JPA BRENSON LAWLOR CORPORATE FINANCE & RECOVERY

JPA Brenson Lawlor Corporate Finance

Start-up & Early Stage Tech Companies

Cash Is King

7th May 2020

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JPA BRENSON LAWLOR CORPORATE FINANCE & RECOVERY

The Irish economy has been brought to a standstill

following the outbreak of COVID-19 across the island,

which has seen the vast majority of businesses having to

limit or cease trading until further guidance saying

otherwise is issued by the government. This is

undoubtedly a turbulent time for all businesses; however,

start-up companies are facing even greater challenges

due to the potential inability of many start-ups to access

capital required to continue operating or to make their

business model a reality. JPA Brenson Lawlor has been,

and will continue to be, on call and ready to provide professional advice to our

current and prospective start-up & early stage tech company clients. We have

continued to advise that clients take a pro-active approach to managing their

cash and communicate with funders to ensure they are best placed to access the

cash they need. Those who can weather this storm will be best positioned for

growth in the medium to long term.

We work with clients from the following accelerator programs and VC’:

JPA BRENSON LAWLOR – HELPING START-UPS & EARLY

STAGE TECH COMPANIES FULFILL THEIR POTENTIAL

Jason Bradshaw

Partner

Corporate Finance

INTRODUCTION

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JPA BRENSON LAWLOR CORPORATE FINANCE & RECOVERY

TABLE OF

CONTENTS

CURRENT

FINANCING

LANDSCAPE

1

PRESERVING

CASH 2

FUNDING

OPTIONS 3

SECURING

FUNDING: TOP

TIPS

4

GOVERNEMNT

SUPPORTS 5

LOOKING

FORWARD 6

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Many start-up and early stage companies will face a difficult task of securing the funding needed to bring their

products/services to the market. The task of securing capital is always a difficult process for start-ups for several

reasons:

• Scaling back of traditional lending post 2008 financial crisis

• Difficulty in standing out to prospective investors

• Intense competition from other start-up companies

• Categorised as a high-risk investment

However, whilst these barriers to capital are still prevalent, there has recently been a new and challenging barrier

introduced – COVID-19. The recent pandemic has significantly impacted the financing landscape for start-up

companies and brought a fresh wave of funding challenges to overcome. Start-up companies now face delays in the

implementation of their business model due to government restrictions, almost zero levels of consumer demand in

many sectors and a shift in focus for almost all sources of funding.

Government restrictions will certainly impact the plans of many start-ups looking to roll-out new products or expand

their current operations. Until there is a nationwide easing of the restrictions, it will be difficult for business plans to

unfold as intended. The government restrictions have also confined the vast majority of the population to their homes,

thus creating a huge drop in consumer demand for many sectors. These challenge’s impact start-ups and established

businesses in much the same way, but it is the potential lack of resources which compound the pressure for start-ups.

A recent survey by Scale Ireland found that the key challenges faced by early stage innovation driven companies are

the slow responses by key actors, lack of co-ordination between government, banks and others and the thresholds for

supports being too high, with support instruments not adequately matching needs.

Outside of the close friends and family circle, start-ups primarily seek external funding from willing investors.

However, in the current economic environment investors will be focusing their attention on serving and maintaining

their existing portfolio to ensure that current clients/companies are being given all the resources required to secure

their future. The current crisis may lead to lower company valuations in the short to medium term and this may entice

investors to part with their cash for businesses which they see as good value. There may be opportunities for start-

ups to stay afloat through investor cash, but with the trade-off having to give away increased shareholder equity.

Start-ups should focus their attention on keeping the business afloat until the markets hopefullu return to normality

within the next 12-18 months.

1 CURRENT FINANCING LANDSCAPE

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The vast majority (80%) of Irish Start-

Up’s only have enough cash to sustain

the business for the next six months

while the remainder (20%) only have

enough cash to get them through the

next month according to recent

research by Scale Ireland. These are

startling statistics and highlights the

urgency required in minimising

existing cash burn whilst also

securing additional funding.

During the current economic climate,

we are likely to see many businesses

fail as consumer demand has fallen

dramatically. With the possibility of

normality not returning until a

vaccine is found, many businesses will

continue to see their cash reserves

depleting and the revenues dwindling.

Many start-ups will fail without pro-

active cash management, those who

can stay solvent will be best poised to

take advantage of the economic

growth which has historically

followed large economic downturns.

Some tips for start-ups and early stage

tech companies on preserving cash

are as follows:

(a) Minimise cash outflows

The first priority will be to review all

elements of expenditure, focusing on

the largest cost centres e.g. Wages,

R&D etc. Cash outflows can be

minimised by seeking loan

moratoriums (where relevant),

abatement or deferral of rent and

rates, delaying of tax payments where

allowable by Revenue, negotiating

with employees on reduced hours or

pay and shelving non-essential

spending e.g. new CapEx projects or

non-core employees. Saving cash now

may be essential in order to secure the

viability of the business for the next

six months. Cash is King and start-ups

should budget accordingly.

(b) Communicate with your

funders

It is important that start-ups are

transparent with their investors

and/or funders so that both parties

understand the current cashflow risks

of the business. Most funders will

currently be focused on their existing

portfolio companies in order to

maximise their chances of survival,

communicating clearly with funders

on required support can result in

additional capital being made

available to help your business

weather the storm or lenders

providing moratoriums on

repayments and refinancing options.

Communication will be essential for

pre-revenue start-ups who will need

to instil a level of confidence in

funders that their business model still

has potential to succeed.

(c) Seek government support

The government has announced a

wide range of supports to help

businesses and start-ups navigate

these difficult times. Start-ups should

make use of all supports available to

them as these may prove to be an

essential life-saver in accessing the

liquidity needed to stay afloat. For

example, the temporary wage subsidy

scheme can see start-ups receive a

subsidy from the government of up to

85% of an employee’s salary (if it can

be shown that investment has

reduced by 25%), this level of cash

support is unprecedented. These

schemes will help keep many Irish

businesses afloat whilst also helping

to retain key staff which are often vital

to the success of a start-up business.

2 PRESERVING CASH

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JPA BRENSON LAWLOR CORPORATE FINANCE & RECOVERY

“80% of Irish Start-Up’s

only have enough cash to

sustain the business for the

next six months while the

remainder 20% only have

enough cash to get them

through the next month

according to research from

Scale Ireland”

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JPA BRENSON LAWLOR CORPORATE FINANCE & RECOVERY

Funding is the fundamental aspect of

success for start-ups, as without

sufficient capital a business will struggle

to grow or fully realise its potential.

Start-up founders should familiarise

themselves with the various funding

options available. Some of the most

common funding options available to

start-ups are as follows:

Personal Equity

Self-funding is a very common method

for start-ups which involves using your

own cash or that of friends and family, to

get your business off the ground. This

funding option is often utilised at the

very early stages of a start-ups life cycle.

Crowdfunding

Crowdfunding is a funding option

whereby a business raises capital from a

large amount of investors. Start-ups can

utilise crowd funding by outlining the

business case for their service/product

and offering up portion of equity in

return for the successful raising of the

required capital. Crowdfunding can also

be completed without giving up equity,

through donation based, exchange

based or lending based crowdfunding.

External Investors

Funding can be sought from external

investors who take an equity position in

the company in exchange for providing

capital. Angel investors or Accelerator

programs will often invest seed capital

at the very early stages of a start-up

whilst Venture Capitalists will invest

during subsequent funding rounds

when the potential of the business

becomes more established. Angel

investors typically invest smaller

amounts than venture capitalists, but

both will generally want a 15%/20%

plus equity stake, whilst Accelerator

programs often require circa 10%

equity stakes. External investors will

often present themselves in the early

stages of the funding life cycle.

Employment Investment and

Incentive Scheme (EIIS)

The EIIS Scheme was established by the

Irish Government through the Revenue

Commissioners. Third Party investors

can make investments into start-up

companies and they can then receive

Income Tax relief of up to 40% on their

investment. The funds are repayable by

the Company to the investors after four

years and can be issued as non-equity

shares. This option is a very attractive

opportunity for start-up owners as it is

possible to avoid diluting their equity in

the company. For more details on this

scheme please click here.

Lending Institutions

Lending institutions such as legacy

banks and alternative financiers may

provide funding for start-ups, although

it is often quite difficult due to more

restrictive lending criteria brought

about after the 2008 financial crisis.

Funding is provided on the basis that it

is repaid along with an interest rate and

applicable fees. In order to secure bank

funding, the business must be cash

generative and be able to repay monies

borrowed on a monthly basis.

Government Support Programs

There are a range of Government

programs that assist start-ups by

providing capital. Support is provided

through cheap loans, vouchers, tax

credits and grants etc. Please see section

5 for more details on the available

supports from government bodies.

3 FUNDING OPTIONS

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Get Your Pitch Right

Arguably one of the key factors of success for start-ups is getting the pitch right.

The pitch is vital to helping your company stand out from the hundreds of other

transformative ideas out there. The pitch will consist of several elements which

when combined will instil confidence in potential funders that

your business is the right business for which they should part

with their money. The pitch will entail drawing up a business

plan which conveys the business model, market analysis,

financial projections and ultimately the story of where

this business intends to go and how it intends to get

there.

Target The Right Funders

Whilst every start-up founder wants the capital required

to make their dream a reality, they should not jump the

gun and make hasty decisions on funders. The relationship

between start-ups and founders should be mutually beneficial

and have a common goal in moving the business forward. It is

important the founders assess whether a potential investor is the right

fit culturally for their business as the investor will more often than not will

become part owner through their acquisition of an equity stake. Founders

should ensure their potential investors are also committed to the business

idea and not just the financial reward. The investor should also have

resources other than capital from which the start-up can leverage e.g.

connections, expertise, office space etc.

Demonstrate Your Personal Credibility

In addition to the business plan, it is crucial the start-up founders

understand the importance of demonstrating their own credibility to

funders, who are often investing just as much in the person as the business.

Venture Capitalists, investors and lenders all want to know

whether you have the competency, knowledge and grit

needed to lead the business on a successful trajectory.

Use Accelerator Programs

Accelerator programs are an excellent resource for

early stage tech-start-ups, not only do members of

these programmes benefit from seed capital but they

access mentorships, networking, and recognition

opportunities. Applications to Accelerator programs are

competitive and places are usually reserved for the most promising

start-ups. These programs aim to literally accelerate the growth of

your business and provide you with additional resources needed to

succeed. We here at JPA Brenson Lawlor work with many accelerator

programs and have advised several high potential start-ups within

these programs, assisting them with financial and strategic

objectives.

4 SECURING FUNDING: TOP TIPS

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JPA BRENSON LAWLOR CORPORATE FINANCE & RECOVERY

SBCI Local Enterprise office • SBCI Working Capital Loan Scheme ` - To fund Working Capital requirements to support/enable innovation, change or adaption of the business to mitigate the impact

of COVID-19. - COVID- 19 has negatively impacted turnover and/or profitability by a >= 15% - A business will need to be SBCI eligible - Loans between €25k - €1.5M. Unsecured loans up to €500K - Click here for more details & eligibility criteria

• Business Continuity Vouchers - The voucher is worth up to €2,500 - Can be used for 3rd party consultancy costs

Click here for more details eligibility criteria

• SBCI Future Growth Loan Scheme - Loans for long term investments and there is a list of excluded expenditure. - Loan amounts from €100K to €3M. Unsecured loans up to €500K. - Click here for more details & eligibility criteria

• Microfinance Start-Up Loan - Loans from €5K - €25K - Support for early stage businesses in operation < 18 months - Click here for more details & eligibility criteria

• SBCI SME Credit Guarantee Scheme

- Available to micro and SME’s by banks in situations where they are unable to access traditional finance or refinance existing facilities (usually those with non-traditional lenders).

- Up to 80% of the loan value is guaranteed by the government to the participating bank in the case of borrower default. - Loans between €10K - €1M. - Click here for more details eligibility criteria

• Trading Online Voucher - The voucher is worth up to €2,500 - To help businesses with < 10 employees grow online presence - Click here for more details eligibility criteria

• Microfinance COVID-19 Business Loan - Loans up to €50K for companies with < 10 employees and turnover < €2M. Business must be impacted by more than 15%

in actual/projected turnover and cannot access traditional finance. - Interest at 4.50% for LEO applicants or 5.5% for Direct applicants. - Loan terms up to 3 years. - First 6 months interest and repayment free. - Click here for more details eligibility criteria

• Other LEO Financial Supports

- Feasibility Study Grants - Priming Grants - Business Expansion Grants - Technical Assistance for Micro Exporters - European Globalisation Fund - New Agile Innovation Fund - Brexit Supports for your Small Business - Click here for more details eligibility criteria

5 GOVERNMENT SUPPORTS

At JPA Brenson Lawlor, we assist

businesses in accessing the supports

available to them. Our firm are approved

Financial Advisors by Enterprise Ireland

and Local Enterprise Offices.

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Revenue Commissioners & Government Enterprise Ireland • Wage Subsidy Scheme

- Show >= 25% reduction in investment - Up to 85% of qualifying wages subsidised subject to maximum of €410 - Click here for more details

• Business Financial Planning Grant - Up to €5,000 support for companies who engage financial consultants to assist with business plan preparation. - Available to all Enterprise Ireland clients and certain domestically focused companies with 10 + full-time employees - Click here for more details & eligibility criteria

• Prioritizing of payments and refunds and Tax Return Payment Deferrals

- Revenue will prioritise approval and processing of refunds and repayments to taxpayers. - In some cases, refunds and repayments will be prioritised even in the absence of iXBRL accounts - Click here for more details

• Lean Business Continuity Voucher

- €2,500 in training or advisory services support related to operations of business - Available to High Potential Start-ups - Click here for more details & eligibility criteria

• Suspension of interest for late payments

- Revenue will suspend interest on late payments for filings on taxes such as PAYE and VAT. - Revenue will continue to issue updated guidance. - Click here for more details

• High Potential Start-Up (HPSU) Funding - Businesses with the potential to develop an innovative product or service for sale on international markets and the potential

to create 10 jobs and €1m in sales within 3 years of starting up - HPSU funding is offered through various forms and stages from start-up feasibility to investment stage to post investment

stage - Click here for more details eligibility criteria

• Suspension of Compliance Intervention activities - Revenue has suspended all debt enforcement activities. - warehousing’ of tax liabilities for a period of twelve months after recommencement of trading during which time there will be

no debt enforcement - Click here for more details

• Exploring Innovation Grant - The aim of the Exploring Innovation grant is to support better planning of R&D, Innovation, or International Collaboration

projects - 50% of eligible expenditures to a maximum grant of up to €35,000 - Click here for more details eligibility criteria

• R&D Tax credit payments expedited

- Early payment of 2020 instalments of excess Research and Development (R&D) Tax Credits - Click here for more details

• Agile Innovation Fund & Business Innovation Fund - Supports the development of new or substantially improved products, services, or processes, - Eligible companies may receive up to a 50% grant on €300K of eligible expenditure

Click here for more details eligibility criteria

• Pause on collection of commercial rates for some businesses

- €10,000 restart grant for micro and small businesses based on a rates/waiver rebate from 2019 - Three-month commercial rates waiver for impacted businesses

-

• Sustaining Enterprise Fund

- €180 million fund - Up to €800K support for companies in manufacturing or international traded services - Evidence of >= 15% decline in projected turnover, have 10 + full-time employees and unable to raise funding from market - Click here for more details & eligibility criteria

• COVID-19 Retail Online Scheme - €2 million fund - Aim to enhance digital capability and online competitiveness - Maximum grant of 80% or €40K of the project eligible costs - Click here for more details eligibility criteria

• Restructuring Support and Aid - Funding available to SME’s who have failed to secure funding from market - Temporary Restructuring Loans between €100K and €3M for companies operating 3 plus years. - Equity based restructuring aid between €100K and €3M, companies must contribute 25% - 40% of restructuring costs - Available from Enterprise Ireland. For further information, contact businessresponse@enterprise-ireland.com

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There needs to be a co-ordinated effort by many actors in the Irish start-up sector in

order to ensure our famous start-up culture is preserved. Existing start-ups should

focus on managing their cash and securing required capital, government agencies will

need to focus on expanding existing supports to be more inclusive of the broader start-

up sector and there will need to be continued encouragement for innovation so that we

do not lose a generation of start-ups.

Whilst it is easy to focus on the negatives for start-ups during this pandemic, we should

recognise that there is potential for start-ups to flourish during these uncertain times.

Originally the pandemic was viewed as a systematic shock which affected all

businesses, it is now becoming clear that some sectors are benefiting such as logistics,

education, online entertainment, Information Technology, and food retail. The huge

increase in those working from home is likely to fundamentally change the way

businesses operate. Businesses can save money on rent and overheads through

allowing employees to continue working from home and employees are likely to be

much happier as a result of less commuting and more flexibility in achieving their

required output. Working from home will provide many new business opportunities

through the need for communication solutions, IT hardware & software, and cyber

security solutions. The logistics sector has seen a rapid rise in demand due to the

current pandemic, a rise which is unlikely to fall off in the future as people become

accustomed to online ordering convenience and reduced risk of contagion. It is likely

that we will see start-ups begin to disrupt this sector and optimising logistics through

technology such as drone delivery or the improvement of transport routes due to

machine learning and Artificial Intelligence. Dublin based Buymie, a same day grocery

delivery service, recently raised €2.2M in its latest funding round, which shows funders

still have appetite for innovative and scalable start-ups.

Moving forward, we are likely to see choppy waters for Irish start-ups, but every storm

eventually passes and with this passing, opportunity often comes. It is important that

we recognise that this black swan event will force us to innovate, which may prove

extremely beneficial for those who capitalise on opportunities presented.

6 LOOKING FORWARD

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JPA Brenson Lawlor

Chartered Accountants & Business Advisors

t: 353-1-668 9760 f: 353-1-668 9778 e: info@brensonlawlor.ie w: www.brensonlawlor.ie

Argyle Square

Morehampton Road

Donnybrook

Dublin 4

Unit 218/219

The Capel Building

Mary’s Abbey

Dublin 7

Jason Bradshaw FCA

Corporate Finance & Recovery Partner

T: 086-820-1442

E: Jason@brensonlawlor.ie

Conor Martin ACA

Corporate Finance & Recovery Manager

T: 01 668 9760

E: Conor@brensonlawlor.ie

Ian Lawlor FCA

Managing Partner

T: 087-855-9454

E: Ian@brensonlawlor.ie

Bruce Waldron

Corporate Finance Senior Executive

T: 01 668 9760

E: Bruce@brensonlawlor.ie

Adam McIvor

Corporate Finance Executive

T: 01 668 9760

E: Adam@brensonlawlor.ie

CONTACT US:

Michael O’Leary

Tax Partner

T: 087-827-3317

E: MichaelOLeary@brensonlawlor.ie