[Sorin is an office managing partner and cochair of the Venture Capital & Emerging Growth Companies practice at McCarter & English.]
The New Jersey Economic Development Authority (EDA) continues to innovate and create new mechanisms and programs to support the tech, tech-enabled and life science entrepreneurs, inventors and enterprises so critical to the state and surrounding region.
From coworking, accelerator and incubator opportunities, to investment support of a number of venture funds, to matching-dollar programs and unique tax incentives that enable tech companies to sell their unused Net Operating Losses (as a form of non-dilutive financing), to programs that encourage angel investors to invest in N.J. companies—with the new CoVest Fund, the EDA has again demonstrated its commitment to the state’s economic development, job creation and retention and wealth accretion.
While no single investment vehicle or program is a panacea capable of meeting all of the disparate needs for capital resources of our burgeoning tech and life science enterprises, the CoVest Fund offers a unique solution for access to capital for early-stage and emerging-growth companies.
In this instance, the EDA is helping companies build that all-important bridge from product development to actual commercialization. It is precisely at this sensitive juncture when many entrepreneurs experience a dearth of capital and too few financing options. This funding vehicle makes a lot of sense for those enterprises that might otherwise seek venture debt or some combination of debt and equity resources, and that need an additional source to complete such a funding round.
Similar to venture debt mechanisms for companies that are at the initial or early stages of commercialization, the CoVest Fund offers a debt solution in the form of convertible notes and a warrant kicker, with the obligations secured by a lien on the intellectual property assets of the company.
Of course, debt solutions, especially secured debt, offer some unique challenges and risks to a company, including debt-service obligations and the possible loss of mission-critical technology assets in the event of default. The EDA’s CoVest Fund mitigates these risks with a below-market interest rate and highly favorable, extended payment terms that provide companies with long-term debt (10-year maturity) and seven years without repayment requirements, thereby providing companies with an ample amount of time for their commercialization efforts to take hold and result in positive cash flow to service the debt.
Given the reality of limited capital resources suffered by virtually all developing technology and life science companies, I am pleased to see the EDA continuing to build on its positive track record of doing as much as it can to meet the needs of such companies with solutions applicable throughout their development and maturation periods.