Should You Start A Company

As I get questions from readers from my Ask The Chief Dragon Slayer Campaign, I will take some of the questions that I think might have a broad audience and post them here on the blog.

This one is filed under “Dragons – Fundraising: Can I Spend The Investor Money As I Get It?”

Question:

Thanks for your comments about accredited angel investors. It was very helpful. We just finished your business plan and are starting to pitch our deal to angel investors and venture capital. Since we are already spending money on buying stuff for the company, can we start spending the investor money as we get it?

Steve

Answer:

The first thing you need to buy is a big sword – so you can fight off all the dragons that are getting ready to hatch! Firstly, you didn’t say – but I hope you have a Reg D PPM for a LOT of reasons. Please see FundRaisingDocuments.com

One of the things that should be covered in your Reg D PPM is how you handle investor funds as you receive them. For every successful offering I have ever been involved with or even watched from the sidelines, the money is ALWAYS escrowed as it is collected. That means that the money is deposited in a separate, untouchable escrow account UNTIL all of the minimum level of funding is reached. None of it goes into the company’s operating account until then.

Why?

If you are raising $1 million as an example, the investor who gives you the first $100,000 is going to be as protected as the investor who gives you the last $100,000 if it is all escrowed. If, instead, you spend the first investor’s money on starting the company while you are still trying to raise the rest, he is at substantial risk:

• You business plan is built around having a total of $1 million in order to successfully implement the plan.
• If you are unsuccessful in raising all $1 million, it means you can’t implement the plan.
• Which probably means you will run out of cash and go out of business AFTER you have already spent the first investor’s money!

Even semi-sophisticated angel investors understand this and you will find it virtually impossible to raise your funding for your start up company unless the funds are escrowed OR you get all $1 million, in our example, from one group. In that case, they can ensure the same thing: full funding before you start using the money.

If you don’t have a PPM, get one. If you already have a PPM, make sure it has the escrow language in there. It’s hard enough getting angel investors to write a check that will clear the bank. Don’t make your task even more difficult!

Ask YOUR QuestionGo to www.StartUpCompanyQuestions.com and ask your own question. You might see it answered here – and you will get invited to a FREE teleseminar and webcast on the “Top 21 Questions Entrepreneurs Want to Know MOST about Start Up Companies!”

Robert Lee Goodman, MBA
Ceo & Chief Dragon Slayer
www.CeoResource.com

PS: Next month I will be releasing a new Audio E-book Coaching Series, “Funding ForePlay – Getting Ready to Romance the Money For Your Start Up Company.” In addition to the multiple-module audio, you will get the ten real life sample documents (over 300 pages) that you can use as guides to develop your own “must have” ten documents – that you NEED before you are REALLY ready to romance the money. You can use these ten documents as templates for your own documentation base to help ensure that you competently and legally raise the funds for your new company.

I will be offering the first 500 copies at less than half the regular price of $795. If you are one of the first 500 paying clients, you can get all the audio modules and all the sample documents which are discussed in detail with the audio e-book for only $395. If you hired me to work with you individually to provide this same level of information, the cost would be well over $10,000. Now, you can get the information, insights and sample documents you need for under $400 IF you are one of the first 500.

After 500 copies are sold, the price WILL go to $795. I haven’t set up the shopping cart for pre-pays yet. However, if you want to make sure you are one of the lucky 500, send me an email with the subject, “Make me one of the lucky 500″ and I will let you know if slots are still available and how you can pre-pay directly and reserve your copy.

Posted February 1st, 2008 under Dragons - Fundraising, Funding Foreplay, Start Up Companies, Start Up Company Workshop, StartUpQuestions.com. Tags: accredited investors, angel investors, audio e-book, business plan, coaching, escrow, fund raising, Funding Foreplay, fundraising, investors, ppm, reg d, risk factors, securities law, start up, startup, startup company risk factors, vc
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