In Raise Capital on Your Own Terms: How to Fund Your Business without Selling Your Soul, attorney and capital raising coach Jenny Kassan describes various capital-raising strategies available to mission-driven entrepreneurs and provides a six-step process for finding and enlisting investors who are a match with your personal goals and aspirations.
Jenny has over 25 years of experience as an attorney and advisor for mission-driven enterprises. She has helped her clients raise millions of dollars from values-aligned investors and raised over $2 million for her own businesses.
Small businesses represent 99.7 percent of all employer firms and employ more than half of private sector employees. Sixty-four percent of new jobs were generated by small businesses over the past fifteen years.
The Six Steps for Fundraising
Step 1: Get Clear on Your Goals and Values
Your goals and values are the foundation for your capital raising plan.
Step 2: Identify the Right Investors for You
Investors are incredibly diverse. More than 50 percent of the adult population of the United States is an investor. There are millions of potential investors out there, and you need only a few.
Step 3: Design Your Offer
There is a literally infinite number of investment types that you can offer to investors. The basic categories include equity, straight debt, revenue-based debt, convertible debt, and agreements for future equity.
Step 4: Choose Your Legal Compliance Strategy
The strategy you choose will affect to whom you can make your offering, who can actually invest, and how you can get the word out. Before making an offering to any potential investor, it is essential to choose your legal compliance strategy.
Step 5: Enroll Investors
There is no one- size-fits-all way to communicate with investors. Your enrollment strategy will depend on who your target investors are.
Step 6: Address Obstacles Head On
This step involves working on the mental game of preparing for and staying on track during your capital raising journey. No matter how amazing your business and how great your offering, unaddressed mind-set obstacles can make raising money almost impossible.
Securities law is what governs how businesses can raise money from investors.
What is a Security?
Generally, it is any arrangement that allows the contributor of funds to receive a financial return on his or her investment. The most common types of securities are stock (owner- ship shares in a corporation), limited liability company memberships (ownership interests in an LLC), and promissory notes (the document that you use when you borrow money from someone).
Any investment instrument that pays a financial return to someone who is not actively involved in management is a security, regardless of whether the return consists of profit sharing, interest, appreciation in value, or anything else.
Accredited Investors
An accredited investor is defined under federal securities law as an individual with at least $200,000 in annual income or $1 million in net worth, not including her primary residence.(This is just a partial definition—for a complete definition, see the glossary.) Accredited investors make up approximately 10 percent of the population.
STEP 1: get clear on your goals and values
If you don’t design your capital raising strategy with your goals and values in mind, you run the risk of raising money in a way that will require you to sacrifice what is most important to you.
Your Why
Whatever you do, never make a decision in your business that will require you to sacrifice the whole reason you started your business in the first place. For example, if you love having free time to pursue your hobbies, don’t bring on an investor who expects you to devote all your waking hours to the company. Don’t be one of those entrepreneurs who wakes up one day and realizes that she hates the business she has built.
STEP 2: identify the right investors for you
A professional investor is someone who spends a majority of his or her waking hours focused on investing. Some of the categories of professional investors include venture capitalists, people who manage various kinds of investment funds, and people who manage investing for foundations and wealthy.
Angel Investors
High-net-worth individual who invests his or her own money (unlike venture capitalists, who invest other people’s money).
Nonprofessional Investors
The adult population of the United States is about 250 million. Professional investors, therefore, make up about .1 percent of the total population. Nonprofessional Investors The adult population of the United States is about 250 million. Professional investors, therefore, make up about .1 percent of the total population.
Ideal Investors
Your ideal investors are people who are passionate about the same things you are. They are people who totally “get it” within the first few moments of hearing your vision. They are people who believe in you and want to see you and your business succeed. The clearer you are about your ideal investors and the type of relationship you would like to have with them, the easier it will be to find those people.
STEP 3: Design your offer
Convertible Note
Many business owners go to their lawyer or advisor and ask for help raising money from investors. Often, the lawyer or advisor will hand them something called a convertible note and tell them to go out and offer this to their investors. You should never start offering an investment opportunity (i.e., security) to potential investors without first understanding all of the options available and the implications of each.
The Promise
You want to choose a security that has the greatest likelihood of
(1) creating alignment between your goals and interests and those of your investors and
(2) fulfilling on its promises.
Every security contains a set of promises that you are making to your investor. These promises may be explicit, such as the promise to pay a certain amount of interest each year, or implicit.
STEP 4: Choose your legal compliance strategy
A security is any arrangement that allows the contributor of funds to receive a financial return on his or her investment, usually in the form of interest or a share of profits or an appreciation in the value of the investment.
The general rule is that before you make an offering of securities, you must register the offering with both the federal government—the Securities and Exchange Commission (SEC)—and with the securities regulators of every state where you will be offering the investment opportunity.
Step 5: Enroll Investors
The more conversations you have, the faster you will find your ideal investors and hone your message so that it really speaks to them. Think of your investors as a particular breed of dog and your investment offering as a dog whistle that is irresistible to them but unappealing to all other dogs.
When you ask them for a meeting, you should emphasize that the reason you are asking is that you know that what you are doing is well suited to what you believe they care about.
STEP 6: Address obstacles head on
It is just as important to consciously cultivate your state of mind for raising capital as it is to create a great pitch presentation.
YOUR MINDSET
The average investor is lucky to make a 3–5 percent annual return on his or her investments (and much less if the money is parked at a bank). You must compare yourself to the reality of “market-rate returns” and not the hype.
Remember that your unique combination of skills, experience, relationships, values, and resources is not something that an investor can easily find. What you are offering will be a huge gift for the right investor and will have value far beyond the amount of money you are asking for.
All the Best in your quest to get Better. Don’t Settle: Live with Passion.
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