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Looking for startup capital? Organize before asking for cash

By LISA MONTI

Raising capital for a startup is different for each entrepreneur and venture, but starting out on the right legal footing is a sure way to help smooth the process.

Matthew McLaughlin, a shareholder and member of the Emerging Companies Team at Baker Donelson in Jackson, goes through a check list when he counsels clients on preparing to raise money. “Are your corporate documents in good shape? Have you addressed intellectual property matters? Do you have an employee handbook? All of these things that can create risk downstream, you better have taken care of on the front end, before you go sit down with a banker or investor,” he said.

The fewer the legal risks, the better bankers and investors like it. “They are not just going to lend you money or cut you a check without doing some degree of diligence on the business or the company,” McLaughlin said. “Investors and banks don’t want any lingering risks that they perceive would impact the ability of the business either to pay a loan back or provide an investor with the yield they’re looking for on their money.”

Beware, then, of do-it-yourself incorporations and other shortcuts that might raise red flags for lenders. “That is one surefire way to get off on the wrong step. When you’re raising money there’s an expectation from the bank or investor’s perception that your corporation has been formed in the proper manner and it addresses management issues or what happens if somebody does something they’re not supposed to do. A lot time these self help remedy products are less than adequate in addressing those type issues,” he said.

Paying for legal advice might be something entrepreneurs aren’t willing to do, but McLaughlin said it’s worth it in the long run. “The perception is lawyers are expensive but my response is you can’t afford not to have us. I can tell you with a fairly high degree certainly if you have engaged a corporate lawyer to help organize your company in the proper way, you are going to have much higher degree of success raising money than not,” he said.

Borrowing from a bank for a startup is challenging anyway because there is no real property asset such as a building or equipment to offer as collateral.

“Early on where there’s not a lot of assets, you’re probably looking at bringing in some sort of equity investor. That triggers a different set of analysis,” McLaughlin said. “What are you willing to give up? Are you willing to give this person any management rights? Are they going to be common equity or preferred equity? How are you going to value the company? If they are putting in half a million dollars what are they going to get? Ten percent or 25 percent?”

Finding a bank is easy but identifying investors isn’t always. McLaughlin said they’re out there in Mississippi and beyond, and lawyers can help entrepreneurs connect with them.

In general, McLaughlin advises entrepreneurs to put up their own money – cash, credit cards or loans – to get things going. “If you’re not willing to put your assets at risk, that says you really don’t believe in what you’re doing,” he said.

Secondly, he advises, enlist family and friends to help fund your venture.

“Most people can piece together enough money to seed their idea just from friends and family. It’s usually where people start for equity investment. As the business grows you may need more mature capital or more institutionalized investors. Maybe an angel, a high net worth individual, or maybe a venture capital type firm that has an appetite for your particular product or service. Ultimately you become bankable and can go get a bank loan,” he said.

The ultimate goal is to get to a closing where your business is getting funded.

“My belief is if you have got a good product or service and you’re organized about it and have addressed potential risks, then you identified issues about your business and have dealt with those, then you can absolutely raise money in this environment,” McLaughlin said.

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About Lisa Monti

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