The Winds of Change

Accessing Capital.


Raising capital is like fishing. To illustrate, we must deal with two factors: the known and the unknown.


  1. We know there are fish in the sea, and we know they eat. Similarly, we know there are investors in the world—and we know they invest. As a matter of fact, more do-it-yourself investors are swimming with more money and less choice of investment—with any real potential for return—than ever before.


  1. What we do not know is: will they invest in your Company?


  1. To legally “go fishing” for individual investors, you must have a securities-offering document—e.g., a Private Placement Memorandum (PPM), offering circular, or prospectus based on a qualified registration statement compliant with federal and state(s) securities law. We know about seeking indications of interest from individual investors with a “red herring” preliminary-prospectus document; but for all intents and purposes, one should actually produce the required securities-offering document prior to testing of the waters, in this case. Otherwise, if you do get a lot of positive indications of interest, it could be months before your securities-offering documents are ready, and that bad timing alone (investors will assume you don’t have your act together) could ruin your chance of “striking when the iron is hot.”
  2. To effectively attract investors, you must present the securities offering with a marketable deal structure investors are hungry for—the bait.
  3. To get investors to bite, the bait must be more appealing than other food (other offers or investment opportunities). To make your offer more appealing than others you need to shift the fear of perceived investment-capital loss to absolute opportunity lost. In order to do that, you must “mitigate” operational, financial and litigation/regulatory risk.
  4. To easily reel investors in, you need to get them to want to be in the boat.


When raising substantial amounts of capital, while maintaining the vast majority of equity ownership and voting control, everything starts with the production of a marketable deal structure. A marketable deal structure inherently mitigates both operational and investment risk. Through this Corporate Engineering Conservatory,™ you will create a marketable deal structure for your company soon enough, but for now we need to continue to address the remaining concepts to help you frame your mind on what constitutes a marketable deal structure that’s acceptable to you.


Capitalize to Compete. Most entrepreneurs are under the impression that technologies, inventions, patents, processes, or trade secrets that make up their company’s product or service line(s) offer investors the greatest opportunity ever, because nothing like their situation has ever occurred before—they have a lock on the marketplace. No entrepreneur can predict, with any real accuracy, when or if a competitor will introduce superior products, services, or technologies to the marketplace, thereby marginalizing said entrepreneur’s product or service line(s).


Once capitalized correctly, many opportunities abound, and you may need more capital to take full advantage of this situation. Every entrepreneur I’ve met wishes they had raised more capital than originally sought. Planning for a series of capital rounds accomplishes the goal of capital inflows to continue the expansion and growth of your Company.


Ask yourself the question: “Do I want my Company to be the first one in my competitive field to have the ability to quickly raise substantial amounts of capital—while maintaining the vast majority of equity ownership and voting control—or the last?”


In addition, most believe investors want to see entrepreneurs “boot-strapping their way” to success and great wealth for the future, by living like paupers now. This is a false belief, contrary to reality, as well as a foolish assumption. Any experienced investor, relying on that premise to provide the illustrated rates of returns on an investment in the company would run from the deal. What would happen to a company if one or more of the management team—eating ramen noodles and living below their means— needed to be replaced by experienced professionals who demand a real compensation package? Well, the illustrated budgets would not reflect the ability to pay a competitive, executive compensation package. The point being, think like an investor and give yourself a break by budgeting a competitive, executive compensation into your pro forma financial projections. How do you expect to attract a real management team without a healthy and attractive executive compensation package?


View the Effort as a Process, Not an Event. Most entrepreneurs are under the impression that technologies, inventions, patents, processes, or trade secrets that make up their company’s product or services will allow for sufficient net operating margins to expand the company’s growth with internally generated funds once they receive their initial funding. They, therefore, view the securities offering as a one-time event. In theory, only a true monopoly can achieve that feat. Any direct or indirect competition will eventually lower those margins. Outside capital must be employed to keep up with the competition, especially if the competition is formidably capitalized—i.e., publicly traded. Be sure to raise sufficient capital through a series of securities offerings, so your Company can stay ahead.


Sell Products, Services, and Securities. I often ask entrepreneurs if they can sell their product or service. Of course they look at me as if I may be an idiot—their answer is always a resounding “Heck, yeah!” I then ask, “Well, do you think you could sell a ‘piece of the action’ in your Company to investors?” They think a bit and say, “Well, I don’t see why not.” My response is always… “Exactly.” Think of a securities offering as a new product or service launch, where a research-and-development process precedes the actual production or assembly of the product. In this case, the securities-offering document is the product. Thus, as you and your management team go through your day, engaging prospective and current clients in the process of selling products and services, be mindful you also have “a piece of the action” to sell—your Company’s securities. The individual “passive” investor market is demanding high yield, with some upside participation of profits to enhance the yield relative to the risk involved with the security. If you compete—based on yield—by offering hybrid securities, such as; convertible notes, bonds, or preferred stock with higher-than-average yields, you will attract individual investors. Hybrid securities are considered fixed income securities, due to the stated interest rate or dividend. This fixed-income market—just over $40 trillion, which is 25% larger than the equity markets, which is just over $30 trillion according to Zack’s Research May, 2018[1]. In theory, for every three investors who would buy stock in your Company, there are four investors who would buy notes, bonds, or preferred stock in your Company.


Treat Your Company’s Securities Offering as Your Most Important Client. The most important attitude one can adopt is that your Company’s securities offering is your newest and largest client or customer. Yes, get your head wrapped around this concept, and imagine your Company’s securities offering as your newest and largest client, customer, or distributor. That “new customer” is willing to pay you $1 million, $5 million, or more (based on the amount of the securities offering) for you to dedicate 70%–90% of your time to the client’s effort—e.g., your Company’s securities offering—for the next 6–12 months. Would you do this for a client if requested? If so, why not do it for yourself?


Mitigate Risk. If you want to attract serious capital, you must mitigate risk of an investment in your Company and its securities. There are three, critical types of risk you can mitigate or limit—operational risk, financial risk, and litigation risk.


Maintaining Control of your Company. Hybrid securities do not normally have voting rights. Most entrepreneurs can raise substantial amounts of capital without giving up any (or very little) of their companies’ voting rights. To ensure you maintain voting control—e.g., greater than 51%—plan for future rounds of financing and grow your own private pool of investors by selling a series of hybrid securities that give the investor—first or forward—lien on assets in liquation and short-term immediate returns, with no votes. Attract only passive investors in the early stages. Most passive investors couldn’t care less about voting rights. For start-up and early stage companies, it is usually better to have many individual (passive) investors in your Company with relatively small amounts of capital, as opposed to a few professional (active) investors with large amounts of capital. Professional investors do care about and want voting rights. By selling hybrid securities only to passive investors in the first few rounds of financing, you will always control the terms of the deal, maintain voting control, and build a growing pool of private investor contacts, which you may need for additional future rounds of financing for your Company. You should always be dealing from a “relative position of strength” when seeking capital. Adopting these few belief systems and exercising these concepts as your primary discipline will further your Company’s relative position of strength.


Zen Finance. Picture the type of investor base you would like to have. Do you want to raise money quickly with “high-octane” venture capital? Then be prepared to live a high-octane work life—or would you rather have more easy-going investors who truly appreciate their interest, dividend checks, and seek to help their own Company’s investment by thinking how they can benefit your Company with their contacts? The point being, attract capital from investors who are like you if you want peace and fulfillment in your work life.