Private Placements OTOH – Four TrapsApril 18, 2014 – Articles
We continue to get questions and comments on the private placement technique of raising funds for your vineyard or winery. Yes, it’s a much more simplified way to get funding for new projects than it used to be. And, you don’t have the collateral and loan payment issues you have when you get funding from more traditional lending.
But, it is not without its complications.
We hear from “angels” (those investors with capital who are assumed by the SEC to be sophisticated enough that extensive public disclosures are not needed) that there are at least four major ways to complicate your private placement and cause them to shy away.
- Improper valuation of the company. Because these investments are much more informal than public placements, sometimes the valuation of the company – used to determine how much money gets you how much equity – can either be missing or faulty. This is especially true when the new private placement went first to family members and then to more sophisticated investors. The deals the family members already have must be honored when the sophisticated investor reviews the offering.
- Structure of the company. Situations arise when there are multiple companies and multiple personnel. Confusion can reign if the private placement blurs lines and complicates the view of the investor in exactly what the investment is. Is it all related companies? Does the key employee work for the company that is the subject of the investment? These complications scare off the sophisticated investor.
- Boards of Directors. What rights does the investor have in making key decisions of the company? Investors asked to fund large parts of the private placement often want to feel like they have a true role in how the company (and their investments) are managed.
- Liquidation and Stock Purchase. What happens when an investor wants out or when the company is on the rocks? Does the investor have any rights to participate in either event or make decisions about these events? What if the investor has contacts who may want to purchase shares if they become available? Most savvy investors want these investments to be liquid and need to understand how to trade or liquidate their interests.
As with most silver clouds, the private placement has its dark linings. You need to visit these issues up front when you structure exactly what you plan for your offering.