RAISING EQUITY CAPITAL: THE ESSENTIALS YOU NEED TO KNOW
Part 4 of 4 Parts
Warning: There is a considerable amount of information here and in the other sequential Parts concerning the process and issues involved in raising equity capital. I understand how important this information is to you when making up your mind as to who can best help you with the expansion of your business. Consequently, as the guide covers a lot of ground, expect a long read.
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Part 4: Raising equity capital is a collaborative effort
Raising equity capital: what happens next?
What does equity raising entail? When you formally appoint me to help you raise equity capital, you can expect that I will complete the tasks set out below. Of course, these are not the only tasks that I would be performing on your behalf in an equity-raising program. Most of these tasks involve a high degree of interaction between us, because the undeniable fact is that raising equity capital is a collaborative effort between you and me. There are a number of other functions that I fulfill but they depend to a large extent on the individual nature of specific ventures:
- I will evaluate your present business operations and/or business proposals to help you determine achievable and realistic business objectives, so that the quantum of equity funds that you will require is calculated as accurately as possible. This is very important because the quantum of equity funds that you will require has a dominant influence on the scope of the investment proposal to be offered to potential investors.
- I will help you to produce a comprehensive business plan that will identify your commercial business objectives and show potential investors how you will achieve your commercial business objectives.
- I will help your company to become investment ready by ensuring that your corporate structure is investor friendly by providing a level of investor protection and confidence that will help your company to take full advantage of investor interest in your venture.
- I will prepare a Class Order Compliant Offer Document (COCOD) in conformity with ASIC Class Order 02/273 and Australian Corporations Act requirements. The COCOD is your formal Offer Information Statement and sets out details of your company, your business objectives and how they will be achieved, the anticipated financial returns and details of your equity offer. It will identify for investors your company’s corporate structure and commercial governance requirements, and will include other important information such as your company’s board representation, senior management experience and financial performance.
- I will develop a marketing plan to promote your equity offer to potential investors. In that regard, I must again stress to you that there are no guarantees in any capital raising program that venture capital firms and individual investors will contribute funds to a particular venture.
- On your behalf, I will respond to Venture Appraisal Questionnaires submitted by potential investors seeking more detailed information about both you personally, your management team and your investment offer.
- I will help you determine an appropriate response to an investor’s Term Sheet, which will set out some guidelines under which the investor may contribute funds to your venture. Term sheets are given to equity seekers by investors as a ‘good faith’ negotiating offer to invest on certain terms.
- Where necessary, I will assist you in the preparation, negotiation and settlement of Shareholder Agreements between you and investors wishing to participate as equity shareholders in your Company.
You should expect, depending upon the nature of the venture requiring funding, that this whole process will take about 120 to 150 days from the day that you formally retain my services.
Raising equity capital: Fees
The $64 question. OK, OK, I know you’re itching to ask me the $64 question: What’s all this going to cost? There are fees associated with the preparation of COCODs and business plans (I’m sure you appreciate that I have to make a living too!). Fees are set depending upon the amount of work and complexity involved in the venture. If your business plan is not developed enough for the purposes of a capital raising program, I can prepare both documents. Of course, there would be an economy of scale involved if I was to prepare both documents, and my charges are quite reasonable. I do try to keep costs as low as possible.
In-house business plans rarely cut the mustard. Whether you retain me to produce your business plan is of course a matter for your discretion. I simply mention it because while some companies ask me to do the work, others prefer to do it in-house. My experience however, as I said earlier, is that business plans prepared in-house rarely meet the expectations of venture capital firms and private investors and usually require substantial re-writing.
Business plans & COCODS – fixed once-only fee. To cut to the chase, I have a once-only fee to clients that covers the document preparation research, the actual drafting work involved and the necessary time required for both the business plan and COCOD, the costs involved in undertaking all the peripheral functional activities outlined above under the paragraph heading ‘Raising equity capital: what happens next?’ and, and lastly, the costs associated with my work in approaching potential investors. This process involves me in personally contacting many potential investors on my database and presenting your equity offer as a viable long-term investment opportunity.
Equity raising costs. The equity raising work on your behalf (where I do not have to prepare a business plan or COCOD) will generally take me about four to eight weeks to complete, but here again, the time-frame is heavily dependent upon the complexity of the venture. I have a once-only fee for this situation that will not not be varied. Moreover, there is no ticking clock churning over the $$$ on an hourly or daily basis and neither are there any extra costs involved every time you or a company officer telephones me or sends me an email.
The fee. The fee is called a Project Preparation & Listing Fee. This covers the work involved in preparing for and implementing a capital raise program on your behalf. My unfortunate experience however is that many entrepreneurs become so involved in the development stage of their projects, that they neglect to account for the costs of a professional capital raise. They seem to think that the professional capital raise consultants should simply work for free, on the basis that if an investor can be found, the capital raise consultants can be paid through a success fee. Of course, if the project cannot attract investment capital, then the consultants are out of pocket for the work performed. The point here is that no guarantees can be given that investors will contribute to a particular investment proposal at any particular time.
The other point is that if you, as a prospective client, refuse to pay the Project Preparation & Listing Fee, then you are effectively transferring the risk for a successful capital raise from your company to me. That is not ethical, because I have no real relationship with your company. Besides, would you expect your lawyer or accountant or even your architect to work for you for two months without a retainer? We both know the answer to that, don’t we! Well, the fact is that I am in the same relationship to your company as your lawyer and external accountant. So I expect that I should be treated in the same way.
My Project Preparation & Listing Fees is a modest $USD 400. I operate internationally, hence the use of an internationally acceptable currency.
Preparation of complete business plans. If a client requires me to prepare a business plan from scratch, my fee is $USD 2,000. This is because the preparation of a business plan is very time-consuming.
The Chiron advantage; the Chiron commitment! Apart from the fact that my fixed, once-only fee is in reality no more than a token, I offer Clients a ‘NO SURRENDER’ bonus. That means that if your venture’s equity raising program is unsuccessful at first attempt, then we will take stock, perhaps change a few things to accommodate investors’ feedback as to why they didn’t accept the venture, and we run your venture up the flagpole again. We may have to do this a few times.
Fee comparison: Graham v. the Act
Keep my fee in perspective. When we consider your venture in detail and we discuss the settlement of a reasonable fee, there are a couple of things that you need to keep in mind. The first is that whatever fee we agree on, it will be many, many times less than the legal alternative. The alternative is that if you do not wish to rely on my personal exemption from certain of the equity raising provisions of the Corporations Act, you will have to pay for the preparation of a formal prospectus at a very, very substantial cost. I personally have not seen a formal prospectus produced for less than $AUD 100,000. But that is not the full cost involved if you were to go down this path.
The question is: modest or expensive? To take the next step and use the prospectus to raise equity capital means either working through a small stock exchange or publishing the prospectus yourself and circulating it to stock brokers and advertising it in major media outlets. In the case of working through a small stock exchange, this can cost you another $AUD 100,000 in fees and charges. As far as the costs of doing it yourself go, you can spend yourself into business oblivion.
Key point. The key point here is that unless you work through an exempted person (as I am), then you must be prepared to face these very high costs if you wish to work within the terms of the Corporations Act requirements.
In addition to my fee for the actual physical work I perform for you, there is a 5.25% success fee to be paid based on the funds raised. Payment of this success fee only occurs when the equity capital funds are actually paid to you. There is a technicality here that arises from the unpredictable nature of negotiations between you and prospective investors.
The technicality is that as a result of negotiations, the funds raised can be either equity funds, loan funds or a combination of both. I mention this because once negotiations commence between you and potential investors (who of course have their own investment strategies and financial requirements), the end result of the negotiations may be a compromise of equity and/or loan funds. The success fee therefore is based on the total of funds received, no matter how the funds are categorised.
Fee payment offers that are unacceptable
Client offers that exclude cash fees. From time to time, I have received proposals from entrepreneurs to waive my initial cash fee in favour of a much higher success fee and/or a percentage of shares in the venture. In the early stages of my consultancy, I tried to accede to these requests in a spirit of establishing a good consultant/client relationship. Unfortunately for me, these clients took advantage of my generosity to my detriment. Here’s three case studies from the Graham Book of Experience:
Case Study 1: I accepted an arrangement for a high premium on the success fee and options to purchase shares at an attractive price in lieu of a cash fee. When the business plan and COCOD were completed and delivered to the client. the client simply disappeared. There is no doubt in my mind that the business plan and COCOD would have been used for some ulterior purpose. Whether that purpose was legal or not is a moot point. To this day I have wondered if some unsuspecting investors were swindled through the use of the documents I prepared. The reality is however, that I put a lot of effort into the venture for a nil return.
Case Study 2: I accepted an arrangement similar to the arrangement in Case Study 1. When the business plan and COCOD were completed and delivered to the client, the client (without my knowledge) used the documents to enter into a joint venture arrangement to have the product manufactured and distributed by a foreign company for royalty payments based on future sales. As no equity capital changed hands, there was no basis for a success fee. Here again, the reality is that I put a lot of effort into the venture for a nil return.
Case Study 3. I accepted an arrangement similar to the arrangement in Case Study 1. Unfortunately, just as my work preparing the business plan and COCOD was being finalised, the venture Principal became seriously ill and could not continue with the venture. This is another case where I put a lot of effort into the venture for a nil return.
The result? The consequence of my experiences is that clients must now pay a cash fee at the commencement of a venture to cover my costs in complying with the assignment activities. I am sure you can appreciate my reasons for now adopting such a policy.
Raising equity capital: action time
Still with me? Wonderful! We’re getting near the end now. You have absorbed a lot of information here, and it’s been pretty heavy going at times, hasn’t it? However, can you now see from all this information about how raising equity capital is a collaborative effort between us? And how you and your company can materially benefit from my help? Can you now see how you and your company could obtain a substantial amount of equity capital which could be used very astutely to expand your company to reach new horizons?
Consider you future. Could I leave you with this thought? Picture yourself three or four years from now. Where do you want you and your business to be? Do you want your company to be bigger and better than it is at the moment? Do you want your company to be able to give your family a substantial improvement over their present lifestyle? They deserve it, don’t they?
Call me now! So why not give me a phone call right now, this minute, on telephone 61 (0) 405 702 644 and confidentially discuss how we may work together to turn your ideas and dreams of expansion into a successful reality. I have no objection to your calling me at any time, although I must mention that I am in the Australian Eastern Standard Time Zone..
Raising equity capital: the next move is up to you
Time to take the plunge. Thanks again for sticking with me through this Four Part review of the equity raising process. You should take a bow because this is a complex subject. In such a brief review of what is a complex and legal process, I couldn’t have covered all of your equity raising questions, but I may have triggered a few more. Consequently, could I again suggest that you get my eBook and go through it thoroughly.
The eBook will undoubtedly provide answers to the questions you now have. I also hope that I have given you the incentive to think more positively about expanding your company with equity capital. There is now a leap of faith ahead of you to make that jump to the next step and commit to an equity raising program; so always keep in mind that I am here to help when you make it.
Raising equity capital is not easy. Essentially, raising equity capital is a collaborative effort between you as the venture Principal and me as your consultant to make sure that the process proceeds smoothly. Remember: progress is achieved by doing the impossible. Please visit my other webpages that explain different elements of the equity raising process. I am sure that you will find them just as informative as this one.
Please Note This Important Personal Limitation. As a sole-practitioner, I simply cannot accept every assignment I am offered. There are unfortunately not enough hours in each day to accept them all. So if you can see that collaboration between us could be helpful to your company’s business expansion, please call me now. For fairness, I have to operate on the ‘first up, best dressed’ principle.
… this is the end of Part 4: Where would you like to go next? Please select from the following options:
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Yours sincerely, Chiron! the business doctor.™ ... relieves business pain!™ Contact Information:
© Graham Segal, Author. March 2013. All Rights Reserved Creative Commons Licence:
This website and the associated webpages content are produced by Graham Segal trading as Chiron! the business doctor.™. They are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License based on Graham's work at http://chironthebusinessdoctor.com.
Chiron! the business doctor.™ ... relieves business pain!™.
© Graham Segal, Author. March 2013. All Rights Reserved
Creative Commons Licence:
Date this webpage last reviewed/updated: 11 April 2014