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.