As I get questions from CEOs and entrepreneurs at my blog, I will take some of the questions that I think might have a broad audience and use them as an article.
Question:
We just finished our 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?
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.
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:
- 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.
- 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!
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!
Bonus: For more on funding documents, business plans, articles, tips and tools for entrepreneurs and start up company CEOs, you’re invited to visit my blog and web sites…and ask your own questions…
While there, I invite you to download both a sample comprehensive business plan and a complete Reg D private placement memorandum (PPM) for FREE…
While there, I invite you to also download a free 36 minute audio on Funding Foreplay: A four module audio training course that is designed to teach 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…
http://www.ShouldYouStartACompanyToday.com <~~~ The Blog + Free Sample Business Plan / PPM / Audio / More…
http://www.StartUpCompanyUniversity.com <~~~ Courses for the entrepreneur and start up CEO
http://www.ChiefDragonSlayer.com <~~~ Business Plans and Business Planning
Robert Lee Goodman, MBA, Ceo & Chief Dragon Slayer…
© 2008 – Robert Lee Goodman. All Rights Reserved Worldwide
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