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Investors, which can include wealthy individuals, strategic alliances, financial institutions, venture capital firms, stock brokerage houses, etc., want to know, among other things, six basic things about your capitalization plan:
1. Who are you?
Including your management team's background in the business plan or prospectus. More experienced management teams have a greater probability of raising capital. Do what you can to form an experienced board of directors, executive officers or at least an ancillary advisory board. They should also be able to give you some capital contacts of their own.
2. What will you do with my investment?
A detailed "Use of Proceeds" statement should be included in the business plan and must be included in a securities offering document.
3. How safe is my investment?
This generally difficult to answer in a sufficiently assuring manner. Generally, entrepreneurs will attempt to sell less than controlling interest in their firm for a substantial amount of equity capital. For instance, they may attempt to sell 20% of the equity interest in a start-up or early stage enterprise for, let's say $1 million. A sophisticated investor would realize that, by investing, he or she would be valuing the company for $5 million (if $1 million is only 20% of the worth of the company). Generally, there are no other tangible assets in the company, including the entrepreneur's cash. Obviously, this is not a safe situation for the investor.
4. How do I get my investment back?
Exit strategies generally need to be specified rather early in the company's life. Although IPO's or sales of the company may seem attractive, those strategies are not guaranteed and therefore should not be part of the exit strategy. Many tactics are available to provide this benefit to potential investors.
5. If the firm fails, what are my liquidation rights and lien positions on assets?
While this is an outcome we do not like to discuss, start-ups are risky. On average, 85% of start-up and early stage companies fail within their first five years, and 50% of the remaining firms will simply survive providing little or no return. By providing a secured position on assets for the investors, and subordinating your equity in case of liquidation, you can offer the investor some protection.
6. How much will I earn?
Few business plans and securities offering documents include rate of return projections. A prospective investor will want to know the current value of the company based on realistic future financial projections. These include realistic annual earnings growth, realistic gross and net operating margins, as well as increasing capital budgets. Many securities attorneys are reluctant to project a rate of return, because they fear that you'll be sued if you don't hit those numbers. Proper disclaimers provide sufficient legal protection against this occurrence.
Well-prepared pro forma financial projections provide prospective investors with:
* A thorough "Use of Proceeds" statement. (Required by federal securities law.)
* Realistic cash flow projections and analysis, and exit strategies
* EBIT, Key Ratios, Annualized Compounded Rate-of-Return Projections
* Current Company Valuation, Current Pricing of the Company's Securities
* Growth planning, and Future Private, as well as, Public Valuation of the Company
With this information to work with, investors can make a decision on a venture with as much confidence as one can in trying to predict future events.
1. Who are you?
Including your management team's background in the business plan or prospectus. More experienced management teams have a greater probability of raising capital. Do what you can to form an experienced board of directors, executive officers or at least an ancillary advisory board. They should also be able to give you some capital contacts of their own.
2. What will you do with my investment?
A detailed "Use of Proceeds" statement should be included in the business plan and must be included in a securities offering document.
3. How safe is my investment?
This generally difficult to answer in a sufficiently assuring manner. Generally, entrepreneurs will attempt to sell less than controlling interest in their firm for a substantial amount of equity capital. For instance, they may attempt to sell 20% of the equity interest in a start-up or early stage enterprise for, let's say $1 million. A sophisticated investor would realize that, by investing, he or she would be valuing the company for $5 million (if $1 million is only 20% of the worth of the company). Generally, there are no other tangible assets in the company, including the entrepreneur's cash. Obviously, this is not a safe situation for the investor.
4. How do I get my investment back?
Exit strategies generally need to be specified rather early in the company's life. Although IPO's or sales of the company may seem attractive, those strategies are not guaranteed and therefore should not be part of the exit strategy. Many tactics are available to provide this benefit to potential investors.
5. If the firm fails, what are my liquidation rights and lien positions on assets?
While this is an outcome we do not like to discuss, start-ups are risky. On average, 85% of start-up and early stage companies fail within their first five years, and 50% of the remaining firms will simply survive providing little or no return. By providing a secured position on assets for the investors, and subordinating your equity in case of liquidation, you can offer the investor some protection.
6. How much will I earn?
Few business plans and securities offering documents include rate of return projections. A prospective investor will want to know the current value of the company based on realistic future financial projections. These include realistic annual earnings growth, realistic gross and net operating margins, as well as increasing capital budgets. Many securities attorneys are reluctant to project a rate of return, because they fear that you'll be sued if you don't hit those numbers. Proper disclaimers provide sufficient legal protection against this occurrence.
Well-prepared pro forma financial projections provide prospective investors with:
* A thorough "Use of Proceeds" statement. (Required by federal securities law.)
* Realistic cash flow projections and analysis, and exit strategies
* EBIT, Key Ratios, Annualized Compounded Rate-of-Return Projections
* Current Company Valuation, Current Pricing of the Company's Securities
* Growth planning, and Future Private, as well as, Public Valuation of the Company
With this information to work with, investors can make a decision on a venture with as much confidence as one can in trying to predict future events.