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The capital raise process: eat, sleep, raise, repeat

This week on Subtitles On we chat about what is typically involved in the capital raise process. Cool fact, the process that we discuss is fairly similar across most corporate transactions: share sale, asset sale, debt raise, equity raise. Listen HERE.


Yep that is right, most of these processes involve:

  • A third party (investor / bidder / lender) who is interested in your company;

  • That person does investigations (due diligence) on you and your company;

  • You provide that person with access to your info via a data room;

  • You enter into a term sheet;

  • Negotiate full form documents; and

  • Sign the documents and celebrate completion!


Sounds easy? Well it totally is, so let's break it down.


STEP ONE: Why?

Ask yourself why. Whatever the transaction, make sure you know what you want to achieve. Why are you doing this? And what are you trying to get out of it? Why are you raising money? Or why are you selling your business? Or taking on debt? What will this money go towards? How much do you need? And why do you need it?

STEP TWO: How much?


Assuming it is a capital raise you are doing, you need to decide how much of your company you are willing to give away and how much money you need. To be able to make this decision you will have to value your company. How do you value your company? Great question! Unfortunately though, one that doesn't come with an easy answer or one that, we, as lawyers can answer. There are loads of people that can help you and best port of call is usually your accountant.


Helpful terms for you to understand:


  • Pre-money valuation means the value of your company before the investment.

  • Post-money valuation means the value of your company after the investment.


STEP THREE: Pick who you want to take money from

Not all money is good money. Sure, cash is king, but you know the saying: if it seems too good to be true, it probably is. Just as investors will do due diligence on you and your company, you should do due diligence on your investors. Who do you want to go into business with? What type of investor makes sense for your business, given where it is at? What other skills can an investor bring? What is the current skill gap in your company? What terms are a given investor agreeing to invest on?


STEP FOUR: Pitch time

Next step is creating the glossy marketing slide pack, called your pitch deck, that you will present to investors to allow them to get a quick understanding of the opportunity and what your business does and where it is going. It usually includes a summary of the problem you are trying to solve, and how you have done that through your business. You might show a snapshot of where you are at, your financials and who is in the team behind your start up.


TIPS: While the pitch deck is fundamentally a marketing document, be careful with the language you use and make sure that you don't make any misleading statements.


Also, for the pitching novices, the art of pitching is part showcasing the business, part showcasing the founders. We're sure you've heard the same advice we have: just be yourself. Which we all know is easier said than done. We recently listened to this podcast by Adam Grant on authenticity, which has some great tips that you could incorporate into your next pitch deck. Let us know how you go!


STEP FIVE: Skeletons in the closet?


Ok, your pitch went well, so now is the time when you've got to put your cards on the table. You've got to pop the hood, let those investors take a look under the covers and make sure everything is just as you say it is.

This is called due diligence, ie an investigation of your company that an investor / bidder / lender does to make sure there are no skeletons hiding in your closet. In an early stage capital raise this process is fairly light.


Usually an investor will ask you for certain information, sometimes via what is called a due diligence checklist or maybe just an email with a few dot points. Next step is to upload this information into a "data room", which is a secure online repository, where information can be shared for people to access and review.


In an early stage raise, you might use DropBox or GoogleDrive as your data room. As transactions get bigger though, parties will typically use a paid provider such as theDocyard, Ansarada, or Intralinks.

The type of things that would be in your data room include:

  • Pitch deck

  • Company documents (eg constitution, any shareholders' deed, cap table)

  • Board materials - eg board minutes

  • Financials

  • Term sheet (could be executed or theoretical)

  • Sales / marketing / product details

  • Staff details

  • Technology + intellectual property

  • Legal documents

A well-built data room says a lot about a business, including that you are organised and are running a real company, you respect an investor's time and that you are ready to raise capital. It also saves you time and should save time on follow up questions with investors.


TIP: Try and keep a data room front of mind when running your business, and organise your document management system so that you can easily export it at any time for a capital raise or sale process. An organised company comes into a transaction in a much stronger position than a disorganised one.


STEP SIX: Negotiations and legal documents


Now to the fun part - well for us. A very important step and not to be missed, this is where you document the deal. For a capital raise, this means agreeing the following key documents:

  • term sheet (typically non-binding and sets out key agreed terms of the investment)

  • subscription agreement (this is the document where the investor agrees to give you the money and you agree to give them the shares)

  • shareholders agreement (we will do a full episode on this)

  • founder employment agreement (if you don't already have one)

  • IP assignment (if any IP needs to be tidied up - usually something discovered in due diligence)


So you are going to raise - what is next? GET YOUR HOUSE IN ORDER


Ok, so hopefully the process is clearer to you now and gives you some context of why due diligence, data rooms and legal documents are important. If you are about to raise, here are the key things to think about to make sure your house is in order.


1. Does your company hold "its intellectual property"

2. How are you (as founder) engaged, how are employees, contractors, suppliers engaged? Do you have contracts with these people?

3. Is your product / service ready / do you have a business plan ready?

4. Start pulling all your info into a nice document management system that can easily be exported to a data room at any time!


Got questions? We have you covered:


  • Shoot us an email: gisellef@marquelawyers.com.au and felicial@marquelawyers.com.au

  • Follow us and DM us on: Instagram


G & Fee

xxx


p.s Please check out Fee's masterpiece. Isn't she talented!


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