notes either subsequently redeemed (for a proft) or converted into "discounted" shares when the startups raises their next funding round. These securities are not a handout: they are an investment that should generate returns once the economy recovers. Government would work with early-stage investors to identify and assess eligible startups and to allocate capital via convertible notes. The key design issue is at what funding stage to target investment. Should it be limited to companies at the seed stage or extended to companies further along the funding path. Later-stage investments would require greater fnancial commitment by governments. It is also important that the tax incentives available should apply to convertible debt as typically they do not.
(iv) Non-Dilutive Finance
Initiatives to stimulate investment activity by angel investors and venture capital funds need to be complemented by intervention to increase the supply of non-dilutive fnance (NDF). Notable examples are grants for innovation and commercialization. NDF programs are important for three reasons. First, seed investors rarely invest in ideas alone. They recognise that the business plan is ‘a work of fction’. NDF supports the discovery and early commercialisation stages, funding ideas to market which, by providing evidence and validation that creates credibility, enhances their investability. Second, if entrepreneurs raise equity too early they will experience signifcant dilution by the time their business scales-up, with potentially negative impact on motivation and alignment. Employee incentives need to be aligned with share options. They need to be incentivised to become angel investors following a successful exit which, in turn, will increase future entrepreneurial activity. Third, NDF helps frms to achieve their milestones and increases valuation. With the COVID-19 pandemic shifting investment terms and conditions in favour of investors, the signifcance of these milestones and valuations has increased. The support that comes with NDF programs is also critical. Governments are encouraged to pay innovation grants up-front rather than in arrears and to adopt a light touch to auditing to make speedy payments.
The Federal Government has recognized the need for NDF, announcing $250 million in funding for the Industrial Research Assistance Program (IRAP) to assist Canadian small and
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