When Jeff Behrens thought about expanding his Newton,
Massachusetts-based computer systems management firm, he knew
he'd need a cash infusion. "We're doing about one and
a half million in annual sales, but cash was always tight,"
says Behrens, president of The Tulluride Group Inc., who discovered
that private sale of stock could be a low-cost source for growth
capital and expertise.
Public vs. Private
Entrepreneurs are often lured by the appeal of selling stock on
the open market: Instant cash realization with no debt to repay.
But most are not in a position to go public with the complexities
of a public offering-especially in an uncertain market, when a
successful IPO is far from guaranteed.
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A more practical option is selling private equity stock to a few
people who have confidence in your product. There are no investment
bankers or financial consultants to worry about, and you can
maintain the control associated with a privately held company, all
while reaping the advantages of instant cash and no debt. An added
bonus is the potential to bring others' expertise to your
venture. "In addition to raising expansion capital, selling
stock to private individuals allowed me to tie the investors
tightly to the company and benefit from their advice and counsel on
growing the business," says Behrens, 34.
Why would an investor choose your private stock over a hot IPO?
Their direct access to you and your company puts them in a much
better position to effectively evaluate the risks and rewards of
their investment.
To Sell or Not to Sell
You should ask yourself two questions to determine whether a
private equity sale is right for your company. First, is there any
market for your stock? Understand that investors will want to know
specifically how you intend to use the money and what type of
return to expect, as well as a timeline.
67%
of investment industry professionals say the
Enron scandal has prompted them to increase their due
diligence.
SOURCE: Wall Street Reporter
Magazine.
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"Selling stock is a great way for a growing company to
raise money it needs to succeed," explains J. David Washburn,
a Dallas attorney who advises entrepreneurs on practical and legal
issues surrounding selling private stock. "But your company
must be in a growth position in order to attract private
investors."
Washburn says plans to inflate your own salary or pay off old
debts with investors' money will not snag any investors.
Rather, you must first bring the company to a level where the
investor will have confidence in the potential rewards from the
investment.
Second, are you willing to give up a little control in exchange
for equity? Selling private stock also carries responsibilities for
your new shareholders. They will have the right to elect directors
of the corporation, inspect books and records, and, depending on
the set agreements, vote on major corporate decisions, such as
selling assets.
"Raising money sets certain expectations about future
company growth and plans," says Behrens. "[Once outside
investors are involved,] it is no longer a personal lifestyle
business-the owner now has fiduciary responsibilities to the
investors."
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