Frank Milone
Partner, Assurance and Advisory Services
Fiondella, Milone & LaSaracina LLP

A frequent issue faced by early stage and high growth companies is how to determine the value of the company when granting equity based compensation. This issue is not new to management and boards, but as the accounting and tax rules have continued to focus on the concept of fair value and deferred compensation the issue has become more complicated and with greater potential consequences if determined in a manner deemed inappropriate.    

In 2004, the AICPA issued a practice aid titled “Valuation of Privately-Held-Company Equity Securities Issued as Compensation”. This practice aid provides best practices for the valuation of and the disclosures related to the issuance of privately-held-company equity securities as compensation. This practice aid became the standard for how most valuations of private company securities are undertaken by valuation experts and how they should be approached by management. 

In January 2005, Section 409A was added to the Internal Revenue Code. Under Section 409A, a stock option having an exercise price less than the fair market value of the common stock determined as of the option grant date constitutes a deferred compensation arrangement. This typically will result in adverse tax consequences for the option recipient and a tax withholding responsibility for the company.

In addition to the adverse tax consequences under Section 409A, management also needs to ensure that a proper valuation is available to support significant transactions impacting its financial statements. In addition to stock based compensation, other equity and debt transactions may also create the need to support the value of the underlying shares to properly reflect such transactions on the company financial statements in accordance with generally accepted accounting principles. 

We are often asked, “What are the acceptable methods for determining the fair market value of private company stock?” The fair market value of private company stock must be determined, based on the private company’s own facts and circumstances, by the application of a reasonable valuation method. A method will not be considered reasonable if it does not take into consideration all available information material to the valuation of the private company.

The factors to be considered under a reasonable valuation method include, as applicable:

• the value of tangible and intangible assets.
• the present value of future cash-flows.
• the readily determinable market value of similar entities engaged in a substantially similar business.
• other relevant factors such as control premiums or discounts for lack of marketability.

The bottom line is the regulations have significantly changed the method by which a private company determines the fair market value of its stock. For example, valuation of private company stock solely by reference to a ratio related to the value of preferred stock (the old 10 to 1 ratio) generally will not be reasonable.

Most early stage and high growth companies will have to weigh all these factors when considering if and when they should incur the cost of engaging an external valuation firm to determine the fair value of the company or to perform the valuation internally. If the decision is to perform the valuation internally, management and board members will need to ensure that individuals involved in the process satisfy the “significant knowledge and experience” requirement as outlined under Section 409A. Lastly, if engaging a valuation firm it is also advisable to have the qualifications and approach being utilized by the valuation firm reviewed by your audit and tax advisors prior to making a final decision.

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Posted under Sponsor Guest Article, Tech Community / VC World

Our new fiscal year, which began July 1, is off to a great start! Last week we announced the completion of our first two investments of the year – one in a software company that is new to CI’s portfolio, Weston Software Inc. of Westport, and the other in an existing bioscience portfolio company, Cara Therapeutics Inc. of Shelton. The former investment was a Series A and the latter a Series D – two ends of the venture investment spectrum. Together these investments will put to work nearly $800,000 of capital from CI.

Based on our current pipeline of investment opportunities, it appears that our investment activity level this year will likely be strong – on par with last year. We look forward to keeping you apprised of our new investments as the year unfolds.

Peter Longo
President & Executive Director

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Posted under Message from the President

We are excited that the CTech incubator offices at the UConn Health Center in Farmington are now open for occupancy! This is the third CTech location in Connecticut and represents an expansion of the successful CTech incubator initiative, which focuses on cultivating high-tech startups.

In her announcement on Sunday about CTech at the UConn Technology Incubation Program, Governor Rell said, “New businesses will benefit from a full range of resources provided by CI and UConn…Companies will have access to business mentors, UConn research facilities and faculty, student interns and employees, business advisory services, environmental health and safety training and funding.”

To view the governor’s full press release, please click here.

Entrepreneurs or startup ventures interested in obtaining more information about the CTech incubator at UConn or applying to participate should visit http://otc.uconn.edu/tip/how-to-apply/ . Interested parties can also contact:

·         Rita Zangari, Executive Program Director, Technology Incubation, UConn, (860)486-3010 or rita.zangari@uconn.edu.

·         Charles Moret, Managing Director, Business Development, CI, (860)257-2333 or charlie.moret@ctinnovations.com.    

CTech at the UConn Technology Incubation Program is CI’s third CTech initiative. The first CTech was opened in Science Park at Yale in New Haven. This facility is currently undergoing an expansion and is due to open its new space at 5 Science Park on September 1. The second CTech incubator, announced in April, is the CTech IncUBator @ University of Bridgeport, which is now accepting applications from interested companies and is scheduled to open in the fall. For more information, visit www.ctech-ct.org. 

Charlie Moret

Managing Director, Business Development

Posted under CTech

Last week we launched a new Connecticut Innovations initiative, the Angel Investor Tax Credit Program, which is aimed at helping small businesses in Connecticut by stimulating investments in them by angel investors. The program, administered by CI on behalf of the state of Connecticut, was created by Public Act 10-75, An Act Concerning the Recommendations of the Majority of Leaders’ Jobs Growth Roundtable, which was signed into law on May 6.

Under the program, eligible angel investors may take a credit against Connecticut state income tax for certain investments made in qualifying businesses. Investments must be at least $100,000, and the tax credit equals 25 percent of the cash investment, up to $250,000. You may find additional details about the program at the newly launched Web site www.ctangeltaxcredit.com.

Coincidentally, I recently came across a VentureBeat article in which one of Boston’s top angel investors, Will Herman, shares some investment guidelines for would-be angels. It is evident that he is enthusiastic about being an angel investor and, with over 60 angel deals under his wings, he’s got plenty of wisdom to share.

“I invest because I have a blast doing it,” says Herman. “It’s about 75 percent of the fun of running the company yourself with only 5 percent of the stress. I get to meet smart, energetic people with great visions and boundless energy.”

Here is a link to his VentureBeat article “Guidelines for potential angel investors.”

Peter Longo

President & Executive Director

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Posted under Message from the President

It’s always helpful to glean pearls of wisdom from someone who has in-depth knowledge about a topic of interest to you. If you are interested in securing investment capital for your entrepreneurial venture, you may wish to review a list of pointers offered by Darrin Redus, chief economic inclusion officer of JumpStart, a nationally recognized nonprofit that secures and provides resources for entrepreneurs. He has sat through numerous presentations by entrepreneurs seeking new investments – and has summarized in a recent blog post his top ten tips to help entrepreneurs raise capital.

A few of them may resonate with you, so take a look… Here is a link: “10 Tips in Preparing for Investors.”

Peter Longo

President and Executive Director

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Posted under Message from the President

Ever hear of SATOP?  Every once in awhile, a program comes along that seems almost too good to be true and you wonder – what’s the catch?

Well, let me tell you a little about SATOP – Space Alliance Technology Outreach Program.  If you are a Connecticut technology or manufacturing company with a technical problem requiring engineering expertise you may be eligible for support from this amazing group.  This organization is funded by NASA to help small businesses solve challenging engineering problems.  If SATOP is able to assist, the small business is provided with up to 40 hours of FREE technical assistance from rocket scientists or engineers.  The CT SBIR Office is the “Official” partner for the SATOP program in Connecticut.

It’s easy for a Connecticut company to determine if they are eligible.  Simply go to their website and download a request form.  Here are two important links to learning more about the program:

http://www.spacetechsolutions.com/
http://spacetechsolutions.com/requestor/prequalify.asp

Deb Santy
Director, SBIR

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Posted under CT SBIR

I am very pleased to report that  two Small Business Innovation Research (SBIR) winners from Connecticut recently won the prestigious Army SBIR Achievement Award for their technology and novel products designed to help the war soldier.  They are M Cubed Technologies (Monroe) and Precision Combustion, Inc.  (North Haven). 

When you consider that 471 projects were eligible, and only 11 companies were selected, it is so wonderful that two of the winners are from Connecticut.  The Governor was excited as well:

“This competition is about as steep as it gets – companies from all 50 states submitted more than 470 breakthrough products – and to have two Connecticut firms recognized for their outstanding achievement is simply amazing,” Governor Rell said. “I am very proud of M Cubed Technologies and PCI for helping protect and improve the lives our troops in Iraq and Afghanistan. Connecticut may be small, but we clearly have the right focus: moving great products from innovation to commercialization.”

For more information please check out the Governor’s press release:

http://www.ct.gov/ecd/cwp/view.asp?a=1104&q=461948

Deb Santy
Director, SBIR

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Posted under CT SBIR

We are pleased to announce our newest portfolio company, MiraDx.   This exciting new company was formed in February 2008 by researchers at Yale University to develop and bring to market gene-based laboratory tests based on sophisticated, ground-breaking genomic research.  The Company is applying its discoveries to develop molecular diagnostics, which will provide individualized information on the likelihood of disease occurrence and response to certain types of therapy. These diagnostic technologies will generate information that healthcare providers and patients will use in making treatment decisions.

Mira Dx has established its own CLIA-certified lab and has already begun processing the first of its diagnostic tests, under the name PreOvar to help evaluate ovarian cancer risk.

Ovarian cancer kills more women than all of the other gynecologic cancers combined (cervical, uterine, etc.) and is the fourth leading cause of cancer death among women in the United States.  The American Cancer Society estimates that there were about 22,000 new cases of ovarian cancer in the United States in 2007. About 15,000 women were expected to die of the disease.  If diagnosed at the localized stage (very early), the 5-year survival rate is 93%; however, only 19% of all cases are detected at this stage. By the time that a woman becomes symptomatic, the disease has often progressed beyond the localized stage. Further, ovarian cancer is extremely expensive to treat, averaging over $345,000 per patient, largely due to the need for multiple de-bulking surgeries as well as multiple courses of chemotherapy.

The MiraDx PreOvar test requires only a saliva or blood sample, which MiraDx processes in its lab.  And, the doctor and patient can receive the results within 5-7 days. The report will identify the existence of the KRAS-variant—a DNA indicator of risk to develop ovarian cancer.  The results are simply a positive or negative result.

The business operations, CLIA lab and research and development functions of the Company are located at 300 George Street, in New Haven, Connecticut, in approximately 4,000 square feet of space divided into offices and a state-of-the-art automated DNA processing and research laboratory.

To learn more about MiraDx, please refer to the Company website at www.miradx.com or to the Connecticut Innovations press release about MiraDx issued last week.

David Wurzer
Managing Director, Investments

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Posted under From the Deal Team, New Investments, Portfolio Company News

A recent Harvard Business Review blog post by Anthony Tjan emphasizes that CEOs must focus on three things: planning, selling, and executing. To do a good job at all three, entrepreneurs must “assess [their] own entrepreneurial aptitude and effectiveness” and then “quickly fill the gaps with the best talent [they] can find.” In other words, they must build teams to complement their own strengths and weaknesses.

This is great advice for entrepreneurs. Hear more about the importance of planning, selling and executing in Mr. Tjan’s blog post.

Peter Longo

President and Executive Director

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Posted under Message from the President