Today’s episode of Learning Legal with Andrew Easler, Esq. addresses concerns about raising capital for your business or organization and is co-hosted by Andrew Easler and James White, with special appearances by Ethan Hunt. Our co-host, James White, is an international business consultant with extensive experience in raising capital for businesses.
Topics covered include:
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James White (00:31):
Hello and welcome to legal learning with Andrew Easler. I'm James White co-host, and as always, I'm joined by Andrew Easler, the managing attorney of Easler law. How are you doing today Andrew?
Andrew Easler (00:40):
I am doing excellent, ready to go.
James White (00:42):
Awesome. Well, if this is the first time joining us this podcast serves as a deep dive into all things legal business than a variety of other topics. In today's episode, we're going to be going off of last week's topic and about raising money and capital for your small business. So it's good to see you again, Ethan, our new producer/editor. He was the prior cohost, but we felt like sometimes as a small business you have to make tough decisions and shake things up. So we feel like, Ethan feels, I should say that he's probably a better producer and I'm a better co-host.
James White (01:17):
Andrew's the attorney, our consult.
Ethan Hunt (01:17):
You just got the flair.
James White (01:17):
We got the flair. Yeah, I know. I love co-hosting. It's awesome. I'm very vain and my pursuits of happiness. Anyways, Okay. So let's get started here. So when we heard, so here's a question for Andrew. So, and I get this a lot too. I need to raise capital while there's like a million ways to raise capital. So when we hear the term raising capital in your opinion, what does that mean when somebody comes to, you says, I need to raise capital.
Andrew Easler (01:47):
Well, my first thought, when somebody, if that's the first thing they come to me for = we need to back up and rethink where we're going, because if you're, if your first question is I need to raise capital, that's my biggest problem in my business. You may not be doing it right. I think part of it is setting a foundation first, getting a good plan for your business addressing the skills needs the labor needs, the equipment needs, the location needs. All of those things should be planned out. Even before you're asking, Hey, what, what should I do about capital? Then when you get to the point of capital raising, that's where we can have the discussion about what, which type of fundraising capability or, or avenue is going to be right for you and your business. And we'll get more into like the quick types of fundraising is out there for you. But in my opinion, reason, capital is, you know, obviously you need capital to grow your business, whether you're expanding, starting, growing, whatever you're doing. So raising capital can mean anything from, you know, bringing on investors whether it's angel investors, whether it's family, friends, or business associates, or whether it's going to the bank and getting a term loan or a credit card with nine months worth of interest refinancing, or, you know, just bootstrapping it you know, with your own savings or 401k retirement accounts.
James White (03:07):
So raising capital is very broad in its most people assume they'll raise capital like investors and stuff, but raising capital is, is, is basically, you know, the, the generic term for, for pinning capital.
Andrew Easler (03:19):
Yeah. And why do we say, say capital and not cash? You know, why don't we just say, Hey, let's, let's get some money. I need to raise money.
James White (03:27):
Because cash is dirty, dirty.
Andrew Easler (03:32):
No, but seriously. I mean, if we're talking about you know, when we talk about capital it means more than just hard cash, right? When we're talking about capital, we're talking about all of the things that you need in order for your business to get going, like human capital we're talking you may need real estate, right? And if you have an investor who maybe doesn't have the cash, but has a building available for you to, to, to operate out of, that might be another capital contribution. So, you know, when we're talking about capital, you have to keep an open mind because sometimes you need to be creative, especially when you're strapped for cash.
James White (04:14):
Yeah, sure. So, okay. So we decided we want to raise capital. I'm James and I want to raise capital and to become a trillionaire, the first trillionaire that ever existed. What are some of the pitfalls in raising capital? So, you know, before we go down the route of explaining, you know, what kind of options are out there for people you know, what are the pitfalls? Because I think people need to know this before they think about raising capital, because I don't me, for example, when I did my first prospectus or offering memorandum when I was like, I don't know, 18 or something, and I was raised like 10 or 15 million bucks, I'm like, I was all excited about raising capital, but I really didn't understand the consequences of raising capital. And, you know, a big thing is the cost of raising capital. A lot of people don't understand that going into it, that a lot of that costs that you're raising a lot of capital raised and gets paid to a lot of different parties, a lot of different people. So we'll talk about that. So what are the, you know, my opinion is the pitfalls are they cost a lot of money. A lot of people don't understand that when you're raising capital, you have to pay the securities attorney. And, you know, just with some of our clients and with, you know, the amount of work, you know, because the amount of work translates into expense. Right. And I, what was the average last one? Cause I know you're doing an S one registry, which is basically a prospectus to file with the sec, for those that don't know what an S one registration statement is. Yeah. Versus a take.
Andrew Easler (05:31):
Yeah. I think they estimated an estimated burden of like 760 hours just to complete an S1
James White (05:40):
Yeah. So, I mean, you could see the kind of cost, how costs can add up when you're paying an attorney, you know, especially securities attorneys, there are a lot more than traditional attorneys because it's more complex legal work. You're going to be paying between 400 and $800 an hour for a securities attorney. And sometimes more if they know what they're doing, they're going to charge because it's very complex. You may be able to, you know, find some that will finance that part of it for you, which we'll get into later on. But I think that's one of my biggest things, is it costs a lot of money to raise money.
Andrew Easler (06:06):
Yeah. I think, I think the biggest pitfall, whenever they're raising money is,the plan for the proceeds, right? Do you have a plan to invest those proceeds appropriately and in a manner that's actually going to,you know, earn you enough money to pay back, however,whoever gave you the money in the first place.
James White (06:31):
Sure. And there's this statistic here from I'm looking at a statistic from Harvard business review right now. And this is actually their statistic that they just said fees to lawyers, underwriters, accountants, printers, and regulators can run between 15 and 20% of the, of a smaller offering and go as high as 35%. So if you think let's just use the term of a million dollars, right. Cause that's a pretty easy number to do math on, you know, you're looking at like 150 grand, that's the baseline of heart with Harvard business review said to 350 grand, 50 grand. I mean, that's a significant amount of money. That's a huge amount of money you have to now make up to, you know, make your investors capital even. And that's what I find a lot of investors don't understand where I feel like, you know, they think they give you a hundred thousand dollars or whatever, $10,000. And they don't realize that there's all these costs associated with underwriting this investment, right? Whether it's the prospectus offering a memorandum document, the promotion side of it, the accounting and hoarding. So it can go high. And so if you're going to, if you need a million bucks to run your business, you better be raised 1.3, 1.48. Honestly 1.5 would probably be the safer bet. So the reason for that, and.
Andrew Easler (07:35):
That means that that money has to work harder for you than what you might be expecting.
James White (07:40):
Right. Make sure that your margins are in your business to pay those investors back. Because the last thing an investor wants to hear is, Hey, I don't have the money to pay you back. Or the business never succeeded. It will be very hard to raise money. Your second go round. If you fail the first time and I know from experience
Ethan Hunt (07:55):
And how do you, how do you even lay that out to like your investor in the way where it's like, Hey you know, we have costs, this is what this is going to cost. Like, how do you, where do you even draw that line of how much you tell them the investor, how much you're not?
James White (08:08):
Well everything's estimated, so you have like proformas you use on. So that depending on the offering document, Andrew can probably explain this better than I can.
Andrew Easler (08:15):
Yeah. I think part of the offering document that you're going to prepare, if you're going to end up using securities as, as the vehicle for your money raise is being completely transparent and disclosing, what kind of costs are gonna be.
James White (08:27):
Disclosing is the number one thing you have to do? You know, I see it, you know, when people hired me as a business consultant to go in there and get them prepped for an actual listing on the NASDAQ or whatever exchange they have, or even when they come in for a consult with drew and, you know, we're sitting there in the room, you know, people are funny, they just don't want to disclose some things. Cause whether they think it's a, it's a special proprietary information, the whole point of doing an offering memorandum or a document or a perspective, that's one, whatever you want to call it is disclosure disclosure, because if your investors don't know the risks, they're basically investing blindly which is why, right. Drew, which is why they, the sec exists in the first place to, you know, generally protect the public. I dunno,
Andrew Easler (09:08):
Like I like that qualifier generally generally open-ended I think it, I think there's maybe some, some animosity about maybe some previous sec cases there from James, but with independent people enforcement.
New Speaker (09:27):
So even if it's not on the document, I would always disclose it. You should have everything in the document, but if something comes up and, you know, I always say when I'm raising capital you know, I haven't, you know, I raised capital, I just raised 500 grand last week for a real estate deal. Which is not a lot when it comes to real estate, but we did it. We got a really good rate on it. Disclosure is the number one thing, if you disclose, you'll probably have very few problems with investors. It's just, when you don't disclose who you do, things that you said you would do that you didn't do, that's when you have problems, when it comes to these securities offering. So, you know, nobody's perfect, everybody makes mistakes, but you know, if you're just, if you, as soon as you find something that you update it, you disclose it. You know, that's the number one thing.
Andrew Easler (10:03):
Yeah. And I know we're, we're looking at it right now through the lens of securities, but obviously, you know you know, selling your shares or selling a bond or something like that is not the only way of raising capital one way. If you're going to like a private lender or even a bank, disclosure is really important there too. Yeah. Right? Because if you don't disclose, you know, a lot of people say, well, I won't raise money.
James White (10:25):
If I disclose all my bad things about my business. And I say, no, you'll actually raise more money. Because what people don't realize is when you disclose stuff, even bad things, right. People build it, build trust with people because people believe you're being honest with them, which you should be honest with them. And therefore, if you're honest with them, it's going to translate into getting more dollars because they think you're going to manage their money. Accordingly. If you're shady or you kind of bend around the truth or dance around the truth, you might raise the money for that person. But you're also going to have to hire an attorney to defend yourself when that person loses their money or you didn't tell them, even if you make these people a lot of money, your investors, a lot of money, they can still Sue you. And they do all the time. It happens all the time. These hostile takeovers happen all the time, these public companies, which is why we can go into where you have no privacy. That's my next thing. My next point that I have is when you're raising capital, whether it's from a bank, whether it's from a private lender, whether it's, you know, from the markets, you have no privacy. Essentially what you're doing when you're raising capital is you're, you're making your company a public entity, which is of the state, I think, and you have no privacy safety to disclose financials. You have to disclose management changes, management, discussion analysis. Then each year. Your competitors will know about all your little programs that you use to make your business run. So if you really want to start a business from our last episode you know, go look at some of these public companies that have some of these like Etgar and Cedar, because you can actually obtain a lot of good information from them. And they basically did the business plan for you and they spent all the money. So just, you know, make sure when you raise some money, again, it costs a lot of money. You have no privacy and even hiring experts is kind of risky. You know, drew can kind of explain why he became an attorney if he wants, yeah,
Andrew Easler (12:02):
I did want to address privacy as it relates to re-even raising money from financial institutions or lenders, even if you're not going public, which is obviously the opposite of private, which means, you know, you have to be in full disclosure. When you're raising money from lenders, you are typically going to be obligated in that loan contract to disclose any material changes in your business. And so if, if the economy takes a dip you know, you lose one of your major customers or something like that, you're then obligated to disclose it. And then now you've got the risk of them getting scared and pulling the loan.
James White (12:39):
You remember our first SBA loan. So in drug testing courses, me and Andrew got an SBA loan. And I remember reading that Drew was, you know, he's an English guy, so he knows linguistics and he knows commas and all this other fun stuff. So he's reading this agreement and he's like, they can call our loan at any time, James. So we're going to take this money and we're gonna invest this money in growing our business. And this bank can call the SBA loan back at any time if they choose or for reason or no reason at all. And I said, oh my God. So we're gonna invest all this money into this product or service that we're doing. And,they could call our loan at any time. And then we have like 30 days to repay it back or 60 days, whatever the, I forget what the clause was, but, you know, that's the problem of going to a bank. You know, we need the money. They're never there for you, but when you have the money and you don't want the money, the bank's money, they come to, you say, take our money, take our money, and then you invest it and then they come take it back. So, you know, that's, I think, why people have a lot of disdain for the financial system. A deal is never really a deal, right. And agreements never really an agreement with these guys. So you always have to make sure that, you know, you have the capital, you have the ability to liquidate to pay these things off, or you have some sort of form to do it. Now, if you fail in business and you raise capital, you just fail while it is what it is, there's ways and processes to overcome those obstacles. But yeah, it's pretty crazy. They have, you know, you have all these issues you have to worry about. So yeah, no privacy, if you're raising money from investors, be prepared to disclose everything. Because if you disclose nothing at all are very little,you could get yourself into some pickle.
Andrew Easler (14:03):
All right. With a pickle, I think now's a great time to go ahead and go into our first break. Don’t you think, James?
James White (14:08):
Yeah, sure. We do break if you want. Yeah.
EASLER LAW (14:10):
At Easler Law, we recognize that small details can make a tremendous impact. Attorneys who take the time to listen carefully and understand their clients can use little details as powerful tools to achieve the best results, our talented and experienced attorneys and team members that come from diverse backgrounds. But we share a common belief in doing right by those that entrust us with their legal matters, schedule a consultation, or learn more. You can visit our website at easlerlaw.com or give us a call at (321) 206-3603.
James White (14:41):
Welcome back to learning legal. My name is James White and I'm here with Andrew Easler. We're both co-hosts and we were talking about the pitfalls and the raising capital, and I wanted to get those over and done before we go further. So if you're interested, you can continue listening, if not, well, continue listening anyways and make sure you subscribe to the YouTube channel and hit the like button for future shows. So Andrew, so this is one for you. You became an attorney and I know why you became an attorney, but you can let our listeners know because experts can blow it. Even though you have good faith and you go hire an accountant, attorney consultants, etc, you know, experts can make mistakes too, right?
Andrew Easler (15:20):
Yeah, absolutely. And I think as you mentioned, one of the reasons that I became an attorney was because we had a couple of experts blow it for us, or at least nearly blow it. You know, one of the problems is yes, there are people who make a career and are passionate about, for example, the law or accounting or taxes, but ultimately they're not the ones that they're not the ones who are going to have to deal with the consequences if they make a mistake or if they don't do something thoroughly enough, or if they don't get your contract or negotiate on or push on certain terms in a contract, I think that's, that's one of the major problems is, you know, ultimately yes, you can work with me as an attorney and I can review your contract and do everything, but I don't have to deal with the consequences you're going to have to deal with. If there's a provision in the contract that your attorney doesn't, doesn't see that may materially affect you later on down the road. You know, ultimately,
James White (16:20):
Which is why it's so important to really vet and hire competent legal professionals or professionals in general, you know, we were saying in one of our prior episodes, no, don't hire a layman bookkeeper hire a CPA bookkeeper because they know the tax law. It's like with our training business Andrew and I have you know, he's an attorney. He reads the regulations for living. This is what he does. And people, you know, they'll go to a layman to give them legal advice and the legal advice is wrong, right? There's a saying in the legal industry, you know, paralegal think their attorneys because just because you work in the business or you're, it doesn't mean, you know, what you're doing, you're have experience in that field, which brings me to my next topic is money.. So a lot of the things, you know, you can go to an investor and the investor will, you know, say I'll invest a million dollars in New York, whatever the amount is, but you will, a lot of founders overlook the actual expertise that, that investor, you know, does the investor have experienced in industry? Can they actually offer more than just money, right? Or what we call the term, sweat equity. You know, there are some people out there that don't necessarily want to take the risk and invest a bunch of money, but they'll use their time, which is money and help you grow your business. So you gotta look at when you're raising money from investors, make sure that investor is going to be good, because there are some bad investors. What we call, you know, saboteurs, right, where they'll invest in your company just to make your life a living hell, because they're invested with more money in a different project. And so you have to make it very clear and you have to be very, you have to be serious about when you're raising money from investors that they're not, they don't have ulterior motives. And that's happened to me in a couple of deals where, you know, somebody owns one chair, they can do a derivative suit and they can make your life notice that they can't, they can't take your business down per se, but they just take a lot of your time and energy. So you can focus on growing your business or competing with them. So just make sure that you, you know you, you, you work with the right type of investors and the right type of investor generally will be somebody that has experience in your industry, or that can offer your business something. In addition to the actual money, they offer marketing devices, public relations, you know, they connect you with different market makers and so forth, which is why you pay a lot of money to venture capital companies to ask consultants to help you.
Andrew Easler (18:27):
It's not just the money that you're looking for. It's the connections.
James White (18:31):
Now the search is endless for money. I know from my experience and understand all this too. The search for money is endless. You're always, if you're raising money as a startup, you probably lose a lot of money, which is why you raise money, because you have a big startup expense and banks don't want to take the risk on you. So you're always going to be searching for money, always, always, always. So that's something to take into consideration to raising money. I remember actually I'll tell the story of the listeners here. So I think it was lead financial Calgary, Canada, and my financial advisor at the time. I remember talking to him and he said, you know, raising capital and starting a business with investors is like, it's like two full-time jobs. You have to be the CEO of your company and work your 12 hour days. And you have to work another eight hours dealing with your investor emails and all the questions that you have and all the other compliance issues that come into play. So just remember if you're raising capital you will be working a lot of time to do it right. And you have to be prepared for that.
Andrew Easler (19:24):
And I think we touched on this in our, in our last episode you know, if you're raising money you can be spending up to 35% just on professionals, which means you've got now 65% of the capital that you've raised, which you still have to pay back to the investor plus plus interest.
James White (19:45):
If you're doing debt financing with interest, right.
Andrew Easler (19:48):
Right. They're looking for a profit is what they're going to say. Okay. So regardless I think that money has to work extra hard and a lot of people don't recognize, you know, they think, okay, well, I'm I want to pay back my investors 5% a year, you know, or maybe maybe more on top of their money. But it's, you know, if you're only using 65% of that money, because you spent 35% on all these other costs, that has to be a lot more than 5% to give them back.
James White (20:21):
Yeah. Yeah. So you have to make sure you, so if you're, if you're expected to pay an investor 5% returns and you're already out 35%, because of all the fees and expenses that you have. Now, if you have a five-year repayment plan, you have to take that 35% at the five 25% over the five years. Should I have to figure out how to make 55% of your money in the next five years? And what's that, what's that ratio workout. If you divide that by five, 55 was divided by five. I have no idea,
Ethan Hunt (20:46):
Let me pull up the calculator, 11.
James White (20:49):
11. There you go. So you have to make up what's left. So your company has to basically return 11% a year for the next five years to just break even on your investors. And that's not including anything else. So, you know, if you add the R and D costs or else you're going to be producing 25, 30, 40% returns, it's, it's, it's very hard to do that. Anybody that pays more than like, you know, unless it's like a government entity or something, anybody that pays more than 70% a year is probably, you know, you're investing in some risks there, for sure. I think that's all that I have for risks. I'm sure there's lots of under risk, a risk of there being underfunded, missing growth opportunities, because you're paying out dividends, you know, that's another thing. People make a mistake up, they pay interest to their investors or dividends if you're doing equity and they could actually be utilizing that capital better to grow their business. they dont,they don't have enough equity. They don't, they don't realize that the reason capital takes time. One of the big things too, if you're raising capital, whether it's debt, convertible debt, whether it's, you know, equity, you know, make sure you don't lose control of your company. Right. That's why you see the attorney mentioned that actually that's why you see an attorney, right. Because you don't want to lose control of your company. Andrew's a really good attorney. That's why I worked with him, for all my deals. And that's why we become good friends because he's done such an amazing job for, for, for me and my clients, when we do our IPOs or capital fundraising.
Andrew Easler (22:14):
Yeah. And I think when we're talking about losing control over a company, when it comes to fundraising, if you're doing securities like equity then obviously they're purchasing a direct piece of the pie from your entity. So once they get over 50% and if they don't like what you're doing, they may outvote you,
James White (22:35):
Or wherever your articles say or your by laws
Andrew Easler (22:37):
Your article bylaws. So yeah, absolutely. In general, if you sell more than 50% of your company out, you're losing that level of control over the,
New Speaker (22:46):
So think about, so I just want our listeners to think about this, think about the worst ever experience, whether it's with the ex-wife ex-husband, a girlfriend and think about never getting rid of that person in your life. And that's what having investors is like. So if you, if you can handle those people, then go for it. Having investors. I personally have a love, hate relationship with investors and most investors honestly, are really good people. But it just takes one bad apple to ruin your whole entire mojo. So just remember, like I said, make sure, you know, we get offers all the time to invest capital on our projects. And we declined a lot of them just because they're not a good fit, you know, do I want their money? of course, but I don't want their opinions. Right. And that's the problem. So you're an entrepreneur, you're an expert in what you do. So make sure you're aware of that. And you actually have that confidence and because people will invest in them, they won't give you their opinion. And sometimes their opinions aren't in the best interest of you or your business. I remember you have a fiduciary to your business, so your business should come before your personal wishes, dreams, et.
Andrew Easler (23:45):
I think one of the ways that a lot of these companies get into the top of their market is by taking risks and doing big things. And if you have a ton of investors number one, you may be afraid of doing these, these risky deals to get to the top.
James White (24:04):
Which happens to me all the time, right?
Andrew Easler (24:05):
Or number two, or number two, the investors, maybe you, you are ready to go and the investors are clamoring and saying, no, we don't want to take that risk. And now the question is, you're tied back and your hands are tied about making those, those choices. And I think you can see that in some, some of these companies that have recently failed like blockbuster, right? They, they didn't invest or reinvest in, in doing things like red box or a streaming service,
James White (24:29):
But they bought Netflix. I think Netflix was trying to sell to them for like a million dollars or 10 million. Wasn't it? Something small like that?
Andrew Easler (24:34):
It was Netflix, they absolutely approached blockbuster and said, Hey, here's our awesome business model and blockbuster wasn't interested. They didn't want to take the risk of getting out of their comfort zone. And then you see what the result you see.
James White (24:50):
Like if you look at Facebook, I mean, this is a little off topic for our topic of the show. But if you look at Facebook, they rebranded the meta, right? Because the meta you first, whenever you want to call it, which I think is crazy in itself, but anyways, a different radio show, I think, but what you have to do is as a, as a CEO of a company, or as some it's raising capital or growing business, etcetera, you have to be willing to destroy your entire business model, which Facebook has essentially done with their rebranding because they know Facebook is kind of on the decline. People are losing a lot of faith. There's a lot of privacy issues with it. And as people are more concerned about privacy, more concerned, what different things you have to do, as a CEO, you have to look at 10 years from now and say, you know, is Facebook going to be around in 10 years. And I had the answer. I think it will be around, but it's going to be like a MySpace if anybody remembers my space. And then you'll have the metaverse, which will be Facebook's primary source of revenue. So as a CEO, you have to be willing to destroy what you've created and rebuild just like Apple did the same thing with the iPod. You know, apple was on the way out. They almost went bankrupt until Steve Job, whoever it was, Tim cook or wherever the designers were, you know, said, Hey, we need to come up with this new product and look at it. The iPod saved apple, just like the Dodge caravan save Dodge or the Ford F-150 saved Ford. So you have to make sure you understand what you're doing and be willing to destroy what you created and, and, and rebuild. And that's where a good attorney will put, you know, certain language into your offering documents to protect you from those situations. If you have to perform them which brings the next topic, what are some common strategies? So I'm an entrepreneur. I want to raise money. I don't know what, how I want to raise the money, whether it's debt or equity, or just my own credit cards, bootstrapping as an attorney, what would you suggest are some of the common strategies for, for business to raise money? And I guess it depends on how big you want to go, obviously. But touch on that a little bit, Andrew, for me, and then one of the next topics.
Andrew Easler (26:37):
Yeah, so I think the most common strategy for people who are starting up their own businesses is to first start and look at what's in their own bank account, to save up some money. Um and if that is insufficient to get started, they may look at their family, friends, and business associates for you know, raising capital. Outside of that, now you can start looking the next tier up at credit cards. On top of that, you look at a financial institution, other lenders and then on top of that, we have private lenders, which can be both good and bad you know, hard money lenders, or.
James White (27:15):
If you're going up private lenders, hard money lenders. I see it all the time. There's all these like, oh, it's the approvals for $250,000 qualified for your small bit, blah, blah, blah, blah, blah. And these guys charge like 24, 28, 30, 40% a year. You're going to go broke. I promise you, you will go broke if you take those credits and do not fall into that trap of easy money. Um in this kind of a market environment, I would not pay more than like 6% on any kind of unsecured, small business loan, even secured, you know, security by getting a cheaper deal. But if you're paying more than that I hate to say it, but you're probably stupid. So I wouldn't,
Andrew Easler (27:48):
Better just to wait and, and you know, maybe do a couple of side jobs, save up some money.
James White (27:54):
Maybe stupid's a harsh word drew, but I just, I have to, I have to drive that fact home, the people that are listening to this, they're looking at doing it, you know, don't be desperate, don't go to the predators. There's lots of Roach finance people out there you know, just leave them, you know, failing personally is not worth your idea unless you have something like your margins are so high that you can afford to pay the 20%, but I would just, that's almost impossible by the way. You know, I would say nine out of 10 businesses could probably never do that. And then you just hurt yourself long term. And you have to repay that capital back because I think a lot of those people will, you know, make you personally guarantee on those high risk loans as well. So it's better just to, you know, right now with Americans, the reason why I came to America was because, Drew, is you can't get financing like you can in the United States. America really is the promised land for small business. And, you know, unless you're, you know, in my opinion, unless you're raising, you know, billions or, you know, several million dollars, you know, there's lots of other alternatives than, you know going to the markets with an offering memorandum, our subscription agreement because the, you know, after you raise capital is where it gets really dicey and complex and could cost a lot of money. And we'll go into that a little bit. That's some good strategies. So, are there any other strategies you'd recommend? So I bootstrapped my business. I'm growing. I have, I have sales, I have revenue. You know, I have a bet maybe bank loan and maybe some credit card debt. But I think my business could scale. I think he can go national, I think can go worldwide. Right. what are some of the financing options for those types of people that aren't like the micro or small businesses that want to like scale their business and become a Tesla or an apple, because there are people that are going to bond and do that or, or even a medium sized business, 500 million a year or something like that. What are some of the options they have for accessing capital?
Andrew Easler (29:37):
Sure. So I think we talked about, you know, financial institutions applying for, you know, an SBA loan or something. I think they have some limits. I think the largest amount right now that they're offering is 5 million. that doesn't mean you can't
James White (29:52):
That doesn't mean you can't get more than that. That's just what they're insuring alone for. Right. If I remember correctly.
Andrew Easler (29:57):
Yeah. I think if the individual financial institution, the lender wants to give you more capital than they certainly can. Outside of that, you've got angel investors who might do, you know you know, one or two you know, big, big investments in your, in your business and may also importantly make connections and provide opportunities for your business, just like a venture capital firm above that. You can start looking at crowdsourcing crowdfunding that kind of thing. And then on top of that you know, you can start with an offering memorandum and a perspective.
James White (30:35):
Sure. So there's like reg D offering rounds is reggae plus, which allows like a general solicitation. If you've heard some of these companies doing these deals where they'll do a reggae, they'll basically take all the middlemen and do what they call a direct listing on that general. Generally, not always, but a reggae offering. I think it, maybe doesn't always so much, I'm not an expert in, and that side of the compliance aspect of it. So I don't want to comment any further. Okay. So to recap some common strategies, raising capital, obviously bootstrapping with your own personal funds, whether it's credit card savings, etcetera going to the bank, if you're just starting a small business bootstrapping or going to the bank is probably going to be your best bet and cheapest form of capital.once you start getting into investors that they're family, friends, and close investor friends, you could probably get away with like a reg D, which I, my experience runs three to $5,000 in today's market. It might be more with inflation. It could go up to you. I, you know, I think I paid 10,000 plus for some of those, depending on the complexity of the deal. And then you go to the big leagues, which is like the S one registration statement, and those can range anywhere between like 80 to several hundred thousand into the million dollar range. Like some of these big companies that are going public Ethan. And they're just like they spent millions of dollars on them, because you got disclosures, right. And when you get things changing every day in a company, whether it's management, whether it's, you know, your technology with stuff you use you have to make sure before you file that, s1, you, you have that all in there. Otherwise you get sued for securities fraud and that's the last thing anybody wants to be sued for. So
Ethan Hunt (32:03):
I'm curious, cause I took a flight with you and we had someone who wanted to possibly invest it over, flying over, you know, just a two hour flight. I'm curious, you know, cause I guess, you know, this isn't like a, I mean, you're not a salesman, but you're sort of a salesman when it comes to, to, to your pitch. And I'm curious, do you have any tips about the pitch or what you're saying? Is there any magical, you know, formula?
James White (32:27):
I mean, one thing I've learned is to keep it simple, stupid, right. Be laser focused. You know, I remember one of my investors back in the day was the guy that started chicken soup for the soul. And you know, he introduced me to a lady that was part of this big, you know, networking organization for investors or whatever, just, you know, and I was talking to her and I remember one thing she said, what was her name? And I think it was like, Lynn Dorman, maybe that was her name or something like that. Anyways, I remember I was talking about all these ideas I had, right. And this one we're talking about in previous episodes stay laser focused. I was like, I'm gonna do this. I'm gonna do this, this one I'm gonna do. And she's like, whoa, you're confusing me. My answer is no, because confused minds say no. Right. And I, and that really hits something in me. And I said, I have to be laser focused. And just because I have ideas doesn't mean I have to tell everybody about my ideas because most people, there's a reason why 99% of the people in this world, aren't the 1% of the world, if that makes sense. And I don't mean that in a derogatory way, it's just that some people can't handle complex situations. They get confused because of their world. They're coming from a completely different environment and a completely different world. Now, if I'm talking to Elon Musk or Jeff Bezos, or be one of these people that have had a lot of moving parts or complex businesses, they would understand, right. But even they don't want to hear these complex nuances of your business. So what you need to do when you're pitching investors is go in there, you know, they call it the elevator pitch for reasons like a 30 second pitch to go up in the elevator, the next floor down at, to go to the park aid, to leave the pitch that you didn't get him capital. And I guess maybe but yet keep it simple, right? Like, Hey, I'm James White, we'll work training.com. We do risk regulatory and compliance training. We sell online courses, right? So you have an idea of what I do. Our revenues are XXX we're growth rate XXX. Would you be interested in investing? That's really how simple it is. I think we work. There's a story about how it works. I don't know if you've heard of the saga but SoftBank, I forget his name now, but I think it was a CR founder or something like that. The guy went to him and talked to him for five minutes. He got a $4 billion investment and the deal went obviously bad for the guy. Obviously that's a lot of money. Lucy ended up taking over the company. Then the guy that invested I think kicked the founder out, that's an example. I mean, it doesn't take much to raise capital. You just have to talk to people, but again, you have to be credible. You can't, you know, show up.
Andrew Easler (34:35):
I think it's absolutely right about the credibility aspect of it. I think being laser focused is definitely important. Part of it being confident really comes across with an investor being genuine in, in your pitch. If you're, if you're too loosey goosey or too, you know, pie in the sky, I think it really, it comes across easily for an investor as, as something that's not what they want to get in.
James White (35:00):
Sure. I mean, we've all heard the stories of these billionaires saying everybody said no to me, everybody said no to me because they were probably explaining it like in this grandiose idea. And they knew in their head because you know, those people think differently, like people that aren't real entrepreneurs, that real entrepreneurs, not people that are Uber drivers or, you know, have a micro business, but real entrepreneurs that actually start businesses, hustle are the nitty gritty. Like Elon Musks, Jeff Bezos, these people are all in, they're all in. And so they communicate this, like I'm gonna do this and this I'm going to conquer the world. I'm going to go to Mars or Google, for instance, I'm going to have all the search traffic come to us. We're gonna control all the data. All the we're gonna visualize data in a way that people understand. And so you're explaining to a normal person that works at a 50k or a hundred thousand hundred job, they're going to get so confused because they don't know it just like crypto, crypto scares people because they just don't understand it. So you have to make sure that your pitch is understandable. That it makes sense for like a layman cause even rich people, smart people, investment people, venture capitalists. They don't want to have this one hour pitch. I mean, oh my God, they're busy too. And they see so many pitches. You got to go in there like laser focused. This is what we're doing. This is where we're going. And this is how we're going to accomplish this. And this is why I need your money period. And this is what you're going to get for your money. And then you might have some negotiation depending on the size of the deal. They might want to add a director to the board so forth. And that can be discussed later personally, you know, like with tech companies, like as [inaudible], even though I think I forget what he owned stuff, but he has shares. I think his founder shares the so-called founder shares. They have 10 times the voting power. That's how these people keep control of their companies. Right. And they don't lose control. And that, that strategy is actually falling out of favor with a lot of investors now, because they realized with someone like Zuckerberg, this guy, even though, you know, we've invested a bunch of money, he has a great product, you know, which is why so many people use it. Now people may disagree on privacy and what not, but he does. He had a great product you know, but he has all the power. He has all the decision-making skills, which is why it's so hard to control, you know, and reign this stuff in that he can do anything he wants with what a stroke of a pen.
Andrew Easler (36:56):
All right. Now we talked about you know, in your pitch telling them what they're going to get for their money. I mean, let's talk about the exit strategy because that's really a big part of it.
James White (37:05):
Yes, that's a very common strategy when you're raising money. People just say, how do I get my money back? There's an old saying, you know, the return of principal is greater than the rate of return, right? When an investor is investing in your product, they want to make sure they get their principal back and B they actually make some money from it. So that's a really good,
Andrew Easler (37:22):
And those listeners who aren't as sophisticated as us principle is basically the initial amount that you're putting in.
James White (37:29):
So what are some strategies to, what are some exit strategies in your practice that when you're working with a securities customer are some of the reasoning that small business wants to raise capital and they come to you for advice, what would be some extra strategies that you would, you know, give me for instance. Yeah. So you know, when you're looking at helping an investor get their money back, part of that could be through dividends which is basically you're giving a portion of your profits back to an investor. Another way is let's say if you, if you raise money through debt you could actually do a convertible bond or a convertible venture, which basically means they start out as a loan. And then if at a certain point, the investor can convert that debt or that loan into equity in your business. And then that's one way that they can make some more money. If your business has certainly grown as a result of their loan. Another way is certainly just raising going directly to a public market, right? If you have shares in a company and that company is listed on a public exchange you could then just list your shares and get your money back.
James White (38:39):
And that's why people list, right? It doesn't really cost the company money because you're selling it to somebody else, not the company. Right. And that's why you have liquidity, which is why when you invest in a company, you have to make sure they're trading, which is why I personally, I'm starting to get into crypto now because like, even like Sheba new coin, which is like I bought, I don't know, a couple of thousand bucks for the coins. But they have billions of dollars worth of trading, billions of trading volume of day. So I know I can liquidate my position, whether I lose money or make money. That's another story, but I can liquidate my position pretty quick.
Andrew Easler (39:09):
Sure. I think we're, we're using some terms here that hopefully everybody is familiar with, but you know, liquidity is, basically the amount of trading volume that your, your security or whatever your cryptocurrency has. And then liquidation is basically getting ready.
James White (39:25):
And that's the sign of a good attorney. Everybody is because they,take these crazy terms that only James knows and they dumb it down a little bit so everybody can understand it. So that's really good. Thanks for that. True. okay. So here's something for you. So we raise capital. I dunno. We raised a million bucks and we're all happy. We're giddy. We were like, okay, my dreams are coming true. You know, I got the money now, what does an entrepreneur have to worry about? Or somebody is raising money to have to worry about after. And this is where I always tell people, by the way, I want to interrupt the question to myself here is why this always happens where people raise a bunch of money and they don't realize the consequences of the, or the cost of having that investor. Right. Because it does cost a lot of money. So once you, once you raise the capital, what should you do after you raise the capital and what do you have to do to keep, stay compliant from an illegal?
Andrew Easler (40:17):
Yeah, I think the, the first thing is, hopefully you've already made a plan for what you're going to do with the money after you've gotten it, I had a client the other day who said I asked him, I said, what are you going to do with the capital when you get it? And he said I'm going to spend it on salaries. And the salaries were well above market market rate. And I said, well, you know, what are these people going to do in order for you to be able to grow your business to a point that you can provide an exit for that investor? And you know, we, we hashed it out. We talked about, you know, the skills and the talent of this person, but really what are they bringing to the table? That's going to justify this massive investment and then the cost of that investment. So I think that's one of the, really, one of the big concerns is once you get that money, deploying it in a way that is surgical.
James White (41:09):
Well, that's a problem we're having. Now, if you look at inflation, you know, everybody's talking about inflation, that's the, that's the word on the street. There's so much money out there that nobody knows what to do with the money anymore. Because what do they put where they parked the money? Because we've created the treasury, the fed has printed so much money that now everybody has this abundance of money and they're like, yeah, I don't care. I'll just pay, you know, 800,000 for a house, I'll pay 300,000 for this. Or, and so that's why you're having this inflation. You know, there's a lot of reasons why it's happening, but you know, when you have an abundance of money in the system with cheap interest rates, this is what you get. You have rising prices, which is very, very, very dangerous for small businesses or anybody. I mean, it's good for small businesses to raise capital, but it's dangerous because once the rug is pulled from underneath us, then that's when you go, that's where your businesses have problems. That's where the valley of death happens. So right now, if you're raising capital, you want to make sure you raise enough capital to sustain yourselves, but there's no better time to raise capital than now. There's very pro there's very friendly. The sec has been pretty friendly as far as adopting new rules to help micro and small businesses raise capital. And although people like to note the securities exchange commission there are people too, and I think ultimately they do want to protect the public. Sometimes that's misguided and sometimes you have people who don't understand certain topics like cryptocurrency and they just let it go what runs wild, but eventually that will be regulated once they have the information to regulate and the, and understand how that whole system works. So I think that's all the questions I have for today. Andrew do you want to go over and kind of recap kind of the options to, for raising capital? Like for instance, if I want to hire you as an attorney how would I go about hiring you as an attorney for instance, and, you know, and do you find that there's any is there amounts of money that you have to do something different with, like, for instance, if I'm just going to raise a million bucks, could I do like a reg D offering, which I think is pretty common or, you know, would you suggest reg forget the limits now there's limits on all of these things folks. So you have to make sure when you talk to an attorney, you figure out how much you're actually going to need that we think can recommend the best document for you.
Andrew Easler (43:12):
Yeah, absolutely. And I think you know, compliance is expensive sometimes. So you know, we are pretty cognizant of that when you come to work with us at our firm when you book a consultation we review your entire business. We look at what your strategy is going to be where you're going, what you're going to do with the money, so that when you, when you do come in for that consultation, we already have a really good idea of who you are, what you're interested in, where your skills are at, and then how we can help you. Part of that is choosing what the best fundraising option is going to be for you. Um you know, the smaller amounts, as James mentioned, maybe stick to financial institutions you know, local investors, family, friends
James White (43:55):
Like one private investor for like 100 grand. Yeah, that's fine. And that can be more like a loan than an equity. So you're, you're outside of those, those regulations per se, but always consult an attorney because just because it doesn't sound like a security doesn't mean it's not a security. You have to understand the definition of a security when you're raising capital, because you get yourself into some hot water there. I think that's all I have for today. Just so just make sure that if you can raise capital guys and gals out there, make sure you, you know, you understand why you're raising capital, find the why and why you're raising it and figure out what the anchor strategy and then everything else in between. That's your job as the artist's business too, to kind of make it work between the beginning and the end. Again, if you have any questions, post your comments below, maybe one of your videos will end up one of your questions will end up on our show or in a video acuity video, they come back and make sure you subscribe, like, and make sure you share our content. We're trying to help everybody here do better in life. So thanks for joining us today and have yourself a wonderful week. Thanks for listening.