HOW TO RAISE CAPITAL
There are certain fundamentals that you must have in place in order to raise any
amount of capital from investors properly (whether it
be one investor or one hundred):
First, you must have proper transaction structure in place before you interact with
investors. The overwhelming majority of companies that are just using a business
plan to raise capital (whether for $50,000 or $15,000,000) typically have very little
transaction structure beyond "we're selling 20% of the company for $2,000,000".
This is wholly inadequate. How many shares or units are being sold? Preferred return
or common ownership? What is the share/unit price? What is the total authorized
share/unit pool and how will it affect future dilution of the investment? What is
the exit strategy? How is the investor return modeled? Are the securities convertible?
Not addressing this information places the responsibility for creating proper transaction
structure on the investor - which is very unprofessional and reflects poorly on
the subject company. To raise private capital successfully you need to go well beyond
simply stating to investors an aggregate amount of capital needed and providing
information on the business. Do not expect investors to have any interest in your
opportunity without providing them concise terms and conditions regarding their
capital investment in your company. If you were an investor - would you not want
the same information and structure provided for your investment?
Second, proper documentation for raising capital from investors is of critical importance.
A business plan is not even the bare minimum needed for raising private funding
- of any amount. The specific documents needed for raising private capital are:
Private Placement Memorandum: The Private Placement Memorandum, or "PPM", is the
document that discloses all pertinent information to the investors about the company,
proposed company operations, the transaction structure (whether you are selling
equity ownership or raising debt financing from the investors), the terms of the
investment (share price, note amounts, maturity dates,
etc.), risks the investors may face, etc. Do not confuse the detailed corporate
disclosures, SEC disclosures, and transaction structure in a PPM with the general
information a business plan provides - they are not the same.
Subscription Agreement: Business plans do not even provide the documentation
necessary to allow the investor to actually invest. Don't expect investors to
provide you funding based on a handshake. Would you invest funds into a company
without signing a document that sets forth the terms and conditions of
the investment? The Subscription Agreement sets forth these terms and conditions
- this is the document the investor signs and returns to you with their investment
check. You will have a very hard time raising debt or equity capital without this
basic document.
Promissory Note: In debt offerings you need to have a Promissory Note outlining
the terms of the loan arrangement with the investors. The note is the actual "loan
document" between the company and the investor. It is impossible to have a "loan"
without a "loan agreement" that sets forth the terms and conditions of the loan.
Third, in order to sell securities to investors you must follow the rules and regulations
that govern these sales as set forth by the Securities and Exchange Commission and
State securities regulators. The SEC has specific rules concerning how a private
company solicits capital from investors - even if very few investors are involved.
The Regulation D Offering program is the exemption program designed by the SEC for
private business. It is the most widely used program the SEC offers and provides
the proper exemption needed to raise capital from investors. Not raising capital
properly can provide investors with a "right of rescission" in the future - meaning
they can get their investment back regardless of the circumstances.