I have fallen behind on the Blog …. last year (4/2017) when I was invited assist two start-ups and attend a session in the west side (Seattle, WA) to hear what the Angels and VCs are looking for. This was an opportunity not only for them to hear what investors are looking for and what must be given up by them if there appears to be real or potential interest, but also a chance to see who else they are competing against for financing and gauge what others are willing to offer. (Warning: Some laws have changed and crowdfunding has made substantial inroads prompting me …. to rethink about this changing landscape - the sources of capital and opportunities have undergone some significant changes and there are now new (unanticipated) challenges that I will not touch on today.)
In these investment forums, founders will be pumped up (to some extent), You will hear the term "unicorn(s)", eliciting excitement from investors. That said, the conversations sooner than later turn to a discussion of warrants, preferences, liquidating rights, convertible debt, conversion triggers, conversion discounts, valuation caps, options, down round, founder dilution, vesting schedules, and term sheet negotiations. The head spins! Figuring out how that may impact one or more founders is dizzying. Why is that? Well, because valuing a start-up is quite difficult; in fact, it is darn difficult and time consuming and to factor in now the impact of the new tax act on everyone involved is mega hard and calls for educated speculation (something few start-ups can afford). While the discussions and presentations present many variables and underscore that uncertainty and hope are the norm, it is not all wasted. Founders leave more informed and prepared to present (for future rounds and efforts). This is why I encourage local start-ups to attend these westside functions.
Despite my urging, a number of start-up founders will say something akin to "well, I do not need that hassle, I will do that crowdfunding thing." That also takes time and effort and is not far different from making a pitch to Angels and VCs. In fact, many of the latter are changing their business model in response to the emergence of crowdfunding. Are Angels and VCs dead? No! So, if you decide to go the crowdfunding routs, keep in mind that, depending on how much you want to raise, you will need audited financials. What few founders still fail to realize is that there different types of crowdfunding; there is a reward-based crowdfunding model and an equity crowdfunding. The former has been around longer and is a viable option for smaller companies that need sales and traction to move to the equity crowdfunding level.
Assuming founders are interested only in equity crowdfunding, a critical factor those founders need to understand is that Regulation CF (regulation crowdfunding), while friendly, has costs (i.e., there is a price to play and to get their they have to prepare and have a seasoned team of professional advisors).
As a preliminary matter, crowdfunding exemption is not available to companies without a business plan (not 10 or 20 pages of notes), the plan is to engage in a merger or acquisition with unidentified company(ies) or any bad actors are involved in the offering process. So, beware of whom you choose to name to your Board and whom you choose to use as an advisor.
This is not legal advise! In this Blog, I share my thoughts and impressions (it is entertainment), if you need legal advise,,, then retain me or go to a qualified attorney to review your particular case and review how the law applies and also how it has changed since 2017!)
If you like this Blog, please share and if you are in North Central WA, consider this firm as your potential legal counsel! Thank you.