Forums: Discussions for entrepreneurs and small business.

The Top Five Mistakes in Raising Capital and How to Avoid Them

Great article by Mike Ballard can be found at:

www.americanventuremagazine.com/articles/434-

www.GettingYourMoney.com

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"Whether you think you can, or think you can`t - you`re right." - Henry Ford

"All truth passes through three stages. First, it is ridiculed. Second it is violently opposed. Third, it is accepted as being self-evident." - Schopenhauer

Stay positive and think for yourself. 

 

private equity, venture capital, start up company, angel investor, real estate, investing, money, hard money, financing, business plan, ppm, securities offering, regulation d, 506, 504, scor, letter of intent, loi, executive summary, elevator pitch, term sheet, management team, presentation, subscription agreement, note, commercial, residential, mortgage, hard money, loan, sba, grant, corporation, structure, LLC, corp, 

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How To Effectively And Legally Raise Money From Individual Private Investors For Your Start-Up Company Or For Real Estate Investment -- www.GettingYourMoney.com

I have wasted six investors that required 3000.00 due dilegence (sp?) how do I prevent that? Even though I have an executive summary, business plans, and financial plan and have been turned down, I feel that they`re ripped off. I would like to find a mentor to make sure I`ve done everything right.

Due diligence fees typically should not be asked for (or paid) for an investor to review a business plan/PPM.

The purpose of due diligence fees is to cover an investor`s legitimate costs for background checks and/or other necessary legal work required to review and evaluate the risks/benefits of investing in your company.

Such fees are usually only required after an investor (or VC) has expressed a formal interest in investing in your company(typically via an LOI - Letter Of Intent)

Any due diligence fee request should be made in writing and specify EXACTLY what the fees will cover. The fees should be paid via company or personal check or other traceable means.

Beware of brokers or money-finders who ask for up front fees to assist you in finding investors. First of all, unless they are registered as securities brokers with the NASD, they are not legally allowed to accept fees for selling securities. (A whole other issue).

Also, be advised that a business plan only is not the proper vehicle for raising funds from investors. You MUST have a properly structured private securities offering and comply with SEC regulations to do it legally.

If you want more information on how to effectively and legally raise money from private investors, visit:

www.GettingYourMoney.com

"Whether you think you can, or think you can`t - you`re right." - Henry Ford

"All truth passes through three stages. First, it is ridiculed. Second it is violently opposed. Third, it is accepted as being self-evident." - Schopenhauer

Stay positive and think for yourself. 

 

private equity, venture capital, start up company, angel investor, real estate, investing, money, hard money, financing, business plan, ppm, securities offering, regulation d, 506, 504, scor, letter of intent, loi, executive summary, elevator pitch, term sheet, management team, private placement, PPM, presentation, subscription agreement, note, commercial, residential, mortgage, hard money, loan, sba, grant, corporation, structure, LLC, corp,

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How To Effectively And Legally Raise Money From Individual Private Investors For Your Start-Up Company Or For Real Estate Investment -- www.GettingYourMoney.com

Dear privateinvestor1,

I must disagree with your last post.

I am not aware of any situation where a Venture Capital firm has asked for fees to conduct due diligence.

Robert Johnson

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Too bad you disagree. It`s common and expected.

"A venture capital Term Sheet provides that all legal fees and due diligence expenses will be paid by the company. In practical terms, this means that the payment of these fees comes off the top of the proceeds of the financing. Entrepreneurs sometimes question why the company should bear all the fees of the transaction, however, attempts to oppose this provision have virtually no chance of success and will tip off the opposition that a player is inexperienced in the money-raising game."

Here is the reference document:

http://www.springboardenterprises.org/learning/termsheetexpl anation.pdf

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How To Effectively And Legally Raise Money From Individual Private Investors For Your Start-Up Company Or For Real Estate Investment -- www.GettingYourMoney.com

I am not sure why it`s "too bad" that someone disagrees. I am glad that this site gives you an opportunity to see how people react to disagreement. Especially glad for the opportunity--before doing business with them.

 

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"If you`ve got a frog to swallow, don`t look at it too long. And if you`ve got more than one to swallow, swallow the biggest one first"--Danny Cox

It`s "too bad" from the standpoint that Mr. Johnson`s comment infers that Venture Capitalist firms do not charge due diligence fees, when in fact it is a common practice.

If hairs are to be split as to when those fees get charged, I also noted that fees are typically not charged simply to review a business plan (e.g. the "up-front"  fee issue).

Other than your above statement, rvdebby, the point of which I`m still not sure of, do you have any input of substance to add to the original subject of venture capital and due diligence?

If so, I`d like to hear it.

"Whether you think you can, or think you can`t - you`re right." - Henry Ford

"All truth passes through three stages. First, it is ridiculed. Second it is violently opposed. Third, it is accepted as being self-evident." - Schopenhauer

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How To Effectively And Legally Raise Money From Individual Private Investors For Your Start-Up Company Or For Real Estate Investment -- www.GettingYourMoney.com

I think we made a bit of a shift there.

First of all, your initial post made no mention of legal fees - but the "quote" does.

Second, your initial post did not say "Term Sheet".

So let me revise my position based upon the information contained in your "reference" article.

My experience (plus that of the attorneys and finance people we work with) is that it varies - legal fees are often paid by the Company, but I`ve seen deals both with and without due diligence fees covered by the Company.  I can also tell you, however, that where the Company pays the due diligence and other expenses, there`s often a cap as to those expenses so that the Company isn`t left open ended with payments to the VCs.

The legal fees are to structure the deal and ensure that the company is within legal compliance and are (for the most part) incurred after an agreement is in place. The company should pay them.

Usually the due diligence fee within a Term Sheet is stated so that the company pays them from the funds - unless there is something that "turns up" in the investigation that negates the deal. Then the company is liable for those expenses.

Now - I say again, I am not aware of any VC firm that asks for fees before an agreement is in place. People who ask for up front fees (meaning before an agreement) and call them due diligence fees are likely not the actual investor.

Robert Johnson

 

 

 

 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Hold up! For one, why should an investor ask anyone for any money? Please explain to me why? Paying someone to review your business plan is crazy. I might not be understanding the reason why, but on some websites, I am not going to name. There are many overseas scam artisits asking for retainer fees. Do not send anyone any money without a contract.

I`m confused by your last post since the previous one was trying to show that investors (VC) do ask for money.

You statement "do not send anyone any money without a contract" is pretty broad. If you mean - those who claim to be able to find investors or who claim to be investors and ask for up front /advance fees - then I agree.

However, if you are contracting for "professional services" (legal, accounting, assistance with a business plan, research, etc.) then you should expect to pay for those services. Most professional service firms get a portion of the fee to begin.

Robert Johnson 

 

 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com