but because there's a few of you the best way to raise a question is to enter your question in the box in your control panel. I'll then ask one of the presenters when we come to it or if we don't get to all of your questions today I'll try to get you an answer via email after the webinar. Finally you have two options for connecting to audio via your computer over VoIP or by phoning in. If you click on phone call it'll give you a phone number to call with an access code for this webinar and a personal identification number for you individually. As a reminder this session is being recorded and the presentation slides will be made available through our web pages noted on the screen. They're also available in the handout section on your control panel right now. So today we're focusing on equity capital and we've assembled a great panel from the Ministry of Jobs, Trade and Technology. I'll let them introduce themselves starting with someone many of you will be familiar with and the person who's hosted many of these webinars in the past and let the development of this accessing capital series Susan Lowe. Hello Susan. Hi everybody thanks very much. I have spoken to many of you before. We're with the what used to be the design coordination outreach branch and we've got a new name the regional programs and engagement branch. I'm delighted to be here speaking from Lake Lungan Territories. I hope you enjoy the presentation. Thanks Susan. From the investment capital branch we also have Dave Wallace and David Belleshta. Yeah good morning Dave Wallace I am the compliance manager at the investment capital branch. Welcome. And good morning I'm David Belleshta I work as a portfolio manager. Thank you guys and finally from the BC Immigrant Investment Fund we have Ian Wong. Hello Ian. Good morning I'm the Chief Operating Officer of the Grounds. Great all right so what is the accessing capital series? Many economic development officers and economic developers focus on the macro conditions in their community like land development or promoting tourism which is a good thing. When it comes to helping your local businesses get off the ground and grow or sustain through difficult times you'll need a working knowledge of how to help these businesses get access to financial capital. We don't all get education or exposure to how businesses use capital and how they get access to it but you've probably been in a situation of trying to facilitate that process. So future webinars in the series include a debt capital overview which is being planned for June. There are also sessions being developed on grants as a way of accessing capital and the unique challenges and opportunities for First Nations and Indigenous businesses and communities when it comes to accessing capital. These webinars may be a refresher for some or it may be an introduction to this topic. The goal is to increase your knowledge of the world of financial capital so you can be an effective facilitator for local businesses or for my provincial colleagues you can see how the programs we're offering to businesses and communities fit with their needs. If you have specific questions that you would like to have answered in any one of these webinars please email them to our team and we'll try to work them into those future sessions. But for today's session I'm going to turn things over to Susan for a brief introduction to the overall world of capital. Susan has ten years experience as a business consultant prior to joining the public service. Dave Wallace and David Ballester will then take us through programs that encourage equity investment Ian Wong will talk about some of the specific investment capital branch programs that are designed to support BC businesses and finally Sue will wrap things up by looking at some barriers to attracting equity capital. If you do have any questions again please write them in the box on your control panel and I'll ask them either in between presentations or hold them to the end depending on what I think is appropriate. If I think your question is mostly relevant to you I might send it to the speakers after the webinar instead. Finally be aware that to keep things moving along Sue is kindly volunteered to steer the PowerPoints for the panel so there might be some technical delays but I'm sure it'll be all fine and with that let's kick things off and I'm going to throw things over to you Susan. Thanks Ben. All right I'm very excited to be watching the Accessing Capital in Small Communities series. Today what we're looking at is the overall topic of investment capital. We're going to be looking at how equity capital works specifically so these are the learning outcomes we're hoping to help you attain today. Just waiting for them to come up on my screen. There we go. So today after this webinar you'll be able to summarize different types of capital and different forms of financial capital and describe the types of equity capital that businesses use at different life stages. You'll also be able to identify some resources in BC that can help communities in your businesses in your community to attract equity capital and also look at some of the barriers that prevent businesses from attracting equity capital in small communities. We're not going to be diving into specific technical issues like securities regulations or issuing shares today. We're mostly focusing on how the equity parts of the investment system work and what you can do as an economic developer to facilitate the flow of capital into your community. So capital can be described as assets that make it possible to generate economic benefits. There's a variety of economic theories out there that have different definitions or they might use different classifications for the types of capital. We're not diving too deep into economic theory today so I hope all of my economic degree holding colleagues will forgive me this simplification. But what we're looking at is the part of capital that takes the form of currency, financial capital. And it's used for all kinds of things when you're starting up a business or running a business, paying wages, buying materials and equipment, putting a roof over the business, those kinds of things. So we're going to focus on how businesses use financial capital which is different from how communities use it and we're also taking a settler focused look at this. And I want to acknowledge that Indigenous owned businesses and First Nations communities have a different journey with access to financial capital because of the Indian Act and the way that Indigenous people and First Nations have been excluded from equal participation in the economy and that includes access to finance. That is something that needs addressing and is being addressed and it's not in the scope of today's presentation but we are working on a webinar that focuses on the topic specifically for the fall and I really encourage everyone to tune in for that. So when businesses want to start or grow, expand, change directions, or transfer to new owners, they generally require some kind of financial capital and then generally exceeds what the business owners have in their pockets or what they can generate through their own operations. And to look at the different kinds of financial capital here's a metaphor for you. Taking the lemonade stand as an example, most kids use their parents' assets when they want to start up their first lemonade stand. The women, the water, the sugar, the jugs, the cups, they're all generally pilfered from the kitchen and that first stand gets set up. So if my kid sets up a lemonade stand, I might tell him that he can use my groceries but I get a share in the proceeds and that's equity. That's me putting equity capital into his lemonade stand. If I tell him that he has to pay me back for the proceeds and also give me 25 cents every hour that his lemonade stand is open while he's still got my groceries, that's debt and he can keep whatever he earns. Now if I tell him that he can use whatever he wants and keep the profits and that's a benefit to me because my kid has learned entrepreneurship and that's a positive parenting outcome, that's a grant and I might tell him he also has to give his cousin's job if he wants to keep going and he also has to write me a three-page report on what he learned before he can get his next batch of lemons. So as you can see, grants have a lot of strings attached and they're fairly rare for businesses in the real world. Cue the unicorn. Grants do exist, you can spend a long time searching for them and then only very special people get to touch them for very special purposes but they are however more available to communities and nonprofit organizations that do economic development work. So we are planning a webinar to look at them specifically. We're going to focus on equity and debt for this webinar and the next one. So debt and equity, two common ways of getting access to the cash that a business needs to do many things from funding research to bridging the cash flow gap when orders are received, you have to buy the goods, process the goods and then the customers pay you later. So there's advantages and disadvantages to both equity and debt. What's important is getting the right balance between equity and debt for the business's needs and using both equity and debt in strategic ways. As you can see, here's a quick rundown, advantages of equity. The money does not need to be repaid on a specific time schedule. There's a star there because there are circumstances that that can change. Equity has not come with interest payments that have to be paid that use up limited cash flow. Equity partners can also contribute their knowledge and their connections to a company and when you're financing with equity, you're not having to look at qualifying for a loan. On the flip side, with debt, your lender has no claim on the future profits or control over the company. Once you've paid off the debt, you've paid off the debt. Interest on the debt can in some cases be claimed on income taxes and there's no need to comply with securities regulations. There's also a variety of different types of debt to meet your specific needs from very small loans to very large ones. Disadvantages, that happens too. So when you're working with an equity partner, you are sharing ownership of your company, you're sharing decision making and you're also sharing the future gains of your company and that can be a barrier, something that not everyone wants to get into. Getting access to equity can come with a slow and complex process and if you want to end the relationship, let's just say it can get complicated. The money with equity rarely comes in small amounts because it can be complex to access the fine end. So it's not something that you want to do for very small amounts of money. The disadvantages of debt is that it places a load on the business. The interest costs have to be paid regardless of the business results and eventually you do have to pay back the principal. It can be tough to qualify for loans based on your credit history and lenders may require you to put up collateral that you don't have. So you need equity as part of collateral and non-payment of your debt can result in seizure of your assets and credit problems in the future. So as you can see there's advantages and disadvantages to both. So today we're going to focus on equity capital. What do businesses use it for? Well businesses typically use equity and not debt when they're doing things that have greater risk because equity is not something that you have to make guaranteed payments on. It's used for things that aren't guaranteed to make money. Businesses use equity in their startup phase when they're doing research and development or commercialization of technology that is expected to make a future profit or when they need money to go into new markets or add unknown products to their offerings. It can be the start of your business or can be the start of part of your business. So entrepreneurs also need to show that they've got equity capital in their business to get access to lending. So most lenders will not just cover the entire cost of an asset. So you need a down payment of some kind. You need to show that you've put your own stake into financing whatever it is you're trying to buy. So this is a graphic that we're going to use a couple of different times throughout the webinar. It's the life cycle of a business or life cycle of a business venture that needs equity financing. The sources of equity differ based on the point in time on the life cycle. So this chart shows a fairly typical pattern for business that is going to head towards going public. Not all companies go that way. This is the pathway for many businesses based on developing new ideas or technologies and where growth and eventual exit for the entrepreneurs is considered the goal. Even within an existing business that decides to take on a new technology or product, there's usually a similar life cycle that needs to be financed and it's usually done with equity. So this is an important concept when you're thinking about any kind of financing is the free cash flow in the business. So free cash flow is the money generated by a business after it's done everything else it has to do. So you get your income from sales and then after you've paid your operating costs like inventory, raw materials, labor, building or occupancy costs, equipment maintenance required to make your widgets. Then you have to pay interest on any debt that you have and that's committed to be paid whether or not you've made a single widget or sold a single widget. Then you have to pay taxes that are owed to the governments, federal, provincial and local and then you also have to make capital expenditures, money spent on buildings or an equipment and to keep your business making your widgets. What's left over is the amount available, the free cash flow available to pay a share of profits to the owners including any investors either by issuing dividends or buying back shares that were sold to investors. You can see from this that investors who put up equity are the last to get paid so they take on more risk than lenders do and in deciding whether to contribute equity to a business the investor needs to see from the business plans that there will be enough free cash flow available to give some money back or to reinvest in the business as well. So if a business takes on too much debt and has greater interest payments, there won't be any free cash flow left for the owners or for the business to reinvest and this is why business owners and managers need to make careful choices about how much debt or equity to use and get a balance in financing their operations. So when investors decide to put money into a company they're looking for a return on their investment of course and there's two ways this happens through capital gains which is generally the most favorable of earning types and whatever one's looking for. So the value of the asset increases and the investor is able to sell that for more than what they paid for it and in terms of income tax treatment half of what they've gained in a given year is included as income on their income tax and this is usually associated with the ownership of public or private businesses but it can also arise when you sell or dispose of capital property. Dividend income is when there's profits left in the company the investor stays in but the company pays out small amounts to their investors and in terms of income tax what happens is it gets grossed up and a dividend tax credit gives it a tax advantage to investors it's not counted the same as your employment income foreign source dividends they do not get treated the same way and they're taxed in the same way as interest income on investments so the company's board of director decides whether the company is going to pay those dividends and the amount and when it's getting paid so each type of investment return is treated differently for tax income tax purposes and that leads to why some of our investment programs that we're going to talk about later why they're structured the way that they're structured investors are on the lookout for a variety of things when they're considering where to put their money mainly they look at whether the risk of the investment is adequately balanced by the potential return so when you're thinking about how do I support businesses in my community and attract investment to them these are the things that investors are looking at so risk tolerance every investor as we know has a different risk profile so how much can they afford to invest and how much will it affect them if it's lost so if you're looking at a person with a moderate income of $5,000 investment is a lot and if it's in their retirement portfolio and they are 63 years old they are not looking for much risk for a 40 year old millionaire of $5,000 investment may not even be worth the paperwork especially if it's only going to generate a few percentage points of return so looking at who the investor is and how much they want to invest can help you understand what their needs and interests are investors also have different timelines for when they need their money returned for example investing in earlier staged biotech life sciences companies it requires patience it's also high risk it takes several years to bring biotech products to market and things could go wrong in clinical trials and you just don't make any money at all investors look at the macroeconomic variables to the larger economic factors support this industry so it is never a good time in 2019 to invest in buggy whips beyond that you want to look at or people look at what's happening to the industry more broadly and is that something I want to put my money into investors also look at wanting to understand the way a knowledge of an industry and a business work so the closer they are to what's happening inside the business the less risk they're taking on because they're not going in blind this is why businesses need to be able to provide good reliable financial and management reports then some investors start to specialize in certain industries and they may put their funds into businesses that they already know well because they're able to grasp the difference between a good investment and a less good one some investors want to take a seat at the table they want influence over management because that is how they reduce some of their risk this is precisely one of the factors that can make entrepreneurs quite nervous about taking on equity investments and finally investment diversification investors may not want to put all of their eggs in one basket so whether it's a family that decides not to buy shares in the forest company that they work for or a venture capital company wanting to put funds into a bunch of different technologies spreading the risk around through diversification is something that money if not most investors are looking for so there are a lot of rules for attracting and accessing capital we don't have time to talk about them all today but it's useful to cover this one area of regulation which is who the company can sell their shares to without going public because public companies have to register with the VC securities commission and they have strictly regulated requirements for disclosure of their activities so when you're starting up or you're a smaller business you're likely working in the realm of private capital you can have up to 50 shareholders and they have to meet certain criteria and those criteria are intended intended to ensure that people aren't exposed to risks but they can't mitigate as a private issuer you can have no more than 50 shareholders and you can only sell shares to people who are what's known as qualified purchasers and that includes directors officers or employees of the company the family members of those people close personal friends close business associates of the directors executive officers or control persons and those are people who are close enough to understand what's going on in the business and that way they can understand the risks associated as well there's also this group of people called accredited investors and those are people who meet thresholds for having a certain amount of assets so the amount that they're risking is not going to significantly impact them if it is lost and finally you can also sell shares to current security holders so people who are already holding shares can buy more but anyone who buys shares in a private company has to sign a document stating that they are aware of the risks and these are some of the ways that legislation and regulations are set up to protect people who are investing in private companies we want that to happen because not every company can go public so I'm going to turn it back over to Ben awesome I'll thanks that Susan that was a really good uh intro to equity um so now I'm just going to put it over to Dave Wallace let's see if we can get his webcam up David think you just need to accept that request uh David Wallace is going to talk to us about the small business venture capital tax credit program great thanks Ben yeah good morning Dave Wallace I'm the compliance manager at the investment capital branch and I'm going to speak to you today about the small business venture capital tax credit program as Susan said earlier you will see this slide a few times in the presentation and I want to point out that the the vertical access is the cash flow or sources of financing that a business will receive and the horizontal access is goes through the stages of a business from idea through startup through development stage through a growth stage and finally to maturity so we'll point out that uh the the investment capital program specifically the tax credit program is for early stage financing you can see at the bottom of the image there so that's where our program comes in mainly for uh the founders investment friends and family and angel investors other sources of financing can be social finance funds foreign investors can come through at any point during the cycle venture capital funds and eventually public markets ipos so we'll get you to move on to the next slide Ben so when we look at the tax credit program the province offers a 30% tax credit to both individual and corporate investors who invest in eligible businesses so the generally the investors are employees of the of the company they can be family and friends of the founders we do have many angel investors and many corporate investors also so we'll move to the next slide so we look at the the businesses in our program so the business must apply for registration in the program and meet the criteria that's outlined in our governing legislation the small business venture capital act so the business must apply and be approved to raise money under the program the business will use the funds to finance growth to help develop products to scale up their technologies and to understand that from an investment standpoint this is a patient source of equity financing so it's not a quick turnaround for investors it's often higher risk investment and it can take long periods of time in order for this investment to materialize either through a merger and acquisition an IPO or you know the company has a successful exit so we'll move on to the next slide here so the program has two investment models so the eligible business corporation model and the venture capital corporation model the eligible business corporation model is called the direct investment model that's where the investor invest directly into the business and receives a tax credit for investing in that business a venture capital corporation is often managed by venture capitalists or experienced angel investors who provide expertise advice knowledge and their business experience to help these businesses that they invest in grow so the investor will invest in the venture capital corporation and the venture capital corporation will invest in one or more eligible businesses we mentioned the 30 tax credit rate and in the eligible business corporation program an individual investor or an individual investor can invest up to $400,000 per year now we'll make a note on this we budget 2019 introduce some new changes the previous amount was 200,000 per year and we're waiting for that legislation to be approved by the legislature so I'll just put a footnote there are a few items here that are not set in stone yet so that's one $400,000 we're waiting for approval so our tax credit budget is 38.5 million in tax credits and that calculates out to 128.3 million of investment dollars going in to BC businesses so we'll move on to the next slide so we look at the the eligible business corporation model you can see from the image to the right of the slide we have the eligible business the investor invests directly into the business and the province issues the tax credit to the investor at that point in time 30 tax credit the investor must hold their shares for five years and again a lot of these we're early stage financing a lot of these are higher risk businesses the investment is generally not very liquid so the five-year hold period is often you know is often appropriate and especially if it's a life sciences business then it can be longer than that we mentioned the $400,000 per year for for an individual investor and an EBC eligible business corporation can raise up to 10 million dollar 10 million dollars lifetime so again that's another change we've had used to be five million so we're waiting on approval for that so the business in the eligibility criteria must have a permanent place of business a permanent establishment in British Columbia at the time of registration they must be a small business and that is defined as being under 100 employees once after registration the business can grow and they can be over 100 employees another important criteria is that at registration and through the life of the program the business must pay at least 75% of its assets or sorry 75% of its wages and salaries to employees who report to work in BC next next point the slide is that we call this the substantial engagement in the eligible activity and we measure this by the at least 50% of the assets and expenses must be applied to the eligible activity is outlined in the small business venture capital act that the business is engaged in I will speak more to the eligible activities later on in the presentation but that is at time of registration and throughout the life in the program the business must be substantially engaged the next point for the eligible business is that no more than 20% of its assets must be located outside of BC and finally a business applying for registration of the program must have at least 25,000 in equity capital and that's cash going into the company and we call that basically the company must have raised money and offer often it is founders money going into the company so there must be 25,000 in equity capital in the business in order to apply for the program let's move on to the next slide so we'll talk about the the venture capital corporation model here you can see from the image to the right where the investor invests in the venture capital corporation and the venture capital corporation must excuse me must make an investment into one or more eligible businesses in the eligible business corporation program we had a five-year hold for the shares in the direct direct investment model here the investor can sell their shares and they're the free to sell their shares in the VCC but the VCC must make an investment in an eligible business for a period of five years so that's where the equivalent five-year hold comes in and again often it's not very liquid investment 30% tax credit is available to the investors investing in the the VCC and one of the criteria for the VCC is that they must invest 80% of what they've raised from investors within a two-year period into one or more eligible businesses the businesses often they are already registered in our program as eligible business corporations and the criteria is the same as the last slide so you know number of employees under 175% reporting to work in vc etc so the VCC can invest 10 million into an eligible business in a two-year rolling period so companies can can register as an eligible business corporation in our program raise 10 million and then they can also raise 10 million in a two-year rolling period in the VCC program so we'll move on to the next slide these are the eligible business activities as outlined in the act in the regulation so the first one is manufacturing and processing of goods produced in vc for this particular activity we look at a value-added test a company is taking unfinished raw materials adding value and producing a finished marketable good the next category is the research and development of proprietary technology and this can be many different areas in computer technology life sciences and again often the intellectual property trade secrets are held by that company the next category is tourism and the tourism category is available to companies that generate at least 50% of their revenues from tourists and the tourist is defined as a person who lives at least 80 kilometers away from the business the next is community diversification this is available for businesses outside of metro vancouver regional district and the capital regional district on the island and this is for this particular category is looking for businesses that will diversify the economy there are restrictions in the act that limit certain types of businesses that still applies to this particular category however commercial services retail and commercial services can often be included if it's one of the first businesses in the area and it helps diversify that local economy the next category is the development of an interactive digital media product and what we look for in that is we look for a company developing a product that uses the two of three mediums of text sound and visual next category is the development of clean technologies and we look for companies who increase energy efficiency and conservation reduce greenhouse gases reduce environmental impact related to energy and finally the last activity is new to budget 2019 we're waiting on approval and this is advanced commercialization this is available only to companies located outside of metro vancouver regional district and the capital regional district and this is for companies that use digital tools and platforms to help other businesses scale up build their brands and again it is not for a company that has a product that's that's marketing this is for a company specifically designed to help other businesses scale up and that is the end of my presentation and I'd like to pass it back to Ben here great thanks that Dave um we did have one question come through going back to the start of your presentation about eligible investors for family members someone's asking if there's a restriction that family members aren't able to live under the same roof is the business owners um they're not there is a we have a provision in the act that restricts control of a business so if if if a if an investor by association with one of the founders say owns more than 50% of the shares then they're not eligible so they're like parents grandparents children spouses are not eligible if by making that investment by association they are in a control position in the business right okay thanks that I asked answer your question Larry now let's throw things over to David Beleshta uh Dave David's going to take us through the employee share ownership program and David if you accept there you are great all right take it away thanks Ben and good morning everyone as mentioned I work as a portfolio manager and I'm located in Kamloops providing a regional presence to the provinces tax credit or venture capital tax credit programs I along with four other portfolio managers along with the compliance manager and administrator are collective collectively involved in the delivery promotion and regulation of the small business venture capital act that David just mentioned and also the lesser known employee investment act over the next few slides I'll be talking about what is called the employee share ownership program which forms part of the employee investment act the employee share ownership program or ESOP program encourages equity investments by employees that is cash investments for shares in their respective businesses and that happens by way of what we provide which is a 20 tax credit to a maximum of a $2,000 tax credit per year or a $10,000 investment by an employee the tax credit is applied by the employee to their taxes only the credit is not refundable whereas in the small business venture capital act it is refundable the ESOP tax credit can also not be carried forward if there is unused tax credits however the employee has no limit in terms of continually investing in their small business investments can be made through a self-directed RRSP for an added tax deferral benefit presupposing employee has contraption maroon to do so the employees participating in an ESOP can also make payroll deductions through automatic payroll deduction strategies that the employer may have so next slide blend I'm going to talk a little bit more about what is an eligible employee they have to be resident in the pros and problems at time of subscribing for shares in the business that has registered an ESOP program plan with our program founders are not eligible for the tax credit they'll talk a bit more about them under what's called a succession plan the ESOP plan has to be made available to all employees of the business but the employer may restrict employees that have only worked less than or not more than two years what is what that means is they have to have worked at least two years with the business and they also have to work at least 20 hours per week the employees cannot be major shareholders that is hold 10 percent or more of the small business and that calculation also includes what are called associate relationships those are family members and corporations that they may have a controlling interest in the business applying to a program to register an ESOP cannot have more than 500 million dollars in total assets and pay at least 25 percent of its wages to employees who reside in the province now the qualifying activities for a business under an ESOP plan are more liberal than the small business venture capital act as Dave Wallace had mentioned a business applying under the small business venture capital capital small business venture capital tax capital act have to be substantially engaged in the qualifying activity and that's not the case under the employee investment act in fact service-oriented businesses can qualify for an ESOP plan regardless of location in the province and they can also have more than 100 employees something else I'm going to mention with regards to what are called prohibited activities a business cannot be apply the program and be engaged in primary resource extraction real estate development or financial services over time a business that has an ESOP plan our program cannot exceed raising over 5 million dollars in the last preceding two years go to the next side Ben this is going to be my final slide I have some summary comments on the nature shares and succession planning and a few other comments so with regards to equity shares what that means is the employee is is acquiring shares from the company's treasury that is directly from the business those shares have to be fully participating and what that means is the ability to access dividends shares should also be voting but the shares cannot have any features that reduce risk to the employee and that is basically in the form of a return of capital so return of principal or return on capital so some sort of feature that they get just by holding those shares and those features can include rights restrictions or guarantees that create a debt obligation on the small business a fixed rate of return through dividends in absence of retained earnings or some material right so for example if an employee were to come along make the investment in the ESOP and they get a free membership or free case of beer or wine those things are reduction consider a reduction of risk the only other rights that are available are the result of a death disability bankruptcy or voluntary loss of employment once an employee makes an investment in an ESOP it's done with the expectation those shares are held for at least three years during that time the business has to file with us an annual return just to demonstrate it's still using those funds to grow and develop that business the shares of the employees are to be held in escrow that's basically in safe keeping till that three-year window has been reached all right so now i'm going to talk a little bit of what's called a succession plan and that's where the owners want to sell their business to the employees and it can be done through the ESOP program it's the same tax credit it's a 20% tax credit the shares acquired from the owners the expectation is under a succession plan is that over a period of five to ten years the employees will acquire at least 10 percent of the voting shares in the company and at least 30 percent of the employees will participate in the program the succession program so overall the ESOP or Employee Share Ownership program is intended to provide an extra incentive to attract and retain valued employees the program is intended to increase employee engagement provide a competitive edge to the business and to hopefully get the employees and employees to work together for the long-term success of the respective business and finally the ESOP program is available to both private and publicly held businesses okay so that'll do it for my part of the presentation great thanks for that David um so there's no questions for that right now but we're going to throw it over to Ian who's going to take us through some of the specific investment capital branch programs that are designed to support VC businesses thank you David and Ian should just be coming up now hello Ian take it away oh thank you Ben and good morning everyone I'm going to speak about the two crown corporations that are involved with venture capital in the province carrying on from this previous slide if we can get to the next slide please carrying on from this previous slide this diagram shows where venture capital funds invest in small businesses once the businesses are close to showing positive cash flow venture capital funds start providing this later stage financing this occurs at stage three and four that you'll see at the top in the developmental and gross stages of the funding cycle the two funds I'll be briefly discussing will be concentrating in these stages startups aren't the only businesses that use equity capital developing and mature businesses may need extra financial capital for a variety of things including developing a new product or service line that is unproven or expanding into new markets debt isn't suitable because the business is not yet able to demonstrate certainly that the new idea or market will generate positive cash flow or interest costs or on debt would limit the cash flow needed to run the existing business during the growth and maturity stage large amounts of cash are required for marketing this is where the company is wanting to attract new customers and increase its customer base often a lender will not loan a hundred percent of the cash for new equipment or property so there is a need to put up collateral for debt funded assets some form of down payment is required and if the business itself isn't generating enough cash flow to reinvest in this way there may be a need for equity capital it's very rare that a business generates enough cash flow to buy out its owner so anyone wanting to buy a business has to bring in their own equity capital the esop program david mentioned earlier is a good example of how tax credits can be utilized the bc rena's funds fund was the government's first venture capital fund it was created in 2008 with the purpose of leveraging a 90 million dollar investment by the province of bc into other venture capital funds the 90 million was invested into nine different venture capital funds that were managed by eight different professional venture capital managers as this funding is maturing no further investments are being made and we expect the fund will be wound up in the next few years this means that the investments in these other vc funds will be cashed in and all gains will be realized the bc tech fund this is the latest government fund was created in the fall of 2016 it's 100 million dollar fund and 75 percent of those funds are going into other venture capital funds and 25 percent is being invested directly into other companies the bc tech fund focuses on cash flow positive companies and provides early stage a round investments the investments are in the one to five million dollar range and the areas that the bc tech fund concentrates on are life science digital media information and communication technology and clean tech the bc tech fund looks for companies that are seeing capital to scale up and grow their businesses these last few slides show how the province assists small businesses and later stage in the later stages of their funding cycle so please contact dave david or me if you have any further questions about the programs or the bc tech fund thanks awesome thanks and and thanks to david david for those overviews so we're going to throw things back now to susan who's going to finish up with a look at what barriers might exist to attracting equity capital thanks susan thanks then so we've talked about the different types of equity that are available and some of our programs that exist to help bc businesses encourage investors to contribute equity to their businesses and none of those programs is going to be of much use to developing a community's economy if the businesses themselves aren't ready for that investment so in order for any investor to put their money up for towards a business it has to be worth investing in and not look like it's going to be a headache so the product or service has to be something the investor believes can and should be brought to market so is it interesting technology does it work is it a product or service the investor knows something about does the idea have intellectual property protection so that the technology can't be taken and brought to market by someone else there have to be enough customers who would want to buy this and the business has to be able to get their product or service to that market so this is where a good transportation connections can be a community asset that makes a difference for a business the people involved in running the business have to have the skills to do their jobs of course for angel investors or venture capitalists they also look at whether the entrepreneurs are going to take their advice and follow through on the business plan they look at how much of the owner's own money has been put into the business and they want to see business owners who are committed fully the pricing of the product or service also needs to be set up so that it can make a reasonable profit after the cost of manufacturing and getting to market or covered you're never going to see someone make up profits on volume if they're under pricing their product you're going to see dragons den investors ask about unit pricing and costs a lot because of this and finally is the business going to generate enough free cash flow to give the investors a reasonable return on their investment one of the biggest barriers that we hear about to attracting capital is that businesses are not able to demonstrate and document that their business actually presents that attractive opportunity so either the systems to do that reporting are lacking or the entrepreneur doesn't have the skills of the sophistication to put all this information together into a business plan or a pitch presentation and also maintain the kind of reporting on a regular basis that investors are looking for so a common but somewhat quiet barrier to attracting equity capital is often in the attitude of the business owner towards sharing their business with others the new entrepreneurs who have been successful in generating an idea or experienced entrepreneurs who have bought tooth and claw to carve out a business against the odds they often resist giving up a share in the control over their business or they don't want to give up enough of a share to make it worthwhile for the investor so they don't want a partner and that's fair enough but it can limit their access to capital the other thing that happens is that entrepreneurs can have an unrealistic perception of the value of their business once again if you're watching dragons dan you see the investors there push back against how much money they're being asked to put up for a certain share in their business depending upon what they think the business is worth a $100,000 investment could either be a 10% share or a 50% share and that makes a big difference in how much the investors are expecting to see as a return on their investment so in order to bring equity capital into a business there has to be a legal structure that allows that to happen a lot of businesses especially long-standing ones are registered as sole proprietorships and not incorporated so that doesn't work incorporation creates the legal structure for different for a series of different share classes and that gives the flexibility a company needs to specify decision-making power so what are those voting shares and also how free cash flow gets distributed throughout dividends so some classes of shares can be dividend receiving and others not some investors also want to receive preferred shares and some of those have certain conditions that benefit the investor such as the ability to turn equity capital into debt that has to be paid back and that was that little asterisk on that equity doesn't need to be paid back points earlier in the presentation investors can also look at who else holds shares in the business and how many and decide whether they like that situation if there are a bunch of non-involved family members who hold shares for example an investor may want that to be changed or may want her shares to come with privileges that are different from those family members even in an attractive business opportunity with an entrepreneur who is skilled and willing to share control the business itself has to be set up to give the investor confidence so once again i'm going to return to reporting systems the ability to prove that the business is doing what you say it's going to do finally especially when accessing capital in small communities isolation can be a huge barrier businesses that operate without connections to others like them are going to have a harder time finding equity capital and maybe being ready to accept it so not knowing people who have enough money to become investors or are prepared to take on the complexity and the risk of becoming a shareholder in a business is a big barrier to accessing capital in a small population there won't be that many people who fit the profile of equity investor even if they have the money to do so angel investors often will co-invest put their money together with people who have experience in certain industries or certain types of financing so getting these networks built up in your region or your community will help you start seeing a critical mass where there's people who are used to being an investor so your community may be too small to see a population like this gather but working on a regional basis can actually help you develop those connections with people who start to become more ready and more willing to put their money forward as investors smaller communities also are less likely to have resident lawyers or accountants or the business advisors to help entrepreneurs do the business plans and do the kind of financial and management reporting that are necessary so that investors can see what's going on in the business and finally peer supports if business owners don't know other people who have accepted equity investment into their businesses the first being the first company in your town that gets a venture capital deal can be pretty daunting so bringing people together who are at have companies that are accepting equity capital can help create a peer network and they can talk about and normalize their experiences and advise each other on being an entrepreneur that has investors so how can you help businesses access capital in your small business i know that many people on the line are doing this and they're doing it well so i would definitely say if you've got any best practices pop that into the questions box and then can tell us about your ideas a couple of things that you can do is provide an arranged business planning support for businesses in your community so if you don't have a community futures office nearby get in touch with the nearest one because they offer those programs also innovate bc's uh venture acceleration program puts expertise throughout the province in offices and can connect with entrepreneurs to help them be ready to have a growth business get referrals to legal or accounting supports they may not be in your town they may be in larger centers nearby and as an economic developer you can have those relationships built ahead of time so that if you have a company that needs that sort of support you know where to send them one thing that you can do in your community is to actually build peer networks and bring people together who have companies that are heading on this growth pathway so getting people together so they can normalize those experiences and give each other support is a big part of building an investment community in your in your community and finally make connections with community businesses in your community to these provincial programs such as the investment capital branch and other programs of course like export navigator or innovate bc's programs if your community is very small just remember to work regionally and get those connections happening so a few resources or organizations that you can contact for support community futures bc as i already mentioned they have offices across the province with business planning supports and though they're primarily a lender we will be featuring them on our debt webinar the business planning activities and supports they provide are equally relevant to businesses that want to attract equity investment some community futures offices also have the venture connect program and that can help find buyers for businesses small business bc their office is in vancouver but they do have webinars and online materials and they also have business advisors that can connect with entrepreneurs directly as well and i mentioned also innovate bc so connect people in your community to the ignite program and that is a grant i said it was a unicorn but it actually exists it provides grants for technology development and commercialization and they with matching fund requirements so they will fund up to one third of projects there's also as i said the venture acceleration program which helps grow a company or advance technology the changes the way that things are done in an existing business or industry those are three resources and generally what you want to think of yourself as a connector thanks very much for participating i'm going to turn it back over to ben see if we have questions thank you susan all right i'm just going to open it up to the whole panel right now hi everyone so thanks so much everyone we just had a quick question for you dave um someone was asking about the eligible business corp and whether under a hundred employees also applies to single um proprietors so they own their own business so self-employed it's only available to uh two corporations in bc so sole proprietorships are not permitted to register they must be a corporation um with you know limited ink in their titles so sole proprietors are not permitted to register okay it's no thanks for that um i'm just going to take back the presenter view and go through a couple of other things so that was actually all the questions if you do have further questions um please get in touch with myself or uh with our presenters at their various branches and i'm just going to show you a few upcoming webinars right now if i can yes so upcoming webinars on april fourth uh we have jeremy stone talking about community economic development building resilience in your community and then we've got a new um last edition last minute edition community gaming grants program on april 25th the ministry of municipal affairs and housing community gaming grants branch we'll be talking about that and how you can apply and then on june 6th what to say to foster visitation destination bc we'll be talking about post wildfire marketing messages and i'm just going to point out that the the link for the first webinar there probably isn't december fourth dash three it's probably april fourth dash three yes don't read the link in case anyone is in case anyone is taking you literally thank you um and the community gaming grants program that link will be up but um it's just been last minute edition yesterday so um there'll be a few things to come from that but we'll send out invitations through our normal channels um if you're not already on our normal webinar distribution list please sign up through that link um that's the url and we only use that list to send out notices for webinars and we can sometimes put in a little extra info for projects happening our division when you're signing up just note that title is your job title and company name is your organization so thank you for participating in this webinar and thanks to all our panelists for this great overview of equity capital and kicking off our accessing capital series once you leave this webinar session there will be a window that pops up asking you to take a brief feedback survey please take a few minutes to respond as your feedback helps us to improve this series the recording of this webinar will go up on youtube for viewing and sharing and the link will be sent out by email to everyone who is registered on today's webinar and it'll be added to the economic development website in the bc ideas exchange area uh if you would like to contact myself uh please shoot an email to economicdevelopment at gov.bc.ca for any suggestions that didn't get into the feedback and thank you to the panel thank you effects thanks guys see you bye