\ Raising Capital Get the Money You Need to Grow Your Business Third Edition Andrew J. Sherman AMACOM American Management Association New York Atlanta Brussels Chicago Mexico City San Francisco Shanghai Tokyo Toronto Washington, D. C.
Chapter 1: Capital Formation Strategies and Trends Understanding the Natural Tension Between Investor and Entrepreneur 4 Understanding the Private Equity Markets 6 Understanding the Different Types of Investors 6 Understanding the Different Sources of Capital 8 Common Mistakes Entrepreneurs Make in the Search for Capital 12 How Much Money Do You Really Need? 13 Consider Staged Investment 13 Capital-Formation Strategies 14 The Due Diligence Process 16 Key Best Practices Affecting Capital Formation in the New Millennium 19 Are You Really, Really Ready to Raise Capital? 21 Chapter 2: Selecting the Best Legal Structure for Growth Proprietorship 26 Partnership 27 Corporation 28 Limited Liability Company 33 Evaluating Your Selected Legal Structure 36 Establishing Effective Boards of Directors and Advisory Boards 42 VII
viii Contents Chapter 3: The Role Your Business Plan Plays The Mechanics of Preparing a Business Plan 52 Some Final Thoughts on Business Planning 63 Chapter 4: Chapter 5: Chapter 6: Chapter 7: Chapter 8: Start-Up Financing Financing the Business with Your Own Resources 70 Heaven on Earth Finding an Angel Investor 72 Other Sources of Seed and Early-Stage Capital 85 Additional Resources 99 The Art and Science of Bootstrapping Twelve Proven Bootstrapping Techniques and Strategies 104 Bootstrapping: The Dark Side 112 Private Placements Federal Securities Laws Applicable to Private Placements 116 State Securities Laws Applicable to Private Placements 119 Preparing the Private Placement Memorandum 120 Subscription Materials 124 Compliance Issues 125 Accepting Subscriptions 126 Changing or Updating the PPM Before Completion of the Offering 126 After the Closing 127 The Rise of Secondary-Market Private Placements and the Story of SecondMarket 127 Practical Tips for Ensuring a Successful PPM Offering 129 Commercial Lending The Basics of Commercial Lending 134 Preparing for Debt Financing 136 Understanding the Legal Documents 146 Periodic Assessment of Banking Relationships 148 Leasing, Factoring, and Government Programs Leasing 152 Factoring 157 SBA Programs 164
ix Chapter 9: Chapter 10: Chapter 11: Chapter 12: Venture Capital Venture Capital Investing Trends 178 Primary Types of Venture Capitalists 180 Preparing to Meet with Venture Capitalists 182 Central Components of the Venture Capitalist's Investment Decision 189 Due Diligence Is a Two-Way Street 192 Balancing Your Needs and the Venture Capitalist's Wants 193 Understanding the Venture Capitalist's Decision Process 194 Anatomy of a Venture Capital Transaction Evolution of Venture Capital Deal Terms 198 Negotiating and Structuring the Deal 198 Aligning Business-Plan Analysis and Investor Concerns with Term Sheet Provisions 201 Understanding the Legal Documents 203 Getting Ready for the Next Round 207 2002 and 2003: The "Down-Round" Dilemma 207 The Pre- and Post-2010 Market: The Big Chill and the Slow Thaw 209 Preparing for an Initial Public Offering Recent History 212 The Present and Future 212 Advantages and Disadvantages of an IPO 215 The Hidden Legal Costs. 220 Preparing for the Underwriter's Due Diligence 222 Selecting an Underwriter 226 Selecting an Exchange 231 Alternatives to Using a Traditional IPO 236 The Mechanics of an Initial Public Offering An Overview of the Registration Process 242 The Registration Statement 248 The Road Show 256 The Waiting Period 257 Valuation and Pricing 258 The Closing and Beyond 259 Ongoing Reporting and Disclosure Requirements 259 Resources on IPOs and the Public Securities Markets - 265
Chapter 13: Chapter 14: Chapter 15 Franchising, Joint Ventures, Co-Branding and Licensing Business-Format Franchising 270 Joint Ventures 281 Co-Branding 285 Licensing 290 Mergers and Acquisitions Current Trends Affecting Mergers and Acquisitions in a Turbulent Environment 301 Develop an Acquisition Plan 303 Analyzing Target Companies 307 Selecting the Target Company 308 Conducting Due Diligence 310 Valuation, Pricing, and Sources of Acquisition Financing 313 Financing the Acquisition 314 Structuring the Deal 315 Preparing the Definitive Legal Documents 317 Post closing Matters 320 Capital-Formation and Business Growth Resources Directory Federal Agencies 332 Business Growth Resources on the Web 334 Internet Resources to Learn More About Private Placements, Angel Investors, Venture Capital Networks, Accelerator Programs, and Other Alternative Sources of Funding 337 International Finance Institutions on the Web 340 Guidebooks, Publications, and Networks (Including Computer Software) 341 High-Tech Exporting Assistance 342 Appendix 343 Index 431