Entrepreneurs: Raising Money to Fund Your Business? You Should Know…

Raising capital for your business isn’t your full-time job. But it’s one of the most important…

Here are five recent updates that can help you do it right, from lawyers on JD Supra:

Finders May Pose Risk in Private Capital Raising (Venable LLP):

“Entrepreneurs, company executives, and private equity fund sponsors with a growing enterprise, innovative idea, or a new fund often find themselves needing help when it comes to raising capital to fund the new enterprise. As a result, they often turn to friends, colleagues and others with experience raising capital… Often times, the person agreeing to help raise capital (sometimes referred to as a ‘finder’) will agree to provide access to his or her contacts in exchange for a commission payment based upon the amount of capital raised. Satisfied that this ‘finder’ can help raise the necessary funds, the entrepreneur, company executive, or equity fund sponsor continues operating his or her business and lets the finder ‘do his thing’ by making contacts with individuals interested in investing. What these parties often fail to recognize is the danger that such a relationship can present.” Read on>>

Six Steps to Prepare for Venture Financing (The R. Bernard Law Group):

“Venture capital funds don’t expect startups to be well-oiled machines. In fact, they go into potential deals knowing there will be problems. These issues range from disgruntled founders to disputes over who owns a company’s intellectual property. Acquirers are prepared for these issues and M&A and venture capital professionals will not be surprised to uncover some of these issues during the diligence process. However, when preparing for equity financing it is important that your company does not have the kinds of problems that may be so fatal that it kills your deal. Establishing and maintaining good corporate hygiene will pay dividends as you negotiate your venture financing. By preparing in advance, you can minimize some of the pain and effort in the diligence process and focus instead on negotiating the best deal for your company.” Read on >>

Convertible Debt As A Financing Tool – Friend or Foe? Advantages & Disadvantages From The Perspective of the Founder Of Using Convertible Debt to Raise Capital (Scott Legal Services, P.C.):

“When you start a business and want to attract your first round of financing, Convertible Debt is one product that can be offered to Investors… Convertible debt is a financial product that is debt (like a loan) that converts to equity (usually preferred stock) based on some trigger event (usually a Venture Capital or other funding/financing round). The debt usually accrues interest but the interest is not paid until the trigger event occurs. Once the trigger event occurs, the debt holders can convert the money they loaned, and the accrued interest, to preferred stock and they can usually get the same stock that the Venture Capital fund gets. In addition, Convertible Debt holders are usually able to purchase the preferred stock at a discount. There are other provisions covering various what-if scenarios, but those are the basics. Convertible debt is often referred to as a fancy bridge loan since it ‘bridges’ the company to its next financing.” Read on>>

SBA Rules: Investment Funds Can Now Be Majority Owners of SBIR Companies (Duane Morris LLP):

“Under the new SBA rules, a business participating in the [Small Business Innovation Research] program is no longer required to be majority owned and controlled by U.S. citizens or permanent resident aliens or by a single business that is majority owned and controlled by U.S. citizens or permanent resident aliens. A participating business may now be majority owned by multiple domestic venture capital operating companies, hedge funds or private equity firms, provided that: (i) no single domestic venture capital operating company, hedge fund or private equity firm owns more than 50 percent of the business; and (ii) each such venture capital operating company, hedge fund or private equity firm must have a place of business located in the United States and be created or organized in the United States or under the law of the United States or of any state.” Read on>>

JOBS Act Update (BakerHostetler):

“… Companies looking to raise capital through a funding portal that is not registered as a broker-dealer should not pay any type of compensation that would invalidate the funding portal’s exemption from broker-dealer registration. While the [SEC and FINRA] FAQ indicates co-investments are permitted, the plain language of the [JOBS] Act and the guidance in the FAQ leaves open the question of whether private companies may pay funding portals a fee that would be comparable to the types of fees paid to finders (i.e., an introduction fee).” Read on>>

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