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Inventor
10-14-2010, 03:38 PM
We are in specialty tape manufacturing and have spent some years developing products, testing products and the market, market acceptance, certification or listing with UL/ETL, developing raw material supply base, started establishing manufacturer's reps, selling as well as setting up online store, currently negotiating with major accounts. We are in a market which gives us strategic advantages by the nature of the products which has limited sources.

We now have initial inventory of raw materials and finished products, and are now poised to pursue the market. Supporting growth will become an issue specially that the company is new, no track record or established credit as previous years were devoted to product and market development. Getting financing from institutional lenders will be a challenge and not being considered at this stage.

Current funding Options under consideration:

-Small scale investors (relatives and friends)
-Equity Partnership

Any suggestions from members?

I would, if available, prefer equity partnership with strategic party/ies with good background in Finance, Legal, or business. Is there a legitimate source to locate such parties, or perhaps organizations that matches private investors with business owners?

Business Attorney
10-14-2010, 08:34 PM
Without knowing more about your situation, I would say that relatives and friends are still your best bet. They are typically less demanding, both in terms of return on their investment and input into your business decisions.

If you believe that getting an equity investor is better in your situation, then the best place to look is close to home. While there are a few websites that purport to connect investors and projects, the feedback I have heard (which is admittedly sparse) is that the quality of both the projects and the investors typically leaves much to be desired.

Most individual investors who invest in small companies limit their investments to their own immediate geographic area. The reason is obvious. If they want to keep tabs on how the company is doing, they want to be able to sit down with the management and meet face-to-face, eyeball to eyeball.

Most cities of any size have one or more angel networks where individual investors with funds to invest get together to discuss possible investments. That would be the first place to start.

If there are no existing networks in your community, I suggest that you use your own personal network. Start with professionals who might work with individual investors -- accountants, business lawyers and bankers. If your personal network doesn't include accountants, business lawyers or bankers, use your personal network to seek introductions to those professionals. For example, if you don't know any lawyers or bankers, you probably know real estate brokers or insurance brokers, and they almost certainly know lawyers and bankers.

Inventor
10-16-2010, 02:19 PM
Thanks for your post, it is informative and practical. In fact, I have been networking with professionals and so far had not been fortunate yet to get solid introductions, but I know someday we will get some serious interests.

I did have experience with an Angel Investors group for my R&D company where we were invited for presentation and was very well received that we had follow-up meetings, only for the deal not to materialize apparently with the group members' conflicting interests and views. The group organized a team composing of engineering, financial and other expertise but they mostly relied on the engineer who unfortunately do not have the slightest idea on the product and technology that his pessimism just soured the transaction. It turned out that the group had never invested yet in any venture, being new, or members probably are just not geared yet to invest given the current economic conditions. Angel investment groups have become very sophisticated and demands so much for so little, almost similar to what we call Vulture Capitalists (I mean venture). I do understand they are just being smart and always try to minimize the risk and at the same time maximize the rewards of investing, but as anything else, everything has its own match - the investor and the business getting investment need to satisfy each other's needs to make a deal. I also mean, the need should match the offering to make a good deal, and that is what makes the art of dealmaking.

Being an entrepreneur and an engineer/inventor, I wish to have partners who are experts in finance, marketing, sales, and business so they would be doing the things that I should not be doing so I can just concentrate in the things I love to do - engineering, developing products and manufacturing. With the right people to fill our needs, I would be glad to offer equities for service until the venture is funded and operational.

Inventor
10-19-2010, 09:20 PM
Hi David,

I have a good number of relatives and friends who are interested to invest in our company. We are operating as S-Corp. What legalities do we have to do to bring these investors in the company as shareholders, or what would be the best way to handle their investments?

Matt









Without knowing more about your situation, I would say that relatives and friends are still your best bet. They are typically less demanding, both in terms of return on their investment and input into your business decisions.

If you believe that getting an equity investor is better in your situation, then the best place to look is close to home. While there are a few websites that purport to connect investors and projects, the feedback I have heard (which is admittedly sparse) is that the quality of both the projects and the investors typically leaves much to be desired.

Most individual investors who invest in small companies limit their investments to their own immediate geographic area. The reason is obvious. If they want to keep tabs on how the company is doing, they want to be able to sit down with the management and meet face-to-face, eyeball to eyeball.

Most cities of any size have one or more angel networks where individual investors with funds to invest get together to discuss possible investments. That would be the first place to start.

If there are no existing networks in your community, I suggest that you use your own personal network. Start with professionals who might work with individual investors -- accountants, business lawyers and bankers. If your personal network doesn't include accountants, business lawyers or bankers, use your personal network to seek introductions to those professionals. For example, if you don't know any lawyers or bankers, you probably know real estate brokers or insurance brokers, and they almost certainly know lawyers and bankers.

phanio
10-20-2010, 07:52 AM
Matt - make sure that you read over the SEC's rules. Look to Reg D. There are several options of raising capital without registering with the SEC and others that would require reporting periodically to the SEC. These are based on where you raise funds (within a state or across states - know that states also have private equity rules), the amount being raised and the number of investors. I would suggest you get an experienced attorney involved. A little expense now can really save you money and trouble in the long-run.

If you strictly limit to friend and family - there are other companies that can help you with the documentation and management - look to virgin money or similar companies.

Also, don't forget about Small Business Investment Companies (SBICs) who offer both equity and equity with debt features. These companies may be a better option. You can search the SBAs website for a listing (we also have a search able database of VC, angel and SBICs on our site).

Since you have already spent time with your products feasibility - did any of those you spoke with show any type of interest in a partnership. Those are the ones you might think about partnering with. many solid companies will partner (fund) their suppliers or those deemed to extend their products lines as it makes long-term strategic sense for them to keep these stakeholders close.

There are many options for your business - but, it is hard to point you in the right direction without knowing more about your funding needs - like how much you are seeking to raise and what specifically those funds will be used for.

Inventor
10-22-2010, 10:22 AM
Thanks for the information.. I have been looking at SBICs as well as strategic partnerships. For the latter, there are some interests.

Our need is initially for $1 M and this is for operations and raw material purchases for at least 3 cycles of production and inventory build-up (40%), setting up strategic distribution sites (40%), marketing and sales operation (20%).

For private investors including family and friends, what would you suggest the best form of company would be? LLC, S-Corp or C-corp? Whichever is most simple, the better. Being a family-owned business, we are flexible in converting the company into whatever is best for private investment purposes.









Matt - make sure that you read over the SEC's rules. Look to Reg D. There are several options of raising capital without registering with the SEC and others that would require reporting periodically to the SEC. These are based on where you raise funds (within a state or across states - know that states also have private equity rules), the amount being raised and the number of investors. I would suggest you get an experienced attorney involved. A little expense now can really save you money and trouble in the long-run.

If you strictly limit to friend and family - there are other companies that can help you with the documentation and management - look to virgin money or similar companies.

Also, don't forget about Small Business Investment Companies (SBICs) who offer both equity and equity with debt features. These companies may be a better option. You can search the SBAs website for a listing (we also have a search able database of VC, angel and SBICs on our site).

Since you have already spent time with your products feasibility - did any of those you spoke with show any type of interest in a partnership. Those are the ones you might think about partnering with. many solid companies will partner (fund) their suppliers or those deemed to extend their products lines as it makes long-term strategic sense for them to keep these stakeholders close.

There are many options for your business - but, it is hard to point you in the right direction without knowing more about your funding needs - like how much you are seeking to raise and what specifically those funds will be used for.

Business Attorney
10-22-2010, 12:15 PM
Thanks for the information.. I have been looking at SBICs as well as strategic partnerships. For the latter, there are some interests.

Our need is initially for $1 M and this is for operations and raw material purchases for at least 3 cycles of production and inventory build-up (40%), setting up strategic distribution sites (40%), marketing and sales operation (20%).

For private investors including family and friends, what would you suggest the best form of company would be? LLC, S-Corp or C-corp? Whichever is most simple, the better. Being a family-owned business, we are flexible in converting the company into whatever is best for private investment purposes.

There is no single best form of company. In about 90% of the cases, after reviewing all the factors, I find that an LLC is the best entity. It offers limited liability protection to the owners (particularly owners who have no active participation in the business that might otherwise trigger direct liability for their actions). It passes through losses (subject to various limitations) and income without an entity-level tax at the federal level and in most cases at the state level as well. It allows for flexibility in distributions (which an S corporation does not), is not limited to the types of investors who can own equity (unlike an S corporation), is not limited as to the number of equity owners (again, unlike a S corp) and permits you to tailor the management structure down to particular issues (which is somewhat more difficult to do in the shareholder/director/officer structure in a corporation).

The LLC is the most flexible but for some investors it has drawbacks. Many private equity groups don't want to mess with waiting for K-1s and the potential of getting allocations of taxable income without cash distributions. Also if investors are investing through their 401(k) or pension plans, there can be negative tax consequences when investing in an LLC. So those types of investors prefer a C corporation, double tax and all.

With the amount of money that you are raising, you really need to get good legal advice from a qualified business attorney. There are tax, securities and corporate law issues that affect all of these decisions.

Inventor
10-22-2010, 12:40 PM
Thanks David,

Your input is greatly appreciated, and I had a chance to look at some of your posts as well. I also had a chance to look at your website, who knows someday we may have a chance to work together. We are gearing to go with LLC as we already are operating another business as such, and we have no problems with it. For investments on the LLC from relatives and friends, where they will become members with certain percentage of ownership in the company, will it be to the extent of just including their names as members, or are there any other legalities? Tax-wise, it seems it is personal and the company just need to issue K-1s at the end of a fiscal year. The level of investments vary from 5K to 50K.

Business Attorney
10-23-2010, 12:06 AM
We are gearing to go with LLC as we already are operating another business as such, and we have no problems with it. For investments on the LLC from relatives and friends, where they will become members with certain percentage of ownership in the company, will it be to the extent of just including their names as members, or are there any other legalities?

There are lots of "legalities" depending on how well you want to dot your i's and cross your t's. Generally, I would want any buyer to sign a subscription agreement that would describe what they are buying and certain representations, particularly that they understand the risk of the investment. I would also want them to sign a counterpart of the operating agreement to make it clear that they agree to be bound by all its terms. I would also generally recommend filing Form D with the SEC and the equivalent state filing to comply with any safe harbor rules. If the operating agreement does not reflect the new members, there may need to be revisions to it. In addition, if there are already members in the LLC at the time additional members are admitted, you need to see whether any consents are required from the existing members.

These are a few of the things off the top of my head. Again, if you are really raising up to a million dollars, it would be prudent to get legal advice up front. Posts like mine in an online forum are instructive in a broad way but are not legal advice and are no substitute for having an attorney give you advice with your specific facts at his disposal.

Even with legal advice, you might decide to skip some of the "legalities" I outlined, but at least your attorney would make you aware of the potential risks you face by doing so.

Inventor
10-23-2010, 10:48 AM
Thanks David for your response. On legalities for private investments on the LLC for incoming members from relatives and friends, would it make difference if the need is for under a million, say, in tranches of 250K and 500K?

phanio
10-25-2010, 05:21 PM
Just a quick suggestion - if you end up seeking professional investment (VC, angel or SBIC) they will, most likely, require you to change your organization to a c-corp - either at time of their investment or upon an exit. While I think LLCs are one of the best forms of organizations out there - c-corps are simply better for investors. Do know that c-corps have many more requirements then other forms and are more expensive to manage - but, most professional investors will require it.