crowdfunding & squareknot – how it works derek bond co-founder & managing director

CROWDFUNDING & SQUAREKNOT – HOW IT WORKS

DEREK BONDCO-FOUNDER & MANAGING DIRECTOR

SQUAREKNOT LIMITED

WHAT IS CROWDFUNDING?

Crowdfunding is the concept of funding a project or a business through a large number of people who ‘invest’ a relatively small amount each, usually through a web-based platform.

WHAT ARE THE DIFFERENT TYPES OF CROWDFUNDING?1. Donation Crowdfunding 2. Reward Crowdfunding

3. Loan/Debt Crowdfunding 4. Equity Crowdfunding

SOME OF THE MAIN CROWDFUNDING PLATFORMSDonation & Reward

_______________________________________________________________________________________________________________________________________

Loan/Debt Equity

SUCCESSFUL DIY CROWDFUNDING

• Brewdog – share issue prospectus approved by FCA• Round 1 in 2009 raised £750,000 in 5 months • Round 2 in 2011 raised £500,000 in 2 days (total £2.2m)• Round 3 in 2013 raised £1m in 24 hours (total £4.25 million)• Rewards = free beer!!

• Obama used donation crowdfunding to fund presidential campaigns• Raised $750 million in 2008• Raised $631 million in 2012 - $214 million dollars were small donations• Single email in June 2012 raised $2.6 million

BUSINESSES – WHAT ARE THE BENEFITS OF CROWDFUNDING? BANKS Don’t need to deal with banks and other traditional lenders MARKETING Promote business through the crowdfunding pitch CUSTOMERS Investors become long-term customers REWARDS Added incentive to investors REWARDS Reduces amount of equity given away to investors CONTROL Don’t lose control of business to Angel investors PERSONAL Build personal/business relationships with investors

HOW WILL SQUAREKNOT FACILITATE FUNDING FOR BUSINESSES?Squareknot is the first platform to offer all UK companies the

opportunity to apply for any combination of equity, reward and debt crowdfunding, in affiliation with Business Angels.

REWARDS ANGELS

EQUITY

DEBT

TYPICAL SQUAREKNOT DEAL STRUCTURES FOR A START-UP BUSINESSTotal £100,000 Total £150,000 Total £200,000

Equity Crowdfunding £25,000 Asset/Invoice Finance

£52,500

Scottish Enterprise £50,000

Reward Crowdfunding £25,000

Business Angel Syndicate £50,000Bank Facilities

£22,500

Business Angels £50,000

Reward/Equity Crowdfunding £75,000

Reward/Equity Crowdfunding £100,000

SQUAREKNOT v OTHER CROWDFUNDING PLATFORMS?Large database of potential investorsDifferent types of funding optionsAssistance in business planning and valuationBenefit from expertise and experience of Business AngelsPitch marketing advice and assistanceSquareknot are approved and regulated by the Financial Conduct

Authority

WHAT BUSINESSES CAN RAISE FUNDING THROUGH SQUAREKNOT?UK registered limited companies

Start-upsBusinesses in early stages of developmentEstablished companiesAll sectors

Working capital supportProduct R&DFunding for expansion or acquisitionAsset purchase and capital project funding

HOW MUCH CAN A BUSINESS RAISE ON A SQUAREKNOT PITCH?

• No defined lower or upper limits• Normal range will be between £30k and £250k• Examples:• £35k equity pitch for a zorbing run in Edinburgh• £50k reward & equity pitches for a football club • £125k equity/reward pitch for satellite broadband coy• £200k equity pitch for a software development coy• £450k debt pitch for a residential property development

SPECIFIC AREAS THAT SQUAREKNOT SPECIALISE IN

SPORTS FOOD & DRINK START-UPS

WHAT HAPPENS IF THE TARGET LEVEL OF FUNDING IS NOT ACHIEVED?

If the business pitch does not achieve 100% of its funding target within the agreed listing period, then the committed investments are cancelled, the pitch is closed, and Squareknot earn no commission.

INVESTORS – WHO CAN INVEST THROUGH SQUAREKNOT?UK resident - 18 years old or olderHave a valid UK bank or building society accountCan use a Pension Scheme to make loans/investmentsEquity & Debt Investments - Professional Investors only

By self-certification, orBy correctly completing a short questionnaire

Reward Pitches – no restrictionsMinimum investment £100Maximum on-line investment £10,000 (contact Squareknot to make

investments greater than £10,000)

WHAT DUE DILIGENCE DOES SQUAREKNOT UNDERTAKE ON INVESTMENT PITCHES?

• We undertake a review of the information that a business provides, and obtain evidence to support factual statements where we feel that it is appropriate to do so

• We use an FCA compliant checklist, however potential investors should not rely upon our due diligence when making investment decisions

• We only post investment pitches that in our opinion provide investors with a clear and unambiguous investment opportunity

• We do not provide any assessment or grading of the risk of specific investment pitches – we leave potential investors to make their own assessment of risk

WHAT ARE THE COSTS FOR BUSINESSES?

Commission fees for businesses on successfully funded pitches will be: Equity/Reward - 5% of the total amount raised, (minimum charge set at £2,000) Loans - Between 2% and 5% of the total amount raised (depending on loan term)

Other fees:• Listing/Administration fee - £500• Legal costs – estimated £700 to £1,000• Business Observer fee - £5,000pa (only for certain businesses that raise more

than £100k – at discretion of Squareknot)

WHAT ARE THE COSTS FOR INVESTORS?

• There are NO COSTS for investors to register as a Squareknot member, browse the website, interact with business owners and other investors, or make investments. • Squareknot will take a 5% commission fee from any equity dividends paid and of

any capital gains on the sale of shares.• Squareknot will take a commission fee equivalent to 1% of the initial amount of a

loan, and this commission will be deducted on a proportional basis each time a repayment is made by a borrower.

WHO ARE SQUAREKNOT?• Derek Bond – Chartered Accountant with extensive operational

management experience

• Brian Smillie – an experienced marketing professional who founded and sold his own creative agency

• Tom Preston – Chartered Accountant and Business Angel

• Iain Young – a corporate lawyer and business advisor with real entrepreneurial flair

• Kirsten Buchanan – marketing & communications executive

• Business Observers – a panel of experienced business professionals

SEIS TAX RELIEF• 50% Income Tax relief on amount invested• No Capital Gains Tax on gain on sale of shares• Loss relief if shares are sold at a loss

• Income Tax position for a 45% taxpayer who makes a qualifying SEIS investment of £1,000, and the company subsequently goes under resulting in a total loss for the investor is:• Income Tax Relief (£1,000 x 50%) £500• Loss Relief (£1,000 - £500) x 45% £225• Total Tax Relief £725

SEIS TAX RELIEF – QUALIFYING CONDITIONS• Investor must hold shares for 3 years• Investor maximum amount of investment in any year - £100,000• Investor cannot hold more than 30% of shares in the company• Investor cannot be an employee of the company• Company must be a UK registered unquoted limited company• Company must have less than 25 employees and gross assets of less than £200k• Company must have traded for less than 2 years• Excluded trades include: dealing in land, financial activities such as banking,

insurance, financing, providing legal or accountancy services, hotels & nursing homes• Company can only raise a maximum of £150,000 in total through SEIS

SEIS TAX RELIEF – THE POTENTIAL BENEFITS• Create a portfolio of 10 x £1,000 investments – initial net cost of investment = £5,000Scenario 1• 9/10 companies fail – loss relief (9 x £500 x 45%) = £2,025• Net cost of investment in 10 companies = £2,975• 1 company makes a 3 times return on investment – gain £3,000• Overall position is a profit of £25Scenario 2• 7/10 companies fail – loss relief (7 x £500 x 45%) = £1,575• Net cost of investment in 10 companies = £3,425• 3 companies make a 3 times return on investment – gain £9,000• Overall position is a profit of £5,575 (more than 100% return on initial net investment)

ANY QUESTIONS?

Derek Bondderekb@squareknot.co.uk

Mobile – 07717 432091