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As a startup, finding capital often involves going to family and friends and convincing them to invest in your business. While many of us started this way, what happens when you do not have wealthy family and friends who are willing to invest?
Well, at my company, we put together syndications to acquire our investments. A syndication is nothing more than a group of individuals with aligned interests trying to accomplish something. Movies are syndications, real estate is purchased with syndications and entrepreneurs can raise capital for their ideas through syndication.
Most entrepreneurs are familiar with venture capitalists, who typically join the company as majority owners or at a minimum have a fair amount of control. In this article, I’m going to discuss a way to raise funds without necessarily giving up huge chunks of equity in your business.
One caveat: There are a ton of legal implications and you do not want to violate securities law, so while this article is meant to a be general overview, you should sit down with a securities attorney and go through the process step by step.
1. Get your house in order.
This starts well before you need the capital. At Spartan, we were operating for several years before we executed our first syndication. In that time, we had hammered out our business plan and our strategic plan, initial processes and procedures were put in place, and we had built the foundation of the company.
Make sure every public source of information on you tells the same story. If your LinkedIn profile picture is a selfie, you’re doing it wrong. Get a professional headshot. Do a Google search on yourself. Make sure you know what people will find. Update your resume. Unless you’re a software developer, if you built your website, it looks like you did. Have it refreshed. The most important thing here is that every externally facing element must be professional and uniform.
2. Get educated.
Taking money from other people is a huge responsibility. What you’re really doing is taking years of their efforts. As such, ensure you know exactly what you’re doing. Putting together a syndication requires you to have a base knowledge of securities laws. I recommend taking a course prior to engaging an attorney (which, again, is something you must do).
My company’s syndications are governed by Regulation D of the Securities Act of 1933, more specifically rule 506. Rule 506 of Regulation D allows syndicators to raise money under two different offering types, “b” or “c.” Not everyone is eligible to invest in your company. The IRS has criteria that determine whether an individual can invest and it’s important to know those criteria, which can be found here.
3. Get known.
Once you’ve built a foundation of knowledge on the syndication process, it’s time to start getting your name out there. Hopefully by now your business has a bit of traction, but if not, this is a good way to get started.
First, start writing. Get your thoughts down on paper and get them out there. Start a blog, post on social media and try to get your writing picked up by media outlets. Second, engage podcasters to get your message out. At Spartan, we try to be interviewed on two podcasts per month. This ensures our expertise is spread to a wide audience. Finally, seek out speaking engagements at industry conferences. These are very selective so getting on stage will drive your credibility.
4. Get ready.
Once you feel you’ve gotten out in the world and generated enough interest to raise the funds, put your offering documents together. These typically include your offering memorandum describing your offering (different than a business plan), the private placement memorandum, which is the official document outlining every detail of your offering including all potential risk factors, a purchaser questionnaire that identifies what type of investor you have, pro forma financial statements and all other supporting research documents.
In addition, you need to get your story straight. You need a compelling story that, as Simon Sinek teaches, starts with your why.
5. Get funded.
So, you’ve generated a ton of interest and investors, friends, family and even the tooth fairy want a piece of your offering. Now what? How you accept funds matters. It’s important to work with your attorney and set up the proper intake process, and it starts with a subscription agreement. The subscription agreement is a legally binding document that in essence states “for X dollars, you get X units/shares” of the syndication. In addition, it provides instructions to the subscriber on how to get you the funds. You’d be surprised how many sponsors aren’t prepared for this step.
An important final step is to ensure you communicate the funds received. Our minimum investment is $50,000, which is a lot of money to be unsure of its location.
If you follow this process and you have a clear value proposition, you can open up doors to private investments without having to give away the farm or potentially have a partner whose goals are not aligned with your own. As a final thought, do not do this on your own. Find an attorney to help guide you through the process.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
January 31, 2019 at 08:41AM
Forbes – Entrepreneurs