1. Sources of Funding
Starting and growing a business requires capital. Here are some sources of capital that entrepreneurs use to fund their companies:
- Bootstrapping - most entrepreneurs get initial funding for their businesses using savings accounts and zero interest credit cards to leveraging other personal assets. In turn, this will make potential investors more comfortable knowing you have skin in the game.
- Friends and Family - friends and family can provide either equity or debt funding and might be more flexible on the repayment. To avoid friends and family feeling like “fools” you might want to structure this type of funding as a high interest loan for a specific period of time.
- Accelerators and Incubators - while focusing on accelerating startups and providing resources and connections, these organizations might also provide funding. Usually, they use equity or convertible note approach and have standard terms for all participants for the program.
- Crowdfunding - online platforms that allow individuals and businesses to raise money from multiple backers. There are enough platforms out there to find a mechanism that is best for you, including debt, equity or rewards-based donations.
- Small business loans - there are numerous organizations that lend to small businesses. Most lenders will want the loan to be secured by assets of some type, will require credit score and will set an interest rate. The Small Business Administration (SBA) has many programs that can help small businesses get access to capital.
- Banks – traditionally banks make small business loans. They typically require a track record, a guarantee on the loan while many of them require the business to be profitable or have positive cash flows.
- Economic Development Programs - the state, county and municipal economic development offices have an interest in helping businesses succeed to boost local and regional economies. Depending on the location and the type of business, these agencies might offer financial resources, including loans and grants.
- Partners - finding a partner that could become a source of funding. Strategic partners can benefit from supporting the business and therefore would be willing to align resources.
- Hedge funds, endowment funds, and family offices - one of the focuses is funding small businesses. These lenders often are willing to make longer-term loans and might be interested in impactful businesses.
- Angel investors - these people are accredited and are looking to invest in promising businesses. The increasing number of angels are successful entrepreneurs. Today they are forming investment groups to spread risk and to pool research.
- Venture capital - these firms provide funding on different stages and might focus on specific industries. They are typically looking to make relatively large investments and take a significant share of the issuer. On the upside, VC do follow up investments and some provide support and resources as well as a validation point.
- Crowd Investing - the emerging mechanism of raising money from anyone - including accredited and non-accredited investors - using an online portal. This mechanism allows companies to tap into a bigger pool of funds and build a support group around the business.
2. Raising Money for a Business
When raising funds for growing a business, it is important to consider multiple factors and prepare the right documents. First of all, you need to estimate how much you need to raise based on the expenses you need to cover and the duration. Given the target fundraising amount, you can now estimate the options - is it possible to get a low interest loan for that sum or do you need to look for investors.All investors will do due-diligence on the issuer, team and the product/service, here are some things they are looking for:
Regardless of which mechanism you choose to raise money, you need to know: who is your target investor and who is interested in backing companies in this industry, stage, and traction. It will also save you time if you talk to people who are potentially investing.
- believable market size
- detailed customer acquisition plan
- competition as a validation
- business model
- clear market target
- exit strategy
- use of the funds
Securing funding almost always requires a formal business plan. It should not be longer than 20-40 pages. It should include:
- summary of the current strategy
- a marketing plan
- key metrics
- a management team description
- financials (income, cash flow and executive summary balance sheet projections)
Funding Via SeedingU
SeedingU is a funding portal under the Reg CF which enables private companies to raise funds from the crowd using debt or equity offerings.
Sponsors may seek to raise long term capital in the form of equity, which may be preferred equity. Investors seeking long term gains from capital appreciation resulting from the sale of an asset in the future may seek to invest through this strategy. These are typically longer term investments with uncertain exit timelines and returns.
Debt InvestmentsIn general, the SeedingU process includes the following steps:
Sponsors may also seek to obtain debt financing. These loans are typically shorter term loans (6-24 months), provide a fixed interest rate and are secured by the real estate collateral.
Companies are limited to raising $1M in a rolling 12-month period under the Regulated Crowdfunding exemption.
- Application - Companies can apply to fundraise on seedingu.com. All applications are reviewed by the SeedingU Team and are verified on matching the criteria.
- Compliance Verification
- Exemption under the Regulated Crowdfunding requires:
- Offering will not be integrated with other offerings
- Company must use one online intermediary
- Company must be US entity
- Company cannot be Investment Company or company relying on an exemption from the ‘40 Act
- Must have a business plan
- Cannot be public reporting company
- If conducted an offering pursuant to Regulation CF in the past must be compliant with ongoing reporting requirements
- Cannot be a Bad Actor
The issuer need to have the right disclosures prepared for filing with the SEC. As part of Form C, issuers will need to make the following information is documented:
- Name, legal status, address, website
- Directors, officers, background, offices held
- Identity of 20% beneficial holders of voting securities
- Description of the business
- Financial condition
- Target offering amount, maximum amount, deadline
- Description of the securities including prices and how determined
- Use of proceeds
- Risk factors
- Ownership, capitalization, indebtedness
- Offering mechanics
- Related party transactions
In addition to Form C, financial information required will depend on the size of the intended investment needs:
- Up to $100,000: Information from tax return filed for the most recently completed fiscal year. GAAP financials for past two years or time in existence certified by CEO
- Over $100,000 up to $500,000: GAAP financials for past two years or time in existence certified by CEO and reviewed by public accounting firm
- Over $500,000 up to $1,000,000: GAAP financials for past two years or time in existence certified by CEO and audited by public accounting firm
- One time exemption for first time crowdfunding companies can provide reviewed financial statements rather than audited
The information about the offering and the issuer should be available for at least 21 days before the sale of securities. All the committed funds from investors are held in an escrow account. The issuer has to reach the minimum target amount before the deadline in order to receive the funds. You are required to provide progress reports on the offering according to the disclosure requirements - Form C-U must be filed. Once the amount is reached, the funds are transferred to the issuer bank account and revenue sharing agreements with investors go into power.
seedingu.com facilitates the whole process, including document signing and repayments to investors after funding is complete.
3. Promoting Crowdfunding CampaignRule 204 of Regulation Crowdfunding only applies to companies publishing a notice advertising the terms of an offering in reliance on Section 4(a)(6):
- a statement that the issuer is conducting an offering
- the name of the intermediary through which the offering is being conducted
- a link directing the investor to the intermediary’s platform
- the terms of the offering
- the amount of securities offered
- the nature of the securities
- the price of the securities
- the closing date of the offering period
- factual information about the legal identity and business location of the issuer, limited to
- the name of the issuer of the security
- the address
- phone number
- e-mail address of a representative
- a brief description of the business
What companies can do:
- Promote your financing on social media such as Twitter, Facebook, and LinkedIn
- Send email blasts to relevant email lists about your offering
- Speak about your offering at demo days, pitch events, and public events
- Talk to the press and bloggers about your offering
- Limit advertising materials to broad, non-sensitive, non-controversial statements
- Have each key employee, 20% shareholder, director, and officer, new investor, broker, solicitor or other “promoter” complete a Bad Actor Questionnaire
What companies CANNOT do:
- Make any untrue statements, misrepresentations or omissions (anti-fraud applies) regarding the offering
- Include sensitive, confidential or controversial information in public advertisements
- Include any information in excess of the “tombstone” information set forth above.
The are no limitations on the distribution of the notice so companies should consider reaching out to customers, personal and professional networks via emails, run events to allow potential investors to learn more about the business, product and team. Social media and online communities can be a great way to reach potential investors among your followers and spread the word about the campaign.
4. Investor Relations
It’s important to have an open communication channel to keep your investors informed. Maintaining long-term relationships with your investors is one of the most important parts of maximizing the added value that strategic investors can provide to your business. The communications are best delivered in writing, either through mail or e-mail.
Many early-stage companies choose to provide investor updates on either a monthly or quarterly basis. These periodic updates usually include information about key metrics, traction, and any business issues that have arisen. This update can include links to new articles about the business, information about new partners, team members, opportunities, etc. You also want to notify investors about any current and upcoming issues that the issuer may face, particularly those that relate to fiduciary duty and organizational impact.
Finance Related Updates
You should always notify your existing investors of a new financing round. Your investor agreements may also legally require you to do so when future capital rounds take place. Some investors from previous rounds may also have the legal right to participate in new rounds of capital raising. Maintaining good records of each investor’s holdings and contact details is vital for companies that are raising multiple rounds of capital.
When you receive offers to acquire the business, the terms of your investor agreement may require you to notify the investors of any such offers.
An initial public offering is the offering of shares in your company for sale to the public and the listing of those shares on a publicly traded stock exchange. An offering of this type may need to be notified to existing shareholders in advance.
Quarterly and annual reports should include detailed financial information.Why is Investor Relations important?
Depending on the level of involvement of the investor, phone calls and in person meetings can be beneficial too. Consider scheduling semi-annual meetings or brainstorming sessions with investors, either in person or via conference call.
- It forces you to be accountable to yourself and to your investors.
- It encourages ongoing evaluation of your company and business model on a monthly and/or quarterly basis.
- It helps investor identify potential areas of growth, partnerships, or new business opportunities.
- A record of strong investor communication and a documented history of the issuer’s performance can help attract new investors.
- Investor relations and reporting are important infrastructure components for larger companies and you should start developing this infrastructure early.
5. Company Disclosures and Reporting
Under the rules certain companies would not be eligible to use the exemption, including non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.Reg CF requires companies that rely on the new rules to conduct a crowdfunding offering to file certain information with the Commission and provide this information to investors and the intermediary facilitating the offering, including among other things, to disclose:
- Business name, address and incorporation information;
- A description of the business and business plan;
- Financial Reporting Requirements. GAAP Financial statements of the issuer that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the issuer’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.:
- Under $100k – Internal financial statement review
- $100k-500k – CPA reviewed financial statements
- 500k-1M – 3rd Party audited financial statements
- 1st time crowdfunding issuers offering more than $500,000 would be permitted to provide reviewed, rather than audited, financial statements.
- The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the issuer will accept investments in excess of the target offering amount;
- The narrative discussion of its financial condition covering, among other things, its historic results of operations and liquidity and capital resources;
- A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the issuer are available that have been audited by an independent auditor;
- A description of the business and the use of proceeds from the offering;
- Information about officers and directors (including their history with the issuer, business experience for the past three years and other information) as well as owners of 20 percent or more of the issuer;
- The identity of the Crowdfunding Portal for the offering and compensation being paid to it;
- Number of current employees;
- Certain related-party transactions;
- and other information required by the Form C.
You need to file updates to Form C (designated Form C-U) with information on the the progress toward reaching the Target Amount. Disclosure must be amended if a material change or update occurs (designated Form C-A).
You would be required to file with the SEC and post to your website an annual report within 120 days of the end of each fiscal year (designated Form C-AR). This annual report would include information similar to the offering statement on Form C, including the financial statement and narrative disclosures meeting the highest standard applicable to any of the issuer’s past offerings pursuant to the Crowdfunding Exemption, but excluding offering-specific information.In certain circumstances a company may terminate its ongoing reporting requirement if:
- The issuer becomes a fully-reporting registrant with the SEC;
- The issuer has filed at least one annual report, but has no more than 300 shareholders of record;
- The issuer has filed at least three annual reports, and has no more than $10 million in assets;
- The issuer or another party purchases or repurchases all the securities sold in reliance on Section 4(a)(6); or
- The issuer ceases to do business.
You would be required to file a notice of termination of its annual reporting obligation on Form C-TR.