Selecting An Equity Finance ConsultantWritten by William Cate
Selecting An Equity Finance Consultant By William CateMost Chief Financial Officers (CFOs) realize that it's a hundred times easier to raise venture capital for a public company than a private company. There is no shortage of individuals and firms seeking to advise and coordinate going public process for CFOs. The problem is that many of these equity finance consultants are inept and/or dishonest. Here are some simple rules for finding a competent and ethical advisor. Avoid firms that don't disclose anything about themselves or their employees. The Net is a wonderful free-tool for doing "Due Diligence" investigations on firms and individuals. Do an advanced search on firm and its principals. Credit checks and background investigations are wise investments before you hire any consultant. All equity finance consultants have two basic ways to take your company public. They can help you do an Initial Public Offering. Or they can suggest one of several alternative ways to go public in USA. None of alternative tactics include a public financing for your company. Whatever solution prospective equity consultant advises, you should ask for an estimate of costs, time to trading and odds of being called for trading. You should also determine how equity finance consultant expects to make money helping your company go public. If you have an operating company and decide to do an IPO, your costs should average between $1.5 and $2.25 million. You should expect that it should take an average of 18 months to get your "Effective Letter" from SEC. And your odds of success are about even, that is, 50/50. You should expect to pay your underwriter about 18% of money raised. You will be expected to pay non-refundable upfront expense fees. You should budget $10,000/per broker presentation that will be needed to help underwriter raise your IPO money. If your prospective consultant disagrees with these guidelines, ask them in writing for evidence to support their viewpoint. IPO alternatives range in costs from $60,000 to several million dollars. Amazingly, most expensive IPO alternative is most popular. While doing a reverse merger shouldn't cost your company more than $150,000 in out-of-pocket Due Diligence costs, expense of maintaining your shell float's share price will run into millions of dollars. In a reverse merger, public shell insiders retain their shares. This means they have several million shares of your stock to sell. You are responsible for finding public buyers of their stock and all future shareholders of your public company. Let's assume that reverse merger insiders have three million of your public company's shares. Your goal is to maintain a $4 share price. The previous shell owners will gross $12 million on sale of their reverse merger shares. It should cost you $0.25/share to buy past owners' shares. The past owners will take a three million-dollar bite out of your investor relations' budget.
| | How Venture Leasing Added Millions To A Startup’s Equity Value Written by George A. Parker
Craig Berman beamed noticeably after completing his board presentation. Berman, CEO of a startup that develops nanotechnology applications for defense industry, had just closed a $ 20 million equity round. Berman finalized round at an equity valuation that made whole board blush. Only six months earlier, Berman’s team faced a daunting technical delay that set company back three months. With only four months of cash remaining from a previous equity round, delay would cause Berman’s company to burn cash faster and to fall short of an important benchmark. The prospect of raising additional equity earlier than expected and at a much lower valuation than anticipated was a chilling thought for Berman and his board. Just as things appeared to be headed downhill, company’s CFO broached idea of obtaining $ 1.5 million in venture leasing. Roughly $ 600,000 of this financing would be used to finance existing equipment. The balance could be used for upcoming acquisitions of computer workstations, servers, software, and test equipment. A colleague had introduced Jamal Waitley, company’s CFO, to Jerry Sprole. Sprole heads Connecticut-based, Leasing Technologies International, a leasing firm specializing in equipment financing for venture capital-backed startups and emerging growth companies. It took Waitley less than a month to get financing in place. Cash from selling and leasing back existing equipment along with a leasing line to add new equipment allowed Berman’s firm to operate three extra months without additional equity. When firm finally completed its $ 20 million equity round, pre-money valuation was at least $ 5 million more than it would have been otherwise. Venture leasing had literally created millions of dollars for Berman’s shareholders. Like Berman’s firm, a growing number of venture capital-backed startups are taking advantage of venture leasing to build equity value faster and to expand infrastructure. What is venture leasing and why has it become so attractive to venture capital-backed startups? How are savvy entrepreneurs using venture leasing to increase shareholder value? To find answers, one must take a closer look at this important financing source for venture capital-backed startups. The term venture leasing describes equipment financing provided by equipment leasing firms to pre-profit, early stage companies funded by venture capital investors. Like Berman’s firm, these startups need business essentials like computers, networking equipment, software, and equipment for production and R&D. These firms generally rely on outside investor support until they prove their business models or achieve profitability. Where does venture leasing fit into venture financing mix? The relatively high cost of venture capital compared to venture leasing tells story. To compensate venture capitalists for risk they take, they generally receive sizeable equity stakes in companies they finance. They typically seek investment returns of at least 35% on their investments over five to seven years. Their returns are achieved via an IPO or other sale of their equity stakes. In comparison, venture lessors seek a return in 15% – 22% range. These transactions amortize in two to four years and are secured by underlying equipment. Although risk to venture lessors is also high, venture lessors mitigate risk by having a security interest in leased equipment and structuring transactions that amortize. Taking advantage of obvious cost advantage of venture leasing over venture capital, startup companies have turned to venture leasing as a significant source of funding to support their growth and to build equity value faster. Additional advantages to startups of venture leasing include traditional leasing strong points --- conservation of cash for working capital, management of cash flow, flexibility, management of equipment obsolescence, and serving as a supplement to other available capital.
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