Financing Your Business – Page 3

To Register or Not to Register?: Broker-Dealers and Finders

October 16, 2012 stanczyk Accredited Investors, Broker-Dealers, Financing Your Business, Finders, Investors, Private Placements, Securities, Stock, Venture Capital

If you are involved in a startup you undoubtedly have heard about the company’s need to raise money. If you’ve gone the regular route you may be funded by institutional investors, like an angel or VC fund. The company may also have raised money through a private placement by selling equity to investors directly or through brokers.

You may have heard of another type of person involved in the capital raising process called a “finder”. Everyone has heard of the term a “finder’s fee” which is known to be about 10% of the overall transaction. The concept is the same with startup financing or M&A activities, although who can qualify as a finder and how they can be compensated has been a big deal with the SEC in the last couple years. The real issue is when anyone can act as a finder, and if they really should be registered with the SEC as a broker-dealer. Read more

SEC proposed regulations would allow general solicitation and advertising in a Rule 506 financing

September 5, 2012 stanczyk Accredited Investors, Angel Investors, Crowdfunding, Financing Your Business, Investors, Private Placements, Securities, Stock, Venture Capital

Last week the SEC issued its proposed regulations to allow for public advertising and general solicitation in Rule 506 offerings.

As way of background, at this point when companies are trying to raise funds in a private offering, they typically rely on Rule 506 of Regulation D of the Securities Act of 1933, which allows for an unlimited amount of funds to be raised and minimal disclosure requirements if the securities are sold to accredited investors. Offering undertaken pursuant to Rule 506 also preempt state securities laws, except those relating to fraud and notice filing (and notice filing fee) requirements. While all of the above makes Rule 506 the “go to” securities law exemption, the main reason it was originally allowed is because it has historically only been able to be used in private offerings, where the issuer (or the broker acting for the issuer) had a pre-existing relationship with the investor.

The JOBS Act, which I’ve discussed, contained a provision which would require the SEC to promulgate regulations to allow general solicitation and advertising in Rule 506 offerings, provided that all purchasers in such offering are accredited investors.

Using “Convertible Equity” instead of Convertible Debt

September 4, 2012 stanczyk Angel Investors, Financing Your Business, Investors, Securities, Stock, Tax, Venture Capital

As I’ve discussed, an option for startups to raise money is to do a convertible debt financing. In this sort of a transaction, the investor gives the company a loan evidenced by a convertible promissory note. The note is convertible upon a later financing round into the same type of securities that the financing round’s investors receive, and the note holder gets a discount on the per share purchase price. The benefits of this are that it is generally much quicker and straightforward than a typical seed/angel round and the company and investor do not have to have the awkward and difficult conversation regarding valuation of the company. The detriment to this type of transaction is that the company’s balance sheet is saddled with debt, and if the company does not raise another round of investment before the term of the convertible promissory note comes due, then the investor can essentially bankrupt the company if the investor does not want to extend the due date. Also, there are a good amount of investors that do not like investing through a convertible note, as one of the important terms – how much of the company the investor will own – is up in the air.

Recently, TheFunded.com and the Founder Institute annouced the introduction of a new concept called “Convertible Equity”. The concept and draft documents, were put together by Yokum Taku or Wilson Sonsini and a top accounting firm. TechCrunch has a good write up on it.

The form documents are available for free download here.

From a quick review of the documents it seems to be a great compromise. There would be no more maturity date or interest due. The startup will not have any debt on its books, and the investors would have the opportunity to qualify for the exclusion available on gains for holding “qualified small business stock”. It will still leave open how much of the company the investor actually owns, however, but that can probably be resolved using a valuation cap or some similar mechanism that can be drafted into the convertible equity documents.

The documents appear to automatically convert into shares of the company stock upon a change in control or qualified investment. There doesn’t appear to be an option for the investors to decide to convert at will or in any other circumstance, although certain provisions can be added for different situations.

This would be great if it gets adopted in the startup community, but like anything, it may take awhile. I know I will be recommending it as an alternative to convertible debt.

Crowdfunding – Prepare your Company to Crowdfund

July 16, 2012 stanczyk Accredited Investors, Angel Investors, Crowdfunding, Financing Your Business, Investors, LLCs, Private Placements, Securities, Stock, Venture Capital

As I’ve discussed earlier, the SEC is now preparing regulations to allow for Crowdfunding pursuant to the recently passed JOBS Act. These should be done by 2013 (emphasis on should be done by then – we’ll see when they actually come out). As you may have heard, it will allow for true equity sales over the World Wide Web. Companies will soon be able to sell shares of their corporation (or LLC) through online portals to regular persons that are not accredited investors (i.e. not millionaires or otherwise sophisticated).

There are a couple of things to discuss, the first is whether this is something your company actually would want to do. The second item is, if it is something you want to do, then what can you do to prepare your company to do a Crowdfunding raise in 2013 (or whenever the SEC finishes the regulations).

How do I Value my Company?: Startup Valuation

May 26, 2012 stanczyk Angel Investors, Financing Your Business, Investors, Private Placements, Securities, Stock, Uncategorized, Venture Capital

One of the most important issues when raising money from investors is the valuation of the company. This will drive all of the other financial terms of the deal: how many shares will be sold, at what price per share, and how much equity the investor will own in the company after the transaction.

In essence, for early stage (pre-revenue) startups, the company’s valuation is whatever the market deems it to be. I’m not being glib, that’s actually how it works. For example, say that I have a flat screen TV that I want to sell, if someone offers me $800, and then someone else offers me $900. I’m selling it for the $900 and that’s the TV’s market value. If an investor values you at $1M, then that’s your market value. Now he could be undervaluing you, but probably not by a large amount, and if the investment goes forward at that valuation then it’s the de facto market price. Now that doesn’t mean that there is no room to negotiate. That’s why it’s always said that early stage company valuation is an art and not a science.

Convertible Debt Financing 101

May 10, 2012 stanczyk Angel Investors, Financing Your Business, Investors, Securities, Stock, Uncategorized, Venture Capital

One way that a startup can take seed or angel investments is by doing a convertible debt financing, sometimes called a bridge loan or bridge financing. It is essentially a loan the company receives which allows the investor to later convert the amount due into a certain number of preferred shares upon the company’s next round of equity financing.

The basics of Startup Funding

April 20, 2012 stanczyk Accredited Investors, Angel Investors, Crowdfunding, Financing Your Business, Investors, Private Placements, Securities, Stock, Venture Capital

So you’ve got a great business idea, and a team ready to bring it to market (or at least a plan to begin getting it there), but the one thing you don’t have, like a lot of new companies is the capital to begin. This post will walk through the traditional process for a startup to seek and receive funding. Read more

JOBS Act Breakdown – What the New Crowdfunding Law Actually Means for Startups

April 2, 2012 stanczyk Crowdfunding, Financing Your Business, Investors, LLCs, Private Placements, Securities, Stock

This is a follow up to my last post regarding the concept of crowdfunding in general and the progress of the JOBS Act through Congress (full name – Jumpstart Our Business Startups Act). Since then, the Senate revised and passed the JOBS Act in a 73 to 26 vote. The House then, voting on the amendments made by the Senate, passed it by a vote of 380 to 41. This is something that both parties agree on, and were eager to work together to implement. Josh Earnest, the White House Deputy Press Secretary, stated that President Obama will sign the JOBS Act into law this Thursday, with a bipartisan public announcement. The President and Eric Cantor, one of the champions of the JOBS Act, will appear together for the signing of the bill into law.

This post will detail the provisions of the JOBS Act and how they will affect companies going forward. The JOBS Act can be found here if you’d like to take a read. After it is signed into law, the SEC has 270 days to promulgate regulations. Expect the SEC to claim that they need more time, as the JOBS Act is a monumental change, and there are various consumer (i.e. the new investor) protections required, especially to prevent fraud which, unfortunately, could run rampant if left unchecked. Hopefully Congress can put enough pressure on the SEC to get the regulations complete in the actual 270 day time period, and the regulations will actually have some teeth with respect to fraud without stifling startup’s ability to raise money.

Crowdfunding – A Potential New Wave of Startup Financing

March 21, 2012 stanczyk Crowdfunding, Financing Your Business, Investors, Securities, Stock

As you may have heard, Congress is now debating certain bills which would allow startups to raise funds in a new less restrictive manner, i.e. through “crowdfunding”. The lead bill is the Jumpstart Our Business Startups (“JOBS”) Act passed by the House on March 8, 2012. There is fierce opposition from various groups to the House version of the JOBS Act – including most states, the SEC, the New York Times, Bloomberg, accounting groups, AARP (?) and even the the old “Sherriff of Wall Street” himself, Eliot Spitzer. In this post we’ll look at what crowdfunding is, what Congress is proposing and the effects it may have.

Startup Financing – Private Placements 101

March 13, 2012 stanczyk Financing Your Business, Investors, Private Placements, Securities, Stock

Startups need cash, no doubt about it. One of the ways to go about getting it is through a private placement. This post will give an overview of how such a placement works.

For the sale of any stock in a startup corporation, the federal and state securities regulations require registration of such securities prior to the sale, unless there is an exemption from registration that is available to the company. One of the exemptions from the registration requirements is when the securities are sold in a private placement. This is a federal exemption which preempts state regulation, save for certain notification filings and fees to be paid wherever to whatever state the company and investors are located in.