Preparing for a capital raise and high-level process insights provides a high-level summary of the capital raise process and highlights key factors to consider when preparing for a capital raise.
There comes a time in a business’s operating lifecycle where there may be a need to source outside capital. The timing of this need is very different for each underlying business and is typically influenced by key operational challenges that most early-stage businesses are forced to overcome at the onset of their venture (including product/technology development, inventory constraints, hiring of additional human capital, enhancing marketing/advertising, etc.). Unfortunately, there is no definitive reason to how or why these challenges occur and more often than not, the timing is often unpredictable.
When early-stage businesses find themselves at this unique juncture, some elect to bootstrap their way through the adversity while others seek outside investment for cash and/or strategic purposes. Section 2 is designed to offer general insights into the capital raise process while also highlighting various things to consider when preparing to take on outside capital investments.
Please note: there is no “one-size-fits-all” strategy for raising capital with each process being independently unique (typically differentiating from one another on a basis of operational maturity, human capital expertise, sector/vertical focus, technology and cash-flow generation, varying levels of investor interest) and no two outcomes are exactly the same. As a result, the following section is intended to offer high-level insights that are directional in nature and not definitive.
Prior to a company exploring its capital raise prospects, it is important to understand the structure of a typical process, key events that occur at each phase of the process and the level of detail/work involved. Figure 1 provides a hypothetical summary of what could be expected when venturing into a more traditional capital raise process and the underlying tasks that correspond with each stage.
Setting the stage: Upon realizing the desire and/or need to raise outside capital is appropriate and will support the company’s current and future growth initiatives, it is imperative that the company’s objectives are clearly defined. Thoughtful preparation is critical at the onset of this phase as the details compiled will eventually evolve into the basis of your overall strategy and support your efforts throughout all subsequent stages of the capital raise process.
Key points to consider:
Preparing the materials: It is important to note that the later the capital raise (i.e., Seed and Series A – D), the more detailed your summary materials will need to be. Venture capital firms take more of an institutional approach to their diligence and expect entrepreneurs and business owners to present investment summaries in a more detailed format. This information is generally presented in what is called an Investment Opportunity Summary, which consists of 10-15 slides that cover key aspects of the business and industry. Each summary should be customized to the underlying business, but the following list captures common topics that are typically part of due diligence during preliminary assessments and will allow investors to gain a clear understanding of your business.
(Note: the following sample outline is more applicable to early/late-stage VC audiences):
With the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), proactive tax planning and diligence continues to be a critical component for any transaction process. Careful consideration should be made regarding the tax impact raising capital may have on the business or the existing shareholder(s).
While the tax impact of an equity raise is dependent upon the individual facts and circumstances at play, there are some general topics to consider. You should consult a tax advisor when contemplating a transaction of this nature to review the relevant fact pattern.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.