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How to Find Suitable Investors for Your Company

 

Not all investors are made equal. While some people may think investors have dollars at their disposal and can't afford to lose money, that isn’t always the case. Knowing and maintaining investor suitability standards enables investors to prove their credibility and give you peace of mind. If you’re looking for suitable investors for your company, here are a few tips to finding reliable financial backers to have on your side.

 

Large companies and entities. This can include any bank, insurance company, registered investment company, business development company, or small business investment company. This types of establishments typically have the means and the reliability to act as suitable investors.

 

An employee benefit plan. For companies with employee benefit plans, they may be invested in startups if they meet the following requirements: within the meaning of the Employment Retirement Income Security Act, banks, insurance companies, or registered investment advisers can makes the investment decisions, or if the plan has total assets in excess of $5 million.

 

Organizations with assets in excess of $5 million. This can include charitable organizations, corporations, and partnerships with this sizable about of assets in their name.

 

Any director or executive officer of the Company. If members of the startup would like to invest their own capital in the startup, they are considered suitable investors.

 

Large trusts. Any trust, with assets in excess of $5 million, not formed for the purpose of acquiring the securities offered, the purchase by which is directed by a sophisticated person should offer the financial stability your company needs.

 

Individuals with high net worth. This includes any natural person whose individual net worth or joint net worth with that person’s spouse, at the time of purchase exceeds $1 million at the time of the purchase. This excludes the value of that person’s residence.

 

Individuals with current high income. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income in the current year.

 

Accredited Investors. Any entity in which all of the equity owners are Accredited Investors.

 

Finding the right investors for your company can be an arduous process. When financing your company, it's crucial to find investors you trust who will benefit your business for years to come.

 

At Zccounting, we’re experts when it comes to finances and accounting for startups. To learn more about finding quality investors for your company or for expert advice on the financial side of running your own business, contact us today!

 

Image courtesy of Pixabay.com. 

 

 

Zccountings Guide to Convertible Notes

 

If you’re part of a startup hoping to make your next move towards funding your company, you’ve come to the right place. A convertible note is a type of short-term debt that becomes equity, often tied to future financing. Essentially, an investor would provide a startup company with a loan, and instead of receiving a dollar value with interest in return, that investor would gain equity in the company. This type of financial arrangement is advantageous for early companies that are difficult to value.  It gives the entrepreneur the ability to essentially borrow from their future funding round.

 

Where to Start: If you think a convertible note may be the right choice for your company, here’s a breakdown of where to start, how to approach this transaction, and a few cautionary areas to be aware of.

 

Example text: This memorandum (this “Term Sheet”) summarizes the principal terms with respect to the proposed sale and purchase of Convertible Promissory Notes (the “Notes”) by [your company name], a [Delaware Corporation] company (the “Company”).  Such summary of terms is intended solely as a basis for further discussions and is not intended to be, and does not constitute, a legally binding obligation.  A legally binding obligation will only be made pursuant to definitive agreements to be negotiated and executed by the parties.

 

Private Placement Terms: The Company is offering (the “Offering”) Notes to accredited Investors on the following terms.

 

Issuer: The Company

 

Amount of Investment: Minimum investment of $50,000 for An aggregate of up to $3,000,000

 

Why? A high ‘minimum investment amount’ reassures large investors that you will not have many small scale investors that could interfere with their deal down the line. Realistically, you should try to keep investors at a $250k minimum but really strategic people you could take smaller amounts, down to about $50k. If you have multiple people who want to invest small amounts, we can also host a syndicate, whereas we invest in a vehicle with the purpose of investing at your minimum.

 

Term: The entire amount of principal and accrued interest under the Notes may be paid or convert as set forth below on May 1, 2019 (the “Maturity Date”), if not converted upon an earlier date.

 

You are required to raise more money the range is usually 12-24 months, you can usually get this one on the upper limit.

 

Interest Rate: The Notes shall accrue interest at a rate of four percent (4%) per annum

 

Why? Four percent  is a low interest rate, however I like to start out, and plead ignorance since this is what mortgage rates are at, and you believe that your company is as sure as a shot as your mortgage. Anything under eight percent is a decent rate in my opinion.

 

Investor Eligibility: This Offering is limited to persons who qualify as “accredited investors” within the meaning of Rule 501(a) under the Act.  See the accompanying Investor Suitability Standards.

 

Why? When you use rule 501 of Reg D you are only able to take money from known accredited investors.  Who is accredited?  Individuals that make over $200k couples that make over $300k or any other investor with more than $1,000,000 in investable assets.  Let me emphasis known, because if you publicly disclose to strangers you are raising money, you must verify their income or assets, which no investor will let you do.  

 

No Escrow of Proceeds: The proceeds from the Offering would be immediately released and available to the Company as received in the course of the Offering.  There is no minimum amount that must be sold in the Offering and no escrow of proceeds prior to receipt of a threshold amount.  The Company cannot assure you that the proceeds from the sale of the Notes will be sufficient to allow us to conduct our business.

 

Automatic Conversion on Preferred Financing: Upon the next preferred equity financing of the Company providing gross consideration to the Company of at least $5,000,000 (excluding the amount of the Notes) (the “Preferred Financing”), then the entire principal amount and accrued and unpaid interest outstanding under the Notes will be automatically converted into units of equity securities of the Company (the “Equity Securities”) at a conversion price equal to the lesser of (i) eighty percent (80%) of the price per unit paid by investors in the Preferred Financing for the Equity Securities or (ii) a price per unit equal to the amount that would be paid for the Equity Securities if, without giving effect to and excluding the amount of money invested in the Company in the Preferred Financing, the pre-money valuation of the Company was $21,000,000 (the “Valuation Cap”).

 

I advise against letting lawyers accept checks and hold them in escrow. Oftentimes lawyers will take a long time to remit funds. Instead, have some term that allows a rolling close so that when you get a commitment you can take the check. Time kills all deals. Escrow can also be expensive, so I recommend taking the money directly.

 

Conversion on Change of Control: If the Company consummates a change of control prior to a Qualified Financing, then, upon the election of the holder, either (i) the holder shall receive a payment equal to 150% of the Investment Amount, or (ii) the entire Investment Amount shall convert into shares of the Company’s Common Stock at the Valuation Cap.

 

A ‘Change of Control’ as used in this Term Sheet is (i) a consolidation or merger of the Company following which holders of the Company’s outstanding equity securities immediately prior to such event own less than a majority of the voting equity securities of the surviving entity or its parent, (ii) the closing of the transfer, in one transaction or a series of related transactions, to a person or group of affiliated persons (other than an underwriter of this corporation’s securities), of the Company’s equity securities if, after such closing, such person or group of affiliated persons would hold 50% or more of the outstanding voting equity securities of the Company (or the surviving or acquiring entity) or (iii) a sale of all or substantially all of the Company’s assets or equity securities, other than in connection with an equity financing for cash.

 

Convertible notes, must convert to equity. They convert to equity when you raise your next equity round. This number I put at $5mm because I want you to be able to easily convert if you want to be able to convert. (Note: the faster you convert, the less interest will accrue, thus less dilution) This number is low compared to your raise, you might want this to be a bigger number as it gives the investors an idea of the expected size of your next round. You might want to make this $10mm to show that you will be raising more than $10mm

 

The other benefit of a low number is that the lower the number the lower the financing risk to your investors, meaning that they can be more sure they will be able to easily convert to equity.

 

Note Purchase Agreement: An investment in the Notes will be made pursuant to a Convertible Note Purchase Agreement.

 

If you sell the company the investor only gets 1.5x their money back. I have seen this for 1x-3x. Most commonly is around  2x. The investor usually gets to pick if they take 1.5x or if they convert at the valuation cap. They usually ask for some provision where they get an analysis before the acquisition where they can evaluate the conversation or not.

 

Investor Representation: Each Investor shall be asked to represent that he/she/it is a Qualified/Accredited Investor as defined in Rule 501(a) under the Securities Act of 1933, and has performed sufficient due diligence prior to making their investment decision.

 

This doc is not the final doc they sign, it's only for discussion, the final doc is 40 pages or more and drawn up by lawyer.

 

Additional Information: This Term Sheet does not purport to be all-inclusive or to contain all of the information that a prospective investor may desire in investigating the Company.  Each prospective investor must conduct and rely on his, her or its own evaluation of the Company, its business and the terms of the Offering in making an investment decision with respect to the Notes.  Any prospective Investor having questions regarding this Offering or desiring any additional information or documents to verify or supplement the information contained in this Term Sheet should contact the Company as follows:

 

    Your name and address

 

Expenses: The Company and each Investor shall each bear their own legal and other expenses with respect to the transactions contemplated by this Term Sheet.

 

I would try and stay away from paying for your investors legal expenses, this burns a lot of cash because their counsel will always take the max amount they can.

 

Finders Fees: The Company and each of the Investors shall each indemnify the other for any finder’s fees for which either is responsible.

 

Finders fees are looked down on by VCs.  When they invest the money, they want it to go to operations and increasing the value of their investment.  In terms of finders fee, especially at seed stage, if you have to offer anything, offer some small nominal stock options.  

 

Non-Binding: The parties agree that this Term Sheet does not create any binding obligation on the part of the Company or any other party, including any obligation to negotiate in good faith, and is subject in all respects to the negotiation and execution of definitive agreements.

 

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