Presentation on theme: "C ROWDFUNDING FOR S MALL B USINESS February 21, 2013 Rassul Zarinfar, Founder of Buffalo Bayou Brewing Company www.buffbrew.com Travis Crabtree Looper."— Presentation transcript:
C ROWDFUNDING FOR S MALL B USINESS February 21, 2013 Rassul Zarinfar, Founder of Buffalo Bayou Brewing Company www.buffbrew.com Travis Crabtree Looper Reed & McGraw, P.C. www.lrmlaw.com www.emedialaw.com
Outline I.Capital Structure is like a Car – What options make sense for you? – When does crowd-funding add value, and how? II.Investors are Business Partners You Can’t Divorce – Who should you be looking for? – How will you find them? – & What do you say when you do? III.Tactics: Structuring the Deal – What laws should I be worried about? – How much should you ask for? – How many people & how much each? IV.The JOBS Act: How Crowd-Funding Will Change
Capital Structure is Vehicle What vehicle should I buy for my company? Capital Structure is the vehicle for your strategy It Can Add Value Business partners know things you don’t! The right structure can help add more capital as you grow It Can Destroy Value Lawsuits over who deserves what Short-term decisions to pay debts or buy out partners Every decision depends on the business model, especially financing
A Refresher on Debt vs. Equity DebtEquity They own nothing You control everything, banks can’t vote, only repossess You pay a fixed amount back, no matter how you do So then… which one of these is: ? They own assets & rights to future cash flows Democracy: shareholders vote on certain decisions You more you make, the more you pay
How Many Investors Should I Have? A few put in a lot A lot put in a little Vs. How complex is the deal? What’s the product/service? Will you need more funding later? What value will each investor bring? Questions to consider:
How Many Investors Should I Have? Personal FundsBank LoansAngel / VCCrowd-Funded What does the deal look like? You use your savings You get a loan A lot of $ from a few people A little $ from a lot of people Cash Considerations You get all $$$ After you pay debt, you get all $$ You split $ with a few people You split $ with a lot of people ControlYou = 100% (if current) Split, and they might control Decentralized democracy Skill SetLone Wolf Board of AdvisorsCommunity The cynical take You’ve gambled everything You’re drowning in debt One person controls your life You’re a professional cat herder
Crowd-Funding Has Worked for Me Positives – Experts I can call on – Extensive Social Networks for a Social Product – Connections throughout the community – Easy Access to Capital: “Dry Powder” Negative – Herding Cats – Simplistic equity for semi- sophisticated investors – Lots of feedback over minutiae – Lots & lots of phone calls – Herding Cats – Fiduciary Responsibility Social Networks Sell Beer Simple Deal Terms Simple Business to Understand My Situation: Highly-Skilled Friends
Equity Investors are business partners you can’t divorce Don’t take money carelessly II.
Who Should You Be Looking For? Sophistication level matters – Don’t ever take money from people who don’t understand startup investing. Period. Wealth Matters – Avoid people risking more than they can lose comfortably You need more than just cash – The best Investors bring skills & networks that you don’t have Entrepreneurs think “all I need is money and I can make this work if they just leave me alone”. You’re wrong. You can’t do this alone. – Choose investors that challenge you intellectually – Be wary investors that micro-manage Prefer Pre-Existing Relationships
How Will You Find Them? 1.Personal, Social Network 2.Personal, Social Network 3.Coffee Chats, Meetups, professional organizations 4.Personal, Social Network 5.Anywhere else humanly possible 6.Online Forums & Tools – Kickstarter, etc. Don’t be that person who’s just looking for a buck I never set out looking for investors anywhere. I sought people who would give insight on my business idea & entrepreneurship in general. I shared my business plan with anyone and built real relationships. Soon enough, people started asking to invest.
The Pitch: What to Say Passion Honesty, Transparency Cautious Optimism You’re going to be doing this 24/7. Show them that you’re committed & excited “Bet the Jockey not the Horse” Passion is infectious. Leaders share their vision Set clear expectations from the beginning & you’ll avoid fights later Build trust early with simple, clear deal terms Admit your failures & fears: people trust you more If you lie, they’ll figure it out. You’ll get their cash today & meet their lawyers tomorrow. Don’t promise what you can’t deliver. Be realistic, and candid. Avoid wishy-washy answers, but also avoid being resolute about uncertainty Knowledge/Expertise Know your plan & its industry backwards and forwards Read up on all industry publications If someone asks a question you don’t immediately know the answer to, look it up and get back to them If you miss the same question twice, you’ve failed. Period. In the age of Google, there is no excuse for ignorance Good deals get funded. Don’t be pushy, and don’t compromise your ethics out of fear.
Laws to Navigate Federal: SEC regulates all securities offerings Others States: Each state has “Blue Sky Laws” Texas: Texas State Securities Board Texas Securities Act
How Much Should You Ask For? Goals change as you gain information Choose a structure flexible enough to raise more later I needed way more than I set out to raise at first
Sequencing the Raise for Growth I pledge $50,000 I pledge $40,000 I pledge $30,000 Round 1: $70k Yes, $50,000 Yes, $20,000 No Round 2: $20K I don’t have more I have another $20k You said no dude. No Yes, $20,000
Sequencing the Raise for Growth I pledge $50,000 I pledge $40,000 I pledge $30,000 Round 1: $70k Yes, $30,000 Yes, $20,000 Round 2: $50K I have another $20k Yes, $20,000 Yes, $20,000 I have another $10k I have another $20k Yes, $10,000 Yes, $20,000 Accepting less from more people increases your access to capital
How Many People is Too Much? Simple business meetings Your single investor is probably really committed & you’ll get their full focus One person has a lot of control over you Strategic decisions can become “coin- flips” & arm wrestling matches It better be the right person! Over-investment happens quickly Only oneA few peopleA lot of people Lots of time communicating Fiduciary responsibility to a lot of people Tragedies (Death & Divorce) will definitely come up and distract you Lots of people to answer to if things go wrong Too many cooks in the kitchen? Small investments mean they don’t care as much about you More passionate advocates of your brand Greater social networks, word of mouth advertising & connections Surrounded by experts who can help No one “bet the farm” Easiest access to follow-on capital Communication becomes a burden People have a lot invested in you What if the investors gang up? More fiduciary responsibilities Greater risk of alienating someone and earning a lawsuit A strong team of experts can become your biggest advises More connections than you otherwise have Easier access to follow-on capital
JOBS Act: How New Laws Will Affect Crowd-Funding IV.