The risk of major penalties to you and your company are just too great to do this wrong. Look at what happened in this one case:

Commission Halts Unregistered Activity
By Semisub, Inc., Curtiss E. Jackson and Joshua M. Heller

Harrisburg, PA, 03/21/2008 — To halt the offer and sale of unregistered securities in Pennsylvania, the Pennsylvania Securities Commission issued a Summary Order to Cease and Desist against Semisub, Inc. (Semisub), an entity with an address in Westlake Village, California, Curtiss E. Jackson (Jackson) and Joshua M. Heller (Heller), individuals also with an address in Westlake Village, California. Jackson was Semisub’s chief executive officer and chairman; Heller was a “private equity associate” of Semisub. Semisub was in the business of developing, owning and operating proprietary semi-submersible vessels for the tourism industry and was offering for sale shares of common stock (Stock).

In or about February 2008, Heller telephoned at least one Pennsylvania resident (PA Resident) and offered the Stock for sale. Heller stated that Semisub is looking for investors interested in making “huge” capital gains in the “not so distant future”; that the minimum investment in the Stock is $50,000; that the total offering is $8,000,000; that each share of Stock costs $1.00; that the return is 7 – 10% based on Semisub having one vessel in the water doing business, but once Semisub has four vessels in the water, the return increases to 54%; that Semisub plans to go public; that Heller’s sales commission as a “private equity associate” is around 8% for the sale of the Stock; and the PA Resident would not be expected to do anything else to invest other than to send a check.

In or about February 2008, Heller sent offering materials (Materials) on behalf of Semisub, including a Private Placement Memorandum and a Subscription Agreement, to the PA Resident via overnight mail. The Materials state that Semisub will use investor funds to expand vessel construction and for capital purposes; that Semisub is offering 8,000,000 shares of Stock for a price of $1.00 per share; that Semisub has completed raising approximately $5,800,000 of the $8,000,000 offering to date; and that a 12% rate of return is expected for the Stock during the first year.

In or about February 2008, Heller telephoned the PA Resident and stated that the PA Resident could invest $25,000. The PA Resident had no substantive, pre-existing relationship with Semisub, Jackson, or Heller. The PA Resident was not an accredited investor under Rule 501 of Regulation D, and did not have sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the investment.

The Commission ordered Semisub, Inc., Curtiss E. Jackson and Joshua M. Heller to stop offering and selling the Stock in the Commonwealth of Pennsylvania, in violation of the Pennsylvania Securities Act of 1972, and in particular Sections 201 and 301 thereof.

Any further solicitations or sales made by these respondents in Pennsylvania will constitute violations of the 1972 Act and the Commission’s Orders. Any person who is solicited by or has information about these respondents is asked to immediately notify the Pennsylvania Securities Commission by calling 800-600-0007.

Full details at PA Securities Commission Website

The services of Start Up Company University can help you avoid this kind of attention and action. Sign up now for the Funding Foreplay Audio Course. It will teach you how to properly raise the investment funding you need for your own start up company. If you need 1:1 mentoring, coaching or management consulting, please reserve an hour or two at www.StartUpCompanyMentoring.com.

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Funding Foreplay is a four module audio training course that teaches start up company CEOs like you – how to properly prepare and present the dozen documents you must have to successfully romance and seduce angel investors and VC to invest in your company.

I’ve condensed and distilled down the techniques that have taken me three decades to acquire and fine tune with my own real companies and my own real deals. Funding Foreplay includes over five hours of audio – and over 390 pages of real life, highly confidential, documents you can use as guides for your own dozen documents.

The introductory price of Funding Foreplay will double after the sale of the first 500 courses. You can learn to speak the language of investor love and grab Funding Foreplay at half the price…if you hurry.

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Click on www.FundingForeplay.com to see how this audio course will help get your own new company started and funded…and so you can grab the half price offer while it lasts.

Wishing you stellar success for your start up company,

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

PS: While you’re at the www.FundingForeplay.com site, be sure and find the link to the coupon that will get you a 100% discount on the entire Module 1 audio for Funding Foreplay – if you’re one of the first 1,000 to request it. I really hope you are one of the lucky ones.

This one is filed under “Dragons – Fundraising: Can I Use Investor Money To Pay Me Back?”

Question:

Love the blog! Finally someone answering real life startup company questions! I want to raise $1.8 million for my computer business to take it to the next level. Can I use $250,000 of the $1.8 million to pay me back the money that I have already invested in getting my company started?

Thanks again!

Walt

Answer:

This is one of the most frequent questions I get from clients: Can I get back all of my money that I have invested so far in starting my company from the new investment dollars I get from angel investors or venture capital?

The short answer is almost never.

• Most will see it as a red flag and not invest.
• Most want to see you so committed, financially, to the company that you can’t afford to let it fail.
• If you don’t get paid back, then the company only needs $1,550,000 instead of $1,800,000 to accomplish the same goals that are in your business plan.

The longer answer is maybe a little.

• Sometimes…not often…but sometimes…you might be able to pay yourself back some…or have the company assume, say a working capital loan you took out….or assume responsibility for a second mortgage on your house where you can document that all the funds went into the company.
• The other way that sometimes works is with direct payments to others that you’ve made. For example, say you hire that great consulting firm, Ceo Resource, to help your start up consulting, business plan and PPM prep work. Let’s say, you have already paid them $10,000. What you might do is list Ceo Resource as a start up expense in the start up expenses table even though you have already fronted the payment for their incredibly worthwhile fees. In this case, you turn in the receipt after the funding like an expense report…you have accounted for the expense on the start up costs table…so the numbers balance. However…if you are going to do this…be sure and disclose it in full and glorious detail in the PPM.
• Obviously, the bigger the amount you want back to you, the more resistance from prospective investors.

There are always exceptions….a client in Chicago insisted their board members, who were their first round investors, get back $1 million in start up funding of the $2 million they had invested. I jumped up and down strongly advising against it for the reasons that I just mentioned…but the client always gets the final vote. They did allow me to totally disclose the payback in the PPM I did for them.

So, what happened? They sold the whole $5 million deal out to the first investment group who saw the deal…and the board members got their $1 million. The company had such good traction on a product that was already in the marketplace that the investment group agreed to the terms. So, even with all of my experience, I can be wrong. However….it is the only time that any client in 30 years has ever pulled out more than $100,000. Ever.

Don’t count on being an exception.

All of this brings up another issue for those of you who are going to be seeking investor funds.

• You will only have one shot with most prospective investors. They are not shopping at Baskin Robbins – you can’t offer them 31 flavors of your deal.
• For example, like we were just discussing – how much, if any of your own seed capital should you try and get back in your offering?
• You might be tempted to give it a try…trying to get back all your money with the idea that you can negotiate if anyone brings up the issue.
• The problem is that you probably won’t have the chance…prospects will just tell you they are not interested…or even more likely, “It just doesn’t fit our criteria at this time….” Meaning you probably won’t often get a real voiced objection. Just another no. And no chance to have a discussion for renegotiation.

So, you pay your money…you take your chances…..but you want to do all you can to GREATLY increase your chances – so be sure and structure your investment offering right the first time!

Ask YOUR Question

Go 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.

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.

This one is filed under “Dragons – Fundraising: What Are Accredited Investors And Why Should I Only Raise Money From Them For My StartUp Company?”

Question:

I’m getting ready to raise $2 million for my startup real estate company. I’ve finished my business plan but a friend of mine said I should only talk to accredited investors. I’m not exactly sure what an accredited investor is and I don’t understand why I can’t talk to anybody I want to about investing in my company? Please make this one of your questions for your teleseminar.

Thanks,

Mark

Answer:

Thank you for submitting your question at www.StartUpCompanyQuestions.com. There are several critically important implications and potential dragons I gathered from your question. Since I want to keep you from battling some very vicious dragons as a result of your upcoming actions, I am answering it now so you don’t have to wait until the next teleseminar.

The term, accredited investors, has to do with securities laws – both federal and state – and making sure you comply with the very onerous restrictions that go with the fundraising for your start up company. I’ll give you both the short and long answer to what an accredited investor is in a minute. But the first thing you need to know is that if you raising capital from angel (AKA private) investors, you will almost certainly need more than just a business plan. You need what’s known as a Reg D Private Placement Memorandum – PPM – in order to comply with federal and state securities laws.

If you plan on pitching your deal JUST to traditional venture capital, you do not need a PPM. However, well over 95% of start up companies are too small, too embryonic, to hit the threshold funding levels, growth levels and potential market caps to attract VC funding. Hence, over 95% of start up companies will seek their funding from private investors. Hence, over 95% will need a Reg D PPM.

Reg D is a securities law exemption for private placements that allows companies to raise investor funds without all the costly and overwhelmingly onerous legal and accounting requirements of a public offering of stock. To qualify for the Reg D exemption, you have to follow VERY stringent rules. One is having the PPM. Another is not soliciting the general public (this is a biggie.) Another is only pitching the deal to those investors who can really afford to take the risk and lose their money. Hence, they need to be accredited. It actually gets more complicated in that you can usually offer your deal to up to 35 unaccredited investors with most offerings, depending on how they are structured – but trust me when I say that you are better off sticking with the more sophisticated accredited investors.

If you want more detail on it, check out my web site at www.FundraisingDocuments.com – there you can see why you want to do this, some of the onerous penalties for not doing this (e.g. possible but not probable jail time), and the full listing of Reg D I got from the SEC. Also, from that same page, you can jump to the definition of an accredited investor.

Also, 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.

Ask YOUR Question

Go 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: I am NOT an attorney…I am not an accountant…I am an MBA and strictly a business adviser and coach. All my advice and recommendations are strictly from a general business perspective…and I strongly advise you hire competent professionals for all of your legal, tax and accounting questions.