Block & Tackle

POSITIONING – BE OF MAXIMUM SERVICE.

You’re not here to sell anything. If you can’t get that through your head you don’t belong here. You’re here to be of maximum service to your fellow entrepreneur. You provide an opportunity for entrepreneurs to receive capital for their start-up, early or later stage company directly from us or from other investors interested in investing cash in their company. (“from us” means we trade services as an investment for their preferred equity and cash and we will connect them with our broker dealer networks).

Only Managing Directors, Managing Enterprises or Alliances established by Managing Directors have the ability to introduce start-up early stage and later stages companies to our Wall Street to Main Street method, and by invitation only. You have something they need. They may have something we want. We’ve made this easy for you, them and us to make a qualified decision quickly on how we want to proceed. Stick with our protocol to maximize your return on effort and deflect potential liabilities.

BLOCK & TACKLE

If we engage start-up early stage and later stages companies in our Block & Tackle full service, these companies will have an opportunity to raise a substantial amount of capital while maintaining the vast majority of equity ownership and voting control. We do 90% of the production work, but facilitate the execution of their securities offering through coaching only. The management teams of these companies must have what it takes to sell and close the offering through broker dealers or directly to investors, or we simply will not engage them.

If we are interested in taking them on with Block & Tackle full service, we create an Engagement Letter with the corresponding Corporate Finance Term Sheet. At the end of the Engagement Letter, they will see the payment Options that will enable them to make a qualified decision on how they would like to compensate us, if at all. That’s right. Through the Corporate Engineering Conservatory™ they can do this by themselves at minimal expense related to our involvement. Our involvement extends only to the degree the Corporate Engineering Conservatory™ enables them to do so on our automated platform. However, those With Money have No Time to go through the learning curve and will provide us with our large retainers. Those Without Money, have Time, and not much choice in the matter.

The areas below are SIMPLE EXAMPLES of the AMOUNTS of preferred equity and cash we require as presented in a typical “Corp. Finance Engagement Letter and Term Sheet.” The OPTIONS are what is presented to a prospective portfolio company candidate.

ENGAGEMENT OPTIONS

By going through any one of the first (3) out of (4) Options listed below, your company’s securities can be added to our COMMONWEALTH CAPITAL INCOME FUND-I, where broker dealers, as well as our co-investors will review your company’s securities offering, to make independent decisions on their level of financial commitment.

OPTION I. This option has the most risk and return for us. As indicated within our Corporate Finance Term Sheet under OPTION I, we receive the amount of shares or units of the preferred equity to be issued in the proposed round of financing, as indicated below.   We receive a minimum number of shares or units in preferred equity, upfront with a $0.01 cost per unit, as per the schedule below.  In addition, we recoup our out-of-pocket production investment over time and only if certain successes are realized. For your further protection, the Claw-back provision provides that eighty percent (80%) of the preferred equity shares or units will be relinquished if you do not succeed in raising at least half of the desired amount of capital. Upon exercising the Claw-back provision, the Call Protection on the remaining twenty percent ends, enabling your firm to buy back all or part of our shares or units at the Call price.   The Start Time of 5-6 weeks is because we must fit your production within the production time-frames of companies that have chosen Option II, as they are served as a first priority. This Option qualifies your company for inclusion in our Commonwealth Capital Income Fund-I.

OPTION II. This option has moderate risk and return for us, due to the retainer. You can reduce the minimum preferred equity to be relinquished to us in the proposed round of financing, as indicated below. We receive a minimum number of shares or units in preferred equity, upfront with a $0.01 cost per unit, as per the schedule below. For your further protection, the Claw-back provision provides that eighty percent (80%) of the preferred equity shares or units will be relinquished if you do not succeed in raising at least half of the desired amount of capital. Upon exercising the Claw-back provision, the Call Protection on the remaining twenty percent of the shares or units ends, enabling your firm to buy back all or part of our shares or units at the Call price.   By reducing our return (the amount of preferred equity we receive) you also reduce our risk. This Option qualifies your company for inclusion in our Commonwealth Capital Income Fund-I.

 

IMPORTANT: Our sole and exclusive source of capital for our full service is through SEC registered Broker Dealers, as it serves us as the one degree of separation from regulatory compliance.  In other words, we only make portfolio company introductions to broker dealers. However, our portfolio companies are welcome to introduce themselves to our other co-investors; Platinum Accredited Investors, Platinum Corp. Investors and Platinum Broker Dealers within the Capital Access Portal.

AVAILABLE ONLINE WITHIN COMMONWEALTH CAPITAL’S

CORPORATE ENGINEERING CONSERVATORY™

 

OPTION III. The next least expensive way to engage in the process of raising capital for your company is to engage the overall corporate engineering and capital raising process within our Corporate Engineering Conservatory.™  Toward the end of creating your securities offering document, with a marketable deal structure, in our Corporate Engineering Conservatory™ you’ll be given a choice to OPT-IN or OPT-OUT out of the qualifying process for inclusion in our Commonwealth Capital Income Fund-I. If you OPT-OUT you continue the process without inclusion.  If you OPT-IN, you agree to provide us with due diligence and document clean-up fees in cash and preferred equity, as indicated below.  This process involves the same corporate engineering principles and protocols as defined within this Engagement Letter. This option will save you up to 80% of the preferred equity and cash outlay, as proposed.  However, you will need to do 80% of the work. This Option may qualify your company for inclusion in our Commonwealth Capital Income Fund-I.

 

OPTION IV. By far the least expensive way to engage in the process of raising capital for your company is to engage the overall corporate engineering and capital raising process within our Corporate Engineering Conservatory.™  Toward the end of creating your securities offering document, with a marketable deal structure, in our Corporate Engineering Conservatory™ if you OPT-OUT you continue on without inclusion in our Commonwealth Capital Income Fund-I. This process involves the same corporate engineering principles and protocols as defined within this Engagement Letter. This option will save you up to 100% of the preferred equity and 99% of the cash outlay, as proposed.  However, you will need to do 100% of the work.  This Option DOES NOT qualify your company for inclusion in our Commonwealth Capital Income Fund-I.

NOTE: The retainer may be booked on your balance sheet as a loan to be paid back with the use of proceeds from the sale of securities.

 

ENGAGEMENT OPTIONS – SUMMARY OF TERMS

EXAMPLE OF A $10,000,000 SINGLE TRANCHE CAPITALIZATION FOR AN OPERATING CO.

 

 

The time frame elements for getting started also quicken the decision for the entrepreneur. They all need capital yesterday… if not sooner.

 

 

EXAMPLE OF A $2,000,000 & $10,000,000 DOUBLE TRANCHE

CAPITALIZATION FOR AN OPERATING CO.

 

 

EXAMPLE OF A 

$1,000,000 SEED DEAL FOR A FUND MGMT. CO. &

 $100,000,000 FUND OR REIT

 

 

 

 

The time frame elements for getting started also quicken the decision for the entrepreneur. They all need capital yesterday… if not sooner.

More on Option I. Companies of the Divestiture, Later or Early “Stage” that are of the Platinum and Gold “Type” may have ample working capital or current cash flow to actually choose Option I. However, Option I is really for companies with little or no current capital or cash flow, e. g. Start-Ups. Most companies will not be able to afford the time (8 weeks) it takes just to get started. Remember, it takes an additional 45 – 60 days to produce (production time frame) all the elements included within the Corporate Finance Term Sheet on top of the (8 weeks) it takes just to get started. The reasoning for the delay in time is that our production department needs to fit Option I deals in between other Option II deals. The retainers under Option II enable us to engage the internal professionals within our production dept. immediately. Hence, under Option I the entire process could take 4 months just to get to market with a securities offering and another 3 to 6 months to raise the capital. Hence, most will be better off being dropped into Friction Free under Options III or IV. However, with that being said, at some point we will be reducing that (8 weeks) start time to further encourage the choice of Option I, as we’ll have a greater desire to build long term wealth with the maximum amount of preferred equity acquired in select companies, as opposed to the maximum amount of cash flow upfront.   There are 2 reasons for the difference in timing between Option I and II. Internally, this is how we control supply and demand of our Block & Tackle services. Externally, this is how we organize the time to marshal our internal production resources between Option II portfolio companies to justify the risk of Option I portfolio companies.

More on Option II. Option II is our sweet spot. We lessen our risk and have ample return for our time…and you get paid right away. The 1 week to get started can easily be absorbed in the 45-60 typical day production period, thereby enabling the issuing company (our new portfolio company) to get to market as soon as practically possible. Also, the production period is shortened by 15 days (30-45 days for completion) on average with a retainer, because we can marshal our resources quicker.

More on Option III. Option III is an option some may choose to pursue to save cash and equity, which is fine for those who do not have the cash for the retainer and or are unwilling to part with the preferred equity, up front. We have used Options III & IV in various forms over the years as a great lay off to those who balk at the terms within our Corporate Finance Term Sheet. They will engage in a do-it-yourself Corporate Engineering process. Once they have realized the depth and scope of the Corporate Engineering process, most entrepreneurs are truly humbled. They quickly develop a new found appreciation for the degree of sophistication and complexity involved with this process. Most come back to us with the required retainer for engaging in Option II. This process is a win / win situation for both parties. We hit our sweet spot on risk versus return, and they retain substantial amounts of the preferred equity and get to market quicker with exceptional accuracy and refinement in their deal structure, securities offering document and presentation, as well as delivery platforms. In addition, this tactic further sets their expectations of us, putting us in a continual position of power.

More on Option IV. For those who continue on through Option III they will have another choice as they move through our Corporate Engineering Conservatory.™ About 2/3rds or 67%  through the process, they will have the choice of continuing on with no cost what-so-ever or they can OPT-IN to our VC Fund Commonwealth Capital Income Fund I. If they OPT-IN into our Fund, we collect a due diligence fee (currently $20,000) and a reduced amount of preferred equity (currently $100,000) as compared to Options I or II. We employ a due diligence review of their management team members and a “clean-up” review of the securities offering documents they produced through our Corporate Engineering Conservatory™, multi-media presentation and delivery platforms for compliance. As with Options I & II, their legal counsel must review the final production of all elements for Options III & IV. This is the primary force of our due diligence function, limitation and conclusion of our due diligence process.  This option within our Corporate Engineering Conservatory™ we call Friction Free Capitalization. The primary advantage of being in Commonwealth Capital Income Fund I is that we have other co-investors looking to invest in the preferred equity of the portfolio companies within our VC Fund-I. Our job is to position our VC Fund so it attracts a multitude of accredited investors. Hence, the primary benefit for entrepreneurs who OPT-IN to our Commonwealth Capital Income Fund I, through our Friction Free platform, is their ability to showcase their company and its preferred equity offering to investors who want to invest, but don’t have the time to conduct all the due diligence or arrange the financing structure.  It’s simply an easier way for investors to make quality decisions because we’ve done most of the due diligence and corp. engineering work.

If the entrepreneurs DO NOT OPT-IN to our VC Fund, the Corporate Engineering Conservatory™ will allow them to do it themselves, but totally on their own. It’s our job to make sure they can succeed in this process, as well—but only through automation. We do not assist or service these firms further. Their success directly benefits us by providing great testimonials of success in a friction free environment creating constant demand.

In General – Options. We never use base, standard percentages from the proceeds of a securities offering for our cash and / or equity compensation for our efforts.  Our cash compensation is standard regardless of the amount of capital sought. However, we do modify the amount of preferred equity compensation, determined primarily on the risk profile of the prospective portfolio company based on their Diagnostics Rating. This is done on a case-by-case basis.

If they choose Option I, we need to do a “deep dive” due diligence before engaging them, because if they are a scam outfit, this is the option they’d most likely choose. These are purported to be early to later stage experienced teams and if so they would never choose Option I, as the immediate decrease in cash flow of the offering proceeds (The amounts of preferred equity relinquished in Option I is always greater (normally double if not triple) than Option II), plus another 6-8% broker dealer commission, is a signal that they either truly do not know what they’re doing or they’re a scam operation looking to rip off others. In addition, the timing to get started under Option I is 5-6 weeks. Young companies always need money…yesterday. Therefore, this is another red flag. They most likely wouldn’t make it through a due diligence review of SEC registered broker-dealer, as well. It has been our experience that about 20% of the prospective portfolio company candidates are scam operations, and it’s our job to cut through the scams with the multilayer filtration process that we’ve put in place.

With that being said, if they survive our “deep dive” due diligence, we do want them, because we do have a Sell Through provision in our Corporate Finance Term Sheet for Options I & II that enable us to sell through 50% of the preferred equity as the capital is raised. We also have a Claw Back provision in our Corporate Finance Term Sheet for Options I or II that enable them to “claw back” 80% of the preferred equity we received up-front, and a right to buy back the remaining preferred equity at par value.

SNAPS & ELEVATOR PITCHES

 

Once you have a fairly decent “lay of the land” it’s time to exercise some techniques at generating interest in what we have to offer to the various players in the field. You have the ability to invite Entrepreneurs/Companies, Alliances, Managing Enterprises (and Managing Directors—by Managing Directors only) and Platinum Investors.

The “Snap” is a 5 to 7 second statement about who we are and what we do. You can make up one or more Snaps. The successful Snap will result in a “Wow!” from the receiver or target. The targets are as follows: Entrepreneurs; Alliances; Managing Directors & Enterprises; and finally Investors.

You need to develop your own Snap(s) and Elevator pitch(s) and be able to respond easily and fluidly to quick follow up questions. Until you’ve been in the trenches for a while and can handle the really tough questions, the best response to most follow up questions is with another statement followed by a question “everything you’ll want to know about us and how we do what we do is available on our website. However, access to 90% of our website is by invitation only. Shall I send you and invitation?”

You are to always conduct due diligence on any prospect first.  Only if and when you determine they’re worthy of an invitation, they can start their due diligence on us. They start their due diligence by watching the videos and reading text on the strategically placed landing pages of our website assessable only by that invitation.

Snap(s) are the primary number, 1,2,3…etc. and the corresponding Elevator pitch is the extension of that Snap in sub-alphabet form.

Here are some examples of Snaps to the question “what do you or does your firm do?” from:

Entrepreneurs and Prospective Portfolio Company Candidates.

  1. As a VC firm, we’ve been capitalizing start-up and early stage companies since 1998. Based on our 20-year proven economic model, we’ve streamlined our process with a Capital Access Platform utilizing “AI” (artificial intelligence). The platform is designed to take any company from “Idea to IPO” within 5 years.

 

  1. As a VC firm, we incubate pre-IPO companies, utilizing proper corporate engineering, so they can easily raise $1-25 million in seed or development capital without giving up too much of their company, too early, for too little.”

 

  1. Through proper corporate engineering, we incubate pre-IPO companies, enabling them to easily raise $1-25 million in seed, development or expansion capital through legal securities offerings.
    1. Our primary differential is that our Capital Access Platform enables the entrepreneur to easily create a marketable deal structure housed in a convertible preferred equity securities-offering document, within hours as opposed to months. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

  1. As a VC firm, we capitalize pre-IPO companies, utilizing risk mitigation techniques, enabling them to easily raise $1-25 million in seed, development or expansion capital.
    1. Our primary differential is that our Capital Access Platform enables the entrepreneur to easily create a marketable deal structure housed in a convertible preferred equity securities-offering document, within hours as opposed to months. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

  1. “We’re corporate-engineers who prepare and capitalize start-up and early stage companies for Wall Street IPOs and Corporate Acquisitions—how can we help you?”

 

  1. “We’re a VC Firm that capitalize start-up and early stage companies with hybrid securities, such as; participating convertible preferred equity, so they can easily raise capital without giving up too much of their company too early for too little.”

 

  1. “Our VC Firm is comprised primarily of former Wall Street investment bankers that have built a Capital Access Platform utilizing “AI” (artificial intelligence). Based on our 20-year proven economic model, the platform is designed to take any company from “Idea to IPO” within 5 years.
    1. Our primary differential is that our Capital Access Platform enables the entrepreneur to easily create a marketable deal structure housed in a convertible preferred equity securities-offering document, within hours as opposed to months. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

IMPORTANT. Also study our message in text and video on the Home page of our website.

 

 

Alliance Candidates.

  1. We’ve been capitalizing start-up and early stage companies since 1998. Based on our 20-year proven economic model, we’ve streamlined our process with a Capital Access Platform utilizing “AI” (artificial intelligence). The platform is designed to take any company from “Idea to IPO” within 5 years. These young, well capitalized companies are instructed to employ the services of firms like yours.

 

  1. As a VC firm, we capitalize pre-IPO companies, utilizing risk mitigation techniques, enabling them to easily raise $1-25 million in seed, development or expansion capital. These young, well capitalized companies are instructed to employ the services of firms like yours. Are you in the market for quality deal flow?

 

  1. Through proper corporate engineering, we incubate pre-IPO companies, enabling them to easily raise $1-25 million in seed, development or expansion capital through legal securities offerings. These young well capitalized companies are instructed to employ the services of firms like yours. Are you in the market for quality deal flow?

 

  1. As a VC firm, we incubate quality deal flow (clients) organically for firms like yours. For those companies who simply are not ready or can afford your services, you simply provide a link to our Capital Access Platform and once they’ve raised sufficient capital to afford your services, we send them back to you. Are you in the market for quality deal flow?

 

  1. As a VC firm, we’ve been capitalizing start-up and early stage companies since 1998. We incubate young companies who are simply not ready for an engagement with a commercial bank, broker dealer, larger legal or accounting firms.

 

  1. As a VC firm, our primary differential is that our Capital Access Platform enables the entrepreneur to easily create a marketable deal structure housed in a convertible preferred equity securities-offering document, within hours as opposed to months. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

IMPORTANT. Also study our messages in text and videos on various Alliances webpages on our website.

 

Managing Director or Enterprise Candidates:

  1. We’ve created the world’s 1st ever utility to become the primary source of IPO deal flow for Wall Street.

 

  1. When it comes to funding companies, there’s always standard expectations from Wall Street and the VC industry but never a standardization of process, until now with our Corporate Engineering Conservatory.™

 

  1. As a VC firm, our primary differential is that our Capital Access Platform enables the entrepreneur to easily create a marketable deal structure housed in convertible preferred equity securities-offering document, within hours as opposed to months. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

  1. Our VC Firm is comprised primarily of former Wall Street investment bankers that have built a Capital Access Platform utilizing “AI” (artificial intelligence). Based on our 20-year proven economic model, the platform is designed to take any company from “Idea to IPO” within 5 years.
    1. Our primary differential is that our Capital Access Platform enables the entrepreneur to easily create a marketable deal structure housed in a convertible preferred equity securities-offering document, within hours as opposed to months. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

IMPORTANT. Also study our message in text and video on the Associate page(s) of our website.

 

Platinum Investor Candidates:

  1. We’ve created the world’s 1st ever utility to become the primary source of deal flow for Wall Street IPOs.

 

  1. When it comes to funding companies, there’s always standard expectations from Wall Street and the VC industry but never a standardization of process, until now with our Corporate Engineering Conservatory.™

 

  1. As a VC firm, we’ve been capitalizing start-up and early stage companies since 1998. Through our Angel Rescue Initiative, we rescue angels from previous illiquid investments. No one is doing this, and it works like a charm.
    1. Where risk has been mitigated through proper corporate engineering and the creation of hybrid convertible securities, we re-capitalize your portfolio companies, thereby returning all or a portion of your investment. Spreading the risk out to many new investors, through a legal securities-offering, at substantially smaller investment amounts works like a charm. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

  1. Through proper corporate engineering, we incubate pre-IPO companies, enabling them to easily raise $1-25 million in seed, development or expansion capital through legal securities offerings.
    1. Our primary differential is that our Capital Access Platform enables the entrepreneur to easily create a marketable deal structure housed in convertible preferred equity securities-offering document, within hours as opposed to months. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

  1. As a VC firm, our primary differential is that our Capital Access Platform enables the entrepreneur to easily create a marketable deal structure housed in a convertible preferred equity securities-offering document, within hours as opposed to months. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

  1. Our VC Firm is comprised primarily of former Wall Street investment bankers that have built a Capital Access Platform utilizing “AI” (artificial intelligence). Based on our 20-year proven economic model, the platform is designed to take any company from “Idea to IPO” within 5 years.
    1. Our primary differential is that our Capital Access Platform enables the entrepreneur to easily create a marketable deal structure housed in convertible preferred equity securities-offering document, within hours as opposed to months. They then have an opportunity to sell those securities directly to us and our co-investors. No one is doing this, and it works like a charm.

 

IMPORTANT. Also study our message in text and video on the Platinum Investor page(s) of our website.

Remember, you’re doing due diligence on them first.  Only if and when you determine they’re worthy of an invitation, they can start their due diligence on us. They start their due diligence by watching the videos and reading text on the strategically placed landing pages of our website assessable only by that invitation.

If after they’ve been through our website’s private areas, if they don’t “Get It”, we don’t want them.

 

Of course, you introduce yourself as a Managing Director of Commonwealth Capital in each of the preceding statements.

The Elevator Pitch follows the Wow response from the Snap. No Wow? Don’t deliver the elevator pitch.

The proverbial elevator pitch goes hand-in-hand with the number one rule in comedy; “Know Your Audience.” The pitch must be directed to the audience that you are soliciting. To truly know that audience one must ask a few pointed questions. (Each letter: a, b, c, & d below is responsive to the previous designated letter in the previous numbered section 1, 2 etc. and consecutive in nature.)

The following is further refinement.  Develop your own SNAPS & Elevator Pitches, and share them with us at HQ.

 

  1. Know what to Pitch. (and to whom by defining who they are with questions)
    1. Are you looking for capital? (Portfolio Company Candidates)
    2. Are you looking to increase your clientele or customer base or looking to build real wealth for yourself or your firm? (Alliances)
    3. Are you looking to build real wealth for yourself or your firm? (Managing Directors or Managing Enterprises)
    4. Are you looking for “quality deal flow” or Pre-IPO companies to invest in (Platinum Investors)

 

  1. Prep the Pitch
    1. What have you done to date to raise capital? How much do you need? Do you have a business plan?
    2. What have you done to date to accomplish your goals? Are you playing a “zero-sum-game” on the horizontal level or incubating you own deal flow organically on a vertical level? (They’re all on the horizontal level—we’re only on the vertical level).
    3. What are you doing now to build wealth?
    4. What are you doing now to attract quality deal flow to invest in?

 

  1. Deliver the Pitch
    1. I’ll send you a private invitation to our Capital Access Portal. Once you’ve completed the application process, I’ll be in touch.
    2. I’ll send you a private invitation to our Alliance Portal. Once you’ve completed the registration process, I’ll be in touch.
    3. I’ll send you a private invitation to our Managing Director (Enterprise) Portal. Once you’ve completed the application process, I’ll be in touch.
    4. I’ll send you a private invitation to our Capital Access Portal. Once you’ve completed the registration process, I’ll be in touch.

 

As you can see above we use the words registration and application for a reason.

Let the various portals on the commonwealth capital website do 90% of the work. Do not deviate from the protocols, or you’ll be dragged around by “needy” entrepreneurs; professional “tire kickers”; “wanna be” power brokers; and billionaire “posers.”  The landscape is ripe with fraud. Our protocols are in place to protect you, so follow them.

 

REALITY CHECK

Whether we conduct Block & Tackle or they engage in our Friction Free arena, we enable portfolio-company management teams to learn the language and practical applications of corporate finance to create a finance dept. within their own firm. In doing so, they will be prepared to sell their securities through a SEC registered broker-dealer; to corporate investors and accredited individual investors in compliance with federal and state securities laws.

There are plenty of portfolio-company candidate management teams that believe they can hire and shift the responsibility to someone else to raise the capital for their company; that’s a myth. Even very large, later-stage companies that have engaged SEC registered broker dealers must go on the road to do “the dog and pony shows” to other syndicate members and or their investors. This is a standard mandatory procedure on Wall Street. Even one of the largest IPOs in recent history ($25 billion)– Alibaba, the management team spent months on the road with Citibank, Goldman Sachs and other investment banks running book on the deal.

If the portfolio-company candidate’s team is expecting others (including us) to raise capital for them, we need to know sooner rather than later the level of their understanding and commitment. This is a final closing call for Option II. If we can’t close Option II on this call, we invite them to do it themselves through Option III, and do this themselves through Friction Free in Corporate Engineering Conservatory.™  More often than not, if they have the cash for the retainer and we take them down the road of Option III, they’ll be back within weeks to surrender to the fact that they cannot afford the time to go through the learning curve and will sign and wire the retainer.

THE COST OF CAPITAL – OUR PHILOSOPHY

Many times we’re asked “what’s the cost of capital” for our process. That cannot be honestly answered so easily, because the cost of capital is different for each portfolio company no matter what the deal structure is. “Our process” has no set cost like a bank. The cost of capital for any type of financing is based on a fairly simple set of equations dependent upon various factors. We do calculate the cost of capital for each portfolio company, but only after we conclude the proper corporate engineering for each, as that is the only appropriate way to do so. However, they may want to know what “the cost of capital” is for our process because that’s the way they were trained in academia, which is also appropriate, in an elementary sort of way.

 

What most management teams of start-up and early stage companies don’t understand is the question, although seemingly relevant, is not. It is not, due to the fact that traditional forms of financing are simply not available for start-up and early stage companies that need a substantial amount of capital. They simple cannot negotiate a $5,000,000, 5-year loan or revolving line of credit with a bank, unless the management team members have substantial personal assets and are willing to risk those assets, jointly as well as, severely—meaning each member is on the hook for the full loan. Beggars cannot be choosers in this respect.

 

So, when asked “what’s the cost of capital” for our process, we simply respond with a typical Wall Street tactic. We pose these questions in a response to their question to turn the table on them from entrepreneur issuer to investor.

 

  1. If someone gifted you (whatever the amount they seek-say $10,000,000) how much would your company be worth in 5 years?
  2. Most respond with a large number, say $100,000,000.
  3. Then we say, how much can your company be sold for today?
  4. Most respond “not much” or the idea is worth $5,000,000—or something crazy like that.
  5. We then say, well no one is going to “gift” you $10,000,000. So, If you were an investor, how much of the company would you take for the $10,000,000? 80-90%? This puts the onus on their ability to discern correctly, and sets the table.
  6. Most respond “well, I guess if we were the investors, we’d need a lot of equity, but that’s just too much. Really?
  7. We respond, fair enough let’s settle on 50% of the company for $10,000,000 (or some number they’re ok with) for this hypothetical example.
  8. If that is the case, then you sold 50% of a company that will be worth $100,000,000 in 5 years—their words not ours. That’s $50,000,000 minus a $10,000,000 investment, means the cost of capital would be $40,000,000. And if the company is worth $1 Billion in 10 years that’s a $400,000,000 cost of capital. Sound good? (It’s an extreme cost of capital and they realize it—finally).
  9. Then we say, there’s a much less expensive way to go. With a convertible preferred equity offering you can contain that cost to a maximum of $10-20 million at max, because convertible preferred equity can be temporary equity if engineered correctly.

 

Bantering with CFO’s and other management team members about the “cost of capital” for our process is fun for us, because we gently educate them as we go. You’ll get the hang of it, after a few video conference calls, where we may address this issue.

With any sales, it’s simply a numbers game. In our world the number of young companies seeking capital seems to be endless.

 

We had an old saying at Merrill Lynch back in the mid-1980s: “We have nothing against poor people, we simply cannot afford to talk to them.”  So, if you end up poor in this career, you’ve been talking to the wrong people.

 


Below, you’ll find the Block & Tackle quiz. To progress to the next lesson you must correctly answer all of the questions that follow. If you make any mistakes, you can retake the quiz once complete.