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Balancing Act

Private financing promises quick cash, but beware of potential lawsuits.

Billy the kid's classic line about robbing banks because that's where all the money was needs some updating in the 1990s. Though times are changing, the sad fact is that for entrepreneurs, there's rarely money to be had from a bank.

That's why increasing numbers of entrepreneurs are turning to the private capital market to raise the cash they need. This market consists of venture capitalists, so-called "angels," and wealthy individuals, such as doctors and lawyers, who have some risk capital to spare.

There's a lot to be said for raising money privately. It can be done quickly (sometimes); there's no need for a full-blown Securities and Exchange Commission (SEC) registration statement, a document that can be insanely difficult and expensive to prepare; employees or officers of the firm can generally place or sell the issue themselves; and finally, for many, it is the only hope they have of ever raising any money.

But in the same way that old Billy the Kid never knew when he was going to run into a tenacious teller packing heat under the counter, so, too, are entrepreneurs at risk in their hunt for capital in the private equity markets. That is, you just never know when Dr. Smith is going to turn on you for real or perceived fraudulent action. And just as Billy stared down the barrel of many a six-shooter, so, too, might entrepreneurs find themselves looking at a lawsuit head-on.

Yes, indeed, according to attorney Ben Yankowitz, a partner with Heenan Blaikie, a Beverly Hills law firm that specializes in working with entrepreneurs and emerging companies. "There are definite legal risks to raising capital privately," he says. But, Yankowitz adds, common sense and good counsel can ward off a lot of that risk.

David R. Evanson, a writer and consultant, is a principal of Financial Communication Associates in Ardmore, Pennsylvania.

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This article was originally published in the February 1996 print edition of Entrepreneur with the headline: Balancing Act.

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