Perhaps no asset is more valuable when beginning a company than capital. Raising capital, though, requires compliance with applicable security laws or risking legal repercussions. Here are five tips for startups engaged in the process of raising capital:
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Pick the Right Investors
While getting someone to write you a check is important, the person writing that check is equally as important. Look for an investor who can contribute more than money to the operation. Preferably, this investor would know something about your company’s industry and the investment atmosphere. Prior to deciding if an investor is right for you, take preliminary steps such as meeting the investor in person and asking the opinions of others who have done deals with them.
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Master Your Rules
Having a team and having capital is simply not enough; you also have to know the rules about receiving capital. Not knowing the rules can result in dead deals and even potential lawsuits. Learn the structure of your corporation inside and out. Among dozens of important rules, two rules that startups often fail to learn about are: (1) incorporation issues and (2) the role of preferred stock. First, it is crucial to become an expert on your type of entity formation because the structure can influence financial management, taxes, and numerous other issues. Second, issuing preferred stock while often discussed is generally not a good idea unless your startup is raising a substantial amount of money (i.e, more than $500,000). Instead, your startup may be better served by issuing convertible notes to seed investors.
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Understand Your Product’s Space
Not only do you need to know the rules, you also have to understand the space of your product or services. Learn all you can about your competitors and the world in which your product lives. Besides a general awareness of what the surrounding products are, this awareness extends to (1) considering the intellectual property elements of your product, and (2) advertising or soliciting investors. Intellectual property rights are essential because these rights can protect your company from other properties that might infringe upon your product. Products with properly carved out intellectual property rights can create a niche market, which will prove valuable in raising capital. Also, general advertising or solicitation in connection with raising capital, while no longer prohibited, requires compliance with much stricter and onerous requirements with respect to verifying that your investors are “accredited investors” as defined by the Securities and Exchange Commission. So avoid creating public information about your efforts to raise capital.
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Follow All Compliance Rules
If you do not follow general compliance rules in raising capital, you might end up losing rather than gaining capital. Make sure you are following all compliance requirements with respect to workplace environments, insurance, employment, and capital raising. If your startup sells or even offers securities to non-accredited investors, federal and state laws may require extensive disclosures in order to avoid securities violations. Another mistake often made by startups is retaining unregistered finders to raise capital. If a finder is not registered a registered broker-dealer with the SEC and participates in the process of selling securities on behalf of your startup (more than just making the introduction), then your offering may be in violation of securities laws.
If you are have any questions about raising capital for your startup or are in need of an experienced business lawyer in Los Angeles , contact the prestigious and highly successful Hakim Law Group when you want to make a deal. We are here to help! For all inquiries please contact us at 310.993.2203 or visit www.HakimLawGroup.com for further information.
