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Tuesday, March 08, 2011

BLUE THING #2: Expert Advice from TNNWC: Seeking Capital

Each Week, TNNWC presents an article written by one of its top guns (actually, top minds) offering you EXPERT INFORMATION AND ADVICE for powering up and growing your business. This is some of the best information available. Read it,
think about it, and then PUT IT TO WORK.

TNNWC™ Proudly Presents...

This Week’s Article by
Peter Feltman
, Divisional President,
Emerging Enterprise Venture Capital Program

Seeking Capital

When attempting to find third party capital, start-up and small companies could sometimes obtain capital that later they would find detrimental to their objectives. If a company is seeking third-party capital, the following are a number of items that a company should address prior to making its choice:

  1. Phase of the Company’s Life Cycle
    The type of investor that your company would be seeking would be most likely dependent upon where your company is in its life cycle. For example, is your company a true start-up which would require angel investors, or does the company have some type of operating history that would cater to a certain kind of investor.

  2. Amount of Capital
    The amount of capital is determined by the following factors, which would be on a company-by-company basis:

    • Required Length of Time to hold the new Capital – is the capital needed (i) on a permanent basis (i.e. equity) or (ii) for a certain finite amount of time (i.e. loan);

    • Consensus among the Current Owners – ensure that the company’s current owners are in agreement as to how to proceed with respect to a new capital raise;

    • If an Equity Capital Raise, the Percentage of the Company to Sell – would the owner(s) of the company be willing to sell part of the company in order to obtain capital; and

    • How much Control of the Company are the Owners willing to give – would the owner(s) of the company be willing to relinquish part or all of the control of their company to their new partners.

  3. Type of Capital
    There are multiple issues that would need to be addressed and/or recognized prior to determining the type of capital to raise for your company:

    • Equity
      • Percentage of the Company to sell – do the current shareholders prefer to retain some type of majority control

      • Pricing (on a per share basis) to sell a percentage of the company

      • Tax consequences that may need to be considered – this would most likely be on a state-by-state basis

      • Voting and other rights of the new shareholders – would this new investor have a passive or active role in the Company’s activities

      • Preferred Equity – generally less expensive than common equity, but would have greater rights in terms of payment than common shareholders

    • Debt
      • Type of debt

        • Senior Debt – usually this debt is provided by a bank and would encumber all of the assets of the Company

        • Unsecured Debt – like Senior Debt, but the lending institution does not have a lien on the Company assets, but in all probability the interest rate would be higher

        • Convertible Debt – debt that would, given certain performance hurdles achieved by the Company, would “convert” into common equity of the Company

      • Factors affecting the type of debt:

        • Life Cycle of the Company – younger the Company the higher the interest rate

        • Valuation of the Company – dependent upon the methodology utilized by the lending institution

        • Operating history of the Company

        • The Company’s industry

        • Type of product/service produced by the Company

        • The Company’s marketplace

        • The Company’s customers

        • Company management

In summation, there are a myriad of factors that a Company must address when seeking third party capital. To find the right financing partner, takes time, understanding of your capital needs, and an idea regarding the future growth. The Emerging Enterprise Venture Capital Program within TNNWC can help your Company maneuver through these various options.

Peter Feltman
Divisional President, Emerging Enterprise Venture Capital Program
888-317-6498 x-704

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