Equity Financing in its simplest terms is a business owner’s agreement to accept money from a second party to help fund business operations in legal exchange for partial ownership in the business. The good news is that the business owner didn’t have to get a loan and go into debt having to make principal and interest payments for sometimes years, battling at times the burden of excessive debt service or punitive financial covenants; the bad news is that the business owner now has a partner, and sometimes a controlling force in how the business is managed. NWX Financial Group advises on and arranges equity capital raising for start-ups, growth and expansion stage companies, mature businesses as well as corporations needing acquisition and turnaround financing and generational transfers of ownership. We assist in attracting and structuring various types of equity financing vehicles that are suited to the particular strategic, operational, and cultural needs of our clients. Our objective is to ensure our clients that the equity financing provided will generate the maximum return on investment for both parties, at the least financial exposure. The following is some descriptions of our equity financing solutions we employ.
Angel Investor. “Angels” are small business investors who provide seed-funding options for businesses and/or early stage start-up capital usually in exchange for ownership equity, or sometimes convertible debt. Angels are typically affluent individuals either working alone or through organized groups, who provide capital and advice to companies normally within their industry expertise. While the term may be relatively new, the concept itself is the oldest form of equity finance. Indeed, an angel investor today could have been a relative, close business associate or a retired patron of the arts during the Italian renaissance. Angels normally use their own personal capital from a few thousand dollars to perhaps a million dollars, rather than manage the pooled money of other investors, and while they are more readily available for the discussion of financing opportunities, angel financing is nonetheless difficult to raise. Entrepreneurs may spend countless hours exploring the concepts of their emerging enterprises with numerous Angels only to be graciously rejected.
CSC Capital’s institutional memory is not so old to realize that raising capital in its early stages is frustrating at best, even with relatives. As such we provide the exploratory field work and advice to narrow this investor pool into a manageable and cost-effective vehicle while investigating alternative sources of financing. Further NWX’s global network of suitable early stage investors plus our ability to prepare business plans that shape the strategic and financial content and market the creativity of an engaging enterprise is unparalleled, and with our firm’s operational support we can lift a business from concept to realty.
Venture Capital. A venture capital fund is a pooled investment vehicle managed by a venture capital firm that primarily invests in enterprises that are too risky for the traditional capital markets. Venture capitalists typically invest in novel technologies that have the ability to generate high commercial returns at an early stage. Their equity positions allow them to take a role in managing entrepreneurial companies at an early stage, thus adding both capital and operational skill. While venture capital firms vary widely in their investment approaches and expectations, they all take sizable equity positions as well as earn attractive management fees paid by the pooled investors, as well as share handsomely in the profits of each investment. Most venture capitalists invest over $1 million to several million dollars on each investment vehicle, with a time horizon of normally three to seven years to conduct an private equity sale or an Initial Public Offering.
CSC Capital has utilized a customized venture capital database since the late 1990s to tract the latest information about the venture capital industry, the firm’s, the deals, the benchmarks and the prospects. We then act as intermediaries in locating acceptable venture equity partners for our clients. Venture capital firms generally pride themselves on two skill sets above all: investment knowledge and operational knowledge. NWX positions our clients to become operationally attractive candidates to venture capital firms. Having our business roots and early business connections in Silicon Valley we understand how venture capitalists view transactions, how they source new deal flow, how they perform operational due diligence, and how they connect with dealmakers. Our network of personal contacts includes several venture capitalist firms. Our experience allows us the focus on the right venture capital firms, then negotiating the most optimal equity structure and financing conditions for our clients.
Private Equity. Today’s private equity firm is the name re-invention of what were known as leveraged buyout firms in the 1980s, where large amounts of debt were issued to purchase even larger holdings. In a typical leveraged buyout transaction, a private equity firm buys majority control of an existing or mature company, in often traditional industries. This is a distinct difference between angel investors and venture capitalists that tend to specialize in young entrepreneurial companies, rarely obtain majority ownership, and especially with venture firms focus on emerging technologies. Many of these private equity firms also engage in what is known today as alternative asset management which in layman’s terms means they acquire, provide management oversight and eventually sell illiquid capital investments, such as businesses, real estate, and financial derivatives. Again unlike angels and venture funds, their investor pool consists of many large institutional investors, public pension funds and academic endowments. As such their equity investments can range from the tens of millions to the hundreds of millions of dollars. However, most private equity firms operate as small investment boutiques offering equity solutions to the middle-market in a wide range of industries. Many times these firm’s professionals will consist of former angels, venture capitalists and partners and managing directors of global private equity firms, who combine their skills and relationships.
NWX is in continual contract with several middle-market private equity firms across the U.S. and Europe. Many our relationships were formed years ago when as younger firms we collaborated for the mutual benefit of our clients and their partners. Most private equity groups specializing in the middle-market were actually formed after the founding of CSC Capital, so to many in their industry our firm still represents the established and trusted “old guard.” Some of these middle-market private equity firms have since expanded globally and in so doing has likewise expanded our global reach as well. Again, what separates NWX from our competitors is our reputation in restructuring and our ability to provide operational excellence to our clients, and to a private equity firm that is not only a critical benefit, but can be the difference between a equity partnership or not.
Private Offerings. Issuingprivate stock, either common or preferred, through a private offering of securities is a time-tested way to raise capital. For owners who want to remain in control of their business, a private offering is probably the most attractive form of equity financing, though the amount raised is subject to an independent valuation of the company. Therefore, owners who decide to offer new issues of stock to a select group of investors must understand that the amount of capital raised must be weighed against the dilution of stock. If a company is distressed, the value per share of stock times the number of shares in the offering might not provide the necessary capital to make the process worth the time and effort. Though for companies with significant value, a private stock offering is a equity financing vehicle worth serious consideration. Not only can individuals and institutional investors be invited to purchase shares of stock, an owner can reacquire the sold equity stakes at a later date. A successful private offering further helps to position a company for entry into the public marketplace, if desired. When structured properly, the issuing company can use this tool to generate needed revenue from the sale of stock quickly, while also creating goodwill among the investors.
However, there are many questions that must be answered when structuring the private placement such as; can a debt private placement accomplish the same financial goals as an equity private placement? What valuation method should be used to value the securities? Should angel investors be allowed to participate, or should the offering be limited to family and friends? What do sophisticated investors look for in a private offering of securities, and should the offering be limited to just “accredited investors?” Should other forms of debt and equity financing be considered as well? Should a term sheet be used to gauge potential investor interest? What is the best placement structure based upon the capital needs the business, and are their industry factors to consider? Should a comprehensive business plan be prepared to assist in the preparation of a private placement memorandum? How many regular individual investors can take part in the offering? Should both common and preferred stock be part of the offering and what are the advantages and disadvantages to the investors and to the business? What are the Federal and State legal compliances that need to be taken into consideration as well as accomplished? Should the materials provided to interested investors “over-disclose” to limit liability regarding the sale of private securities? Are there any “blue sky” laws that need to be complied with? Is the timing right for the business and the general economy as well or should the offering be postponed? Should the business first be restructured to bring enhanced value to the offering? The list of questions can go on and on.
NWX works with owners to answer the necessary questions, providing the expertise to navigate through the many complex procedural and compliance issues, as well as advise on all the strategic concerns and opportunities of a private offering of securities. Specifically, NWX believes an accurate though aggressive valuation needs to be conducted and backed up with the appropriate financial documentation. To many times stock values of private offerings, especially for smaller companies are undervalued because either the incorrect method was used or the valuation firm could not extract from the numbers ways to immediately demonstrate an future increase in margins, cash flows and assets as well as find acceptable ways to decrease liabilities. Next NWX contends, as in the sale of entire company, a marketing package needs to be created for interested investors with a detailed business plan that must dovetail with the private placement memorandum. All too often owners forget that the sale of private stock in an offering is a miniature version of a corporate sale, and to attract the right investors at the highest price the same due diligence and information should be provided that is needed to attract the right corporate buyer. Lastly, to NWX the overall structure of the offering as described in the private placement memorandum is vitally important as well as legally required; it provides the mechanisms to facilitate the investment of capital and the sale of private stock. Sophisticated investors want to be provided with a predetermined, efficient, and concise investment framework including information such as the offering and share structure, preferred stock designations, the risks involved, the use of the proceeds, the subscription agreement, and a summary of all pertinent company information.