Perspective: Kirton McConkie Law Blog

Capital raising strategies for private companies

Capital is the lifeblood of small to medium sized companies, whether it comes from a bank, from a wealthy friend or relative, from a group of angels, or from one or more investors who believe in your company and its products or services. This post is an overview of key considerations for companies looking to raise capital. Subsequent posts will address these topics in more detail.

Develop a business plan

Before you can begin the process of raising capital, you need to detail all aspects of your company, from mission, vision and product or service offerings to target audience, production and distribution. Gone are the days of investors throwing money at an idea based on an outline on a cocktail napkin. Business investors today want to see a detailed business plan so they can understand both what the business wants to accomplish, and how it will use the investment proceeds.

How much capital do you need?

After the business plan is complete, determine how much capital your business needs, either to get started or to get to the next level of growth. Be realistic, yet cynical. Assume projects will take longer and cost more than you think they will and build in contingencies. Many early stage businesses run on a shoestring budget, and many of those have succeeded. But if you realistically need $1 million dollars to get where you need to be, and you only budget to raise five hundred thousand, then you will either need to revise your projections or will need to do another capital raise.

What is your company worth?

You may not need to hire a professional business valuation company at this point, but you should have an idea of what the company is worth prior to the capital raise, and its value after the capital infusion. The main reason for doing so is to understand how much of your company you may need to give up for the capital you want to raise. For example, if you need to raise $500,000 and your business is worth $5 million dollars, you can expect to give up around 10 percent of your company.  If the company is worth $1million dollars, you will give up a larger percentage to get the same capital into the company. Business owners are not always the best judge of company value, which is why there are professionals who can be hired for an accurate valuation.

Equity or debt?

From a big picture perspective, selling equity means giving your investors an ownership stake in your company. They will participate in value appreciation as you grow the business, which means their stakes in the company will be worth more. Debt is any form of loan with the intent to repay the investor. With straight debt (debentures or promissory notes), the investor receives the return of principle loaned plus an interest rate paid over the life of the debt. With convertible debt, the investor has the option to either receive the repayment of principle and interest, or convert the debt into some equity security of the company.

Sources of Funds

Where you find capital can range from friends and family who put in initial seed capital to get the business started, to bank or SBA financing, to unrelated investors who learn of your business, through a placement agent or broker or through contacts with the company and its officers and directors. The amount you want to raise likely will help you determine your target audience and pool of potential investors.

Securities Law Compliance

As a general rule, if you take money from someone else to use in your business, you have engaged in a transaction governed by both state and federal securities laws. The exception is if the money is a bona fide gift. The good news is that compliance with these laws is not overly difficult or costly, and the Congress in recent years has taken steps to help businesses by reducing some of the compliance burdens.  But remember: Compliance with the securities laws up front is far less costly than trying to find ways to remedy or fix violation issues raised by regulators down the line.

Obtaining or raising capital is hard enough without worrying about the necessary legal requirements. Before you begin the capital raising process, we recommend working with a qualified securities attorney to ensure your efforts are in compliance with applicable state and federal laws.