Forums: Discussions for entrepreneurs and small business.

I am trying to find out if I can use non-accredited friends and family for a seed round. Later I will be going to big sources; angels, VCs.

• I will need to tap up to 20 or more F&Fs (I don't know rich folks)
• They live in several states
• Most are non-accredited

I have read that there are serious challenges from selling equity to non-accredited investors. How is it done?  My research shows that common stock is usually used, but what if you need to hit up 20 or 30 of your friends? Wont all those voting shareholders (in several states) cause major grief down the road?

What type of stock will ensure I don't screw it up for later capital rounds?

Thanks a million!

You will need to be very careful when it comes to selling restricted stock to non-accredited investors, including friends, family, and fools.

Whether you can legally solicit investments from such sources depends to a large extend on the relationship you have with these people.  With other words, your mom and dad would probably be a safe bet, whereas your new buddy would probably be off-limit. The idea behind requiring an “existing” or “ongoing relationship” is that your family or people who know you for a number of years are in a better position to judge your character and thus less likely to be scammed.

The other avenue you can explore is a private placement or Regulation D Offering under Rule 505 or 506, both of which allow you to raise investments from up to 35 Non-Accredited Investors. The difference is that under Rule 506, these 35 Non-Accredited Investors will have to qualify as Sophisticated Investors, whereas those Non-Accredited Investors under Rule 505 don’t have to meet any wealth or sophistication standards.

There’s an article available on our website that explains the framework of a private placement along with the differences between Rules 504, 505, and 506. The article is available at http://publications.fastventures.com/article/private-placements-or-regulation-d-offerings---what-is-myth-what-is-reality

If you’re interested to get even more information on how to reach investors (high-net-worth individuals), you may want to check out our white paper “How to reach High-Net-Worth Individuals with your Private Placement”. This white paper includes extensive research, detailed strategies on how to identify high-net-worth individuals, and proven techniques to approach them with direct mail, online campaigns, and seminars. This white paper is available at http://publications.fastventures.com/reaching-high-net-worth-individuals-with-your-private-placement

Another avenue you can explore is foregoing an equity offering altogether and consider either straight debt or a hybrid such as convertible debt. This, of course, depends on how much capital you’re trying to raise and what your mid- to long-term capital requirements will look like.

In any event, it usually doesn’t matter what class of stock you issue to screw up subsequent rounds, but rather the valuation based on which you raised seed or first-round financing.

I hope this helps. If you’re interested in discussing your needs and capital requirements in greater detail, please feel free to send me a PM.

 

Mark

   

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Jackson Steiner
http://www.JacksonSteiner.com

Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com

FastVentures,

Thanks for the detailed response! Also for the articles on your site.

I also read up on Reg D on the SEC's website.

I guess Reg D is probably the only way to go for F&F equity financing for me, because I will only pursue this capital after we are fully incorporated and set up (we will be hiring a great law firm soon).

Your point about going straight for the real investors is well taken. The one thing that may hold me back from that is that I don't have a real business plan. I do have a plan, but I don't really have the skills or resources (yet) to do all the financials and technical stuff. Which is ok, I cant do everything. Which is where a company like yours comes in .

I guess I am making the assumption that a pretty slick plan and some highly qualified people are needed to get those kinds of investments

The seed money we get from F&F will go to engineering consultants (logistics, feasibility) and business development people. Then we will be ready to find bigger investors.

--Blar

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PS I joined this SuN thing just three days ago, and wondered what was the motivation behind experienced professionals helping us novices out. Now I see.