When I started Tatango, I didn’t know much about raising capital from investors and had never heard of the Securities Act of 1933. Without this knowledge, I made a lot of mistakes when we started raising capital for the company. That being said, I’ve listed a couple tips below that should help you avoid some of the same mistakes I made as you’re raising your round.
1) Only raise capital from accredited investors - The definition of an accredited investor is found in Regulation D’s Rule 501 of the federal securities laws. An accredited investor is:
- A bank, insurance company, registered investment company, business development company, or small business investment company;
- An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- A charitable organization, corporation, or partnership with assets exceeding $5 million;
- A director, executive officer, or general partner of the company selling the securities;
- A business in which all the equity owners are accredited investors;
- A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
- A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
2) Don’t publicize your offering - The Securities Act of 1933 prohibits public offerings unless accompanied by a registration statement and a valid prospectus approved by the Securities and Exchange Commission. This means you can’t post a message on twitter, facebook, etc. about your stock sale, similar to what SocialMedian did here last year.
With the amount of paperwork, complications and planning that is required to raise a round of capital, I would strongly encourage you to seek advice from an attorney before even soliciting your first investor dollar.
Expected more than two bullets for such a broad subject..
Adam,
Completely understood. In the blog post above I was merely covering two subjects in which for some reason, a lot of entrepreneurs get tripped up on (myself included). Let me know what other specific topics you would like for me to cover in the realm of raising capital. As you said, there is so much to cover under this broad subject.
Hey Derek, thanks for the quick response.
Maybe if you discussed what to look for in potential investors – because I assume it's not a one way screening process (i.e. them reviewing your app).. you don't want some Angel/VC meddling unnecessarily, not giving you freedom, etc..
Or maybe talk about how you got face time with investors early on when nobody knew who you guys were (and I assume you had an early product/none at all)
Thanks, I will definitely try to incorporate that stuff into some new blog posts. If you have any specific questions and you can't wait, feel free to hit me up 206.334.4012
Adam,
Be sure to check out my new blog post http://thederekjohnson.com/2009/06/16/responsib...
When a business wants to expand or commercialise a new product or service, there comes a time when the business needs to raise capital. The Capital Raising Program aims to help clarify your business growth plans and prepare your business to raise capital. The available options under the program include:
Commonwealth Capital Advisors Financial Architect programs; raise seed, development & expansion equity capital for start up and early stage companies.
I meet lots of web entrepreneurs who tell me they want to raise venture capital. Most of these people are first time entrepreneurs and they just assume that ..
I have to disagree with you, most of the entrepreneurs I talk to have no clue about these laws.
Hi..thanks for the information… loved it simply Oh man! What an amazing thing to say
Hi…Your post really got me thinking man….. an intelligent piece ,I must say.
Watching the replay will be useful for anyone who is looking to raise capital and does not have too much prior experience with this exercise …
Raising Capital 101: Today's reality is that a business needs momentum to attract investors. Momentum can mean a variety of things, …
So very true. Either you need traction, revenue or one hell of a management team to attract investors.
Congrats on your success thus far Derek. We'll have to meet up next time I'm back in Bellingham.
Could you elaborate on some of the consequences of your early mistakes and explain what problems you might encounter by raising initial capital from non accredited investors.
Also, you might consider addressing the point that friends and family (who are most likely non accredited investors) are often the only feasible source for an early stage entrepreneur to turn a concept into a demonstratable product. What should a person do if they have no other choice or have already made the “mistake” of taking capital from a non accredited investor?
Eythor,
For sure, hit me up next time you are in the area, would love to catch up.
In regards to your question, the majority of the problems that will arise from taking investments from people that don't qualify as “accredited investors” will happen if the business takes a turn for the worse. In these instances when people lose money, they could claim that they were never qualified to invest, therefore you as the business owner should have never taken their money. You could imagine how messy this gets. Also, down the road, banks, VC's etc. will consider having non-accredited investors in your company as a liability, which could either stop the deal or significantly de-value the company when they do their due diligence.
I know there are certain rules that allow non-accredited family investors to invest, but I would consult an attorney about the limitations etc. If you have already taken non-accredited investments, I would consult an attorney to find out what your exposure is and what can be done going forward.
My advice, only take family money until you have enough money to afford an attorney who can advise you and create the right paperwork to move outside of family investors.
Options for raising capital for setting up your business in the UK.
INVESTORS are expected to take a lukewarm approach to any attempt by Virgin Blue to raise capital to help it steer its way through the downturn in aviation
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