By Jillian Ivey Sidoti, Esq.
Many people assume that in order to raise capital all they have to do is go out and find potential investors to whom they may pitch their idea. However, the laws regulating the sale of any security are such that operating in such a matter would be illegal.
Too often, people learn fact and decide that their aspirations are out of their reach… or worse, raise the capital illegally, putting themselves at risk to suffer very serious consequences should the SEC catch on to what they are up to. Truth is, with the appropriate planning and effort, anyone can raise the capital necessary to execute their business plan.
At a very abstract level, there are five steps to raising private capital, and they are as follows:
1. Develop Your Business Plan: One cannot very well start a company without a plan! At the very least, you want to put together bullet points of the “who,” “what,” when,” “where,” “why,” and “how” you will put your company to work and start generating income. From there, you can flesh out the details.
2. Set Up Your Company: Your next step is to decide what type of entity is appropriate for your business plan, and in which state. A corporation, limited liability company, and limited partnership each have their respective positives and negatives. The particulars of your situation will dictate what best fits your company.
3. Decide What To Offer Investors: If people are going to invest money in your company, one of the most important questions they will have is “what do I get out of this?” First and foremost, you have to analyze your business plan to determine your baseline of what you can afford to offer investors in addition to what the market dictates in your particular industry. You must then determine what you are comfortable offering investors and land somewhere between those points. This could be a percentage return on their capital investment, simply just a share of profits the company earns, or a combination thereof.
4. Put Your Offering Documents Together: Not only may you be required by law to present offering documents (called a “Private Placement Memorandum”) to your prospective investors before taking their money in order to ensure you have made all the appropriate disclosures, but such documents will provide all the information they need to decide to make the investment. The private placement memorandum encompasses the three “D’s” – disclaimers, disclosures, and details.
5. Find Investors: For many entrepreneurs, finding investors is the most intimidating step in the process. However, if you organize and execute your capital raising efforts in the correct manner, then you will be well on your way to meeting your capital goals.
Yes, this is a very boiled down step-by-step. Yes, you will need the advice of a professional to help you along the way. However, you need to realize that if you do give all the above steps the appropriate amount of attention, there is no reason that you cannot raise the capital you need.
Jillian Ivey Sidoti is a partner in Trowbridge, Taylor & Sidoti, a boutique securities law firm with locations in California and Florida. Jillian may be reached for consultation at 323-799-1342 or at: [email protected]