The document outlines an approach for entrepreneurs to fund product development without debt or giving up equity, by partnering with larger companies. It discusses how Thomas McCabe has successfully used this approach in the past by identifying problems that large companies want to solve and developing solutions for them. The document then provides guidance on how entrepreneurs can identify potential partner companies, structure agreements to qualify their technology as the partner's R&D, avoid common pitfalls, and ensure the arrangement benefits both parties.

1. Non-traditional
product financing
Financial Jiu Jitsu for entrepreneurs
Thomas J McCabe
October 2015

2. What we’re going to do
• This invitation-only roundtable seminar will focus on funding product development
without going into debt or seeding valuable stock. Each of the participants will
share valuable contributions and learn from each other's experience.
•
The discussion will be facilitated by Thomas McCabe who used non traditional
methods to raise several rounds of product funding for McCabe Software
(McCabe.com), the company he founded.

3. Outline
• When this can work
• Deals I did --- examples
• Qualifications --- you’re the man
• You’re the clients R&D
• Why it’s a good deal for the CEO
• The arrangement
• Concept
• Contract
• Traps to avoid
• Types of companies where this can work
• Follow up

4. When this can work
• works when the CEO’s biggest problem overlaps commercial marketplace
• Why would it not?
• The CEO’s biggest problems are your companies research treasure trove

5. The deals I did
• A large telecommunications company
• A consulting company trying to establish self in reengineering
• One of the big six accounting firms(at the time) trying to get into Year 2000 remediation
• Hardware manufacturers – – HP, Dell, IBM, Sun
• A branch of the United States Army – – to apply the automation to all its contractors
• A distributor in Italy trying to establish its own technology credibility
• A second large telecommunication company with and extinct language.

6. The Deals I did(con’t)
• With each of these I had a core killer technology and a vision of how it
could play out in a much larger scale with their marketplace presence
•
With each of these there was a new twist I will put into the product. I would
give the sponsoring company credit for the idea. They could use this as a
discriminate to give them a competitive advantage in the marketplace.
•

7. You’re the man -- qualifications
• You are clearly the captain of this niche
• There is a huge overlap with the clients pressing needs
• There is a huge marketplace to be served
• Your passion and commitment is something the CEO cannot get anywhere
else.
• You are hugely successful and could do this deal with somebody else.

8. The entrepreneurs company as killer R&D
• the entrepreneur has precisely what the corporate R&D lacs
• deep understanding of the CEO’s biggest problem
• commitment to the solution space
• vision for product cycles over time
• killer development instinct, with on time delivery

9. From the CEO’s point of view
• The CEO has been waiting for someone who
• articulates his biggest problem
• has the chutzpah to pull it off
• has the credibility in the problem space
• has the passion to succeed

10. This is a very good deal for the client.
• He cannot grow his own killer technology,
• The cost of adapting your technology to his company is minuscule for him
• He can't find articulate and passionate spokespersons to convey his and your
message.
• He is looking for somebody like you.
• He may want you to help penetrate his company

11. Publish a paper with the CEO
• The CEO is looking to be a hero in cyber security
• This is probably his number one priority from its Board of Directors
• You probably can get things published that she probably can't

12. Traps
• Trials
• Pilots
• Legal
• ‘ Let’s get consensus ‘
• Sharing intellectual property
• stock ownership
• ‘tire kickers’
• ‘put in a tool for free and we’ll see how our people like it’

13. Traps --- continued
• If the above come up, explain to the CEO why it kills the deal
• The CEOs company drags out the negotiation – – they can't make a decision
• Do not let the client ‘use the product’ for a while
• Remember what seems like a large amount of money to you, is a drop in the bucket
for the CEO

14. Synergies with types of companies with this
could happen
• Consulting companies
• Overseas distributors
• A company with a related niche, but not quite in cyber security
. Ask attendees --- what type of companies for your niche

15. The agreement
• There is something new the client needs – – new features, new platform, new marketplace,
new language to parse. These new features have to be desirable for your general users.
•
Remember that the client's assessment of development cost is typically for five times larger
than yours – – don't give away this leverage, price it accordingly. If you reveal your very low
development costs you will lose credibility.
•
The client shares is in the development cost and he gets a 50% discount on licenses.
•

16. The contract
• Some money upfront,
• some money with a technical demonstration,
• the rest of the money upon delivery.
• Do not give into a contractual acceptance test – – this will kill the deal.
• Make sure you give money upfront, otherwise the client is not committed.
• I would call these relationships partnerships.

17. Incubator companies
• Firstly, what is their niche.
• Secondly, have they ever tried something like this.
• Thirdly, once they've this, how would they do it do it.
• Fourthly, maybe Vic or I accompany them in the negotiation, or coach them.

18. This is what you do
• While I was doing this there was a regular sales force, selling the regular
product at the regular price.
• It was a mistake to mix in the sales people with this – – they were all custom
one-of-a-kind deals.
• I would handle these myself with the help of very good technical support.
•

19. The other way
• The alternative – – angel investors or venture capital – – takes you off your
game.
• Getting and managing investors is another different game that you're
probably not great at.
• The time spent with clients in your field deepens and expands your
knowledge – – it's right in your sweet spot.
•

20. Try-learn cycle
• Done right, it’s a great deal for the CEO
• repeat it
• Fail at this 3 times, getting better each time, the 4th will work

21. SEC APPROVES TITLE III OF JOBS ACT, EQUITY CROWDFUNDING
WITH NON-ACCREDITED INVESTORS
FROM: CROWSOURCING.ORG
• The SEC just voted on and passed rules to implement Title III of the JOBS Act,
bringing non-accredited investors into the fold for equity crowdfunding.
• This sets the stage for equity crowdfunding to continue its exponential growth over
the next 3-5 years, on top of the existing market for accredited investors.
• Crowdfunding was already expected to surpass VC in 2016 at $34B a year in total
crowdfunding online, across all types of crowdfunding. By bringing in a new class
of investors with Title III, we can expect further growth of the equity market as
venture capital continues to move online.

22. Implications
• it will have massive implications for startups and investors alike, allowing
everyday citizens to invest in startups. This will open up a tremendous
amount of capital available to early stage companies.

23. Summary
• Equity crowdfunding expands to include non-accredited investor participation
• The new rules will go into place after a 90 day commenting period and publishing
• Startups and small businesses can raise up to $1M in a period of a year
• Investors making <$100,000 per year can invest the greater of $2,000 or 5% of
annual income
• Investors making >$100,000 per year can invest up to 10% of their annual income
• Offerings must be made via Broker-Dealer or Portal Intermediary
• Significant disclosures are required for companies to help provide transparency

24. Changing startup funding
• We’re seeing the same shift for investing in startups today that we saw in the 1980’s
for transactions in the public markets. Wealthy institutions, VCs, and Angels have
had exclusive access to investing in high-growth startups, but with Title III we see
the beginning of a more level playing field for information and access for everyday
investors to early stage private investments.
• I anticipate that the next evolution in VC and angel investing will be realized in the
form of equity crowdfunding platforms serving as Venture Capital firms and funds
of their own, as investing in startups moves online and is opened up to the general
public.

25. Companies have to disclose
• Information about officers and directors as well as owners of 20 percent or more of the company.
• A description of the company’s business and the use of proceeds from the offering.
• The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount,
and whether the company will accept investments in excess of the target offering amount.
• Certain related-party transactions.
• A description of the financial condition of the company.
• Financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to
be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.
•

26. Platforms
• Title III equity crowdfunding transactions will be required to take place through an SEC-registered intermediary,
either a broker-dealer or a funding portal. Under the proposed rules, the offerings would be conducted exclusively
online through a platform operated by a registered broker or a funding portal, which is a new type of SEC
registrant.
• The proposed rules would require these intermediaries to:
• Provide investors with educational materials.
• Take measures to reduce the risk of fraud.
• Make available information about the issuer and the offering.
• Provide communication channels to permit discussions about offerings on the platform.
• Facilitate the offer and sale of crowdfunded securities.

27. Follow up
Role playing --- rehearsal
Overcoming objections
Thank You,
Tom McCabe
tom@mccabetech.com
301 775 9454