James E. Burk - Financing Your Small Business: From Venture Capital and Credit Cards to Common Stock and Partnership Interests

FinancingYourSmallBusiness

James E. BurkRichard P. Lehmann

Attorneys at Law

Copyright 2006 by James E. Burk and Richard P. Lehmann

Cover and internal design 2006 by Sourcebooks, Inc.

All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systemsexcept in the case of brief quotations embodied in critical articles or reviewswithout permission in writing from its publisher, Sourcebooks, Inc. Sourcebooks and the colophon are registered trademarks of Sourcebooks, Inc. All brand names and product names used in this book are trademarks, registered trademarks, or trade names of their respective holders. Sourcebooks, Inc., is not associated with any product or vendor in this book. Portions of this book were previously published under the title Financing Your Small Business.

First Edition: 2006

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

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Published by Sourcebooks, Inc.

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Library of Congress Cataloging-in-Publication Data

Burk, James E.

Financing your small business : from SBA loans and credit cards to common stock and partnership interests / by James E. Burk and Richard P. Lehmann.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-1-4022-2025-8

ISBN-10: 1-4022-2025-1

1. Small business--Finance. I. Lehmann, Richard P., 1966- II. Title.

HG4027.7.B8554 2006

658.15'224--dc22

2006030168

Printed and bound in the United States of America

VHG 10 9 8 7 6 5 4 3 2 1

Acknowledgment

We are grateful for the collaborative support we have received from our professional colleagues, clients, and students, past and present, in writing this book. Specifically, we would like to thank IBI Global for providing a teaching laboratory that enhances human potential and accelerates student learning capacity, and our wives, Katherine and Karen, for providing an environment in which we both can flourish.

With further specificity, we thank Tarby Bryant, Eric Delisle, Burke Franklin, Ike Gadsden, Herb Rubenstein, and Robert Johnson for their contributions. We are especially grateful for the contribution of Jay Winokur in Chapter 2 and Katherine Burk and James Harper III for their editorial work on all of the chapters. We also thank our law partner, Alan Reedy, for his suggestions and revisions that always enhance our work.

James E. BurkRichard P. LehmannWashington, D.C.

Contents

Sole Proprietorship

Partnership

Corporation

Limited Liability Company

Nonprofit Entities

Joint Ventures and Corporate Partnerships

Registered Agents

Choosing the State in which to Form Your Business

Qualifications for Starting a Business

Strategy

Developing Strategy

Business Plan

Feasibility Analysis

Structuring Your Business Plan

Consultants vs. Do-It-Yourself

What the Experts Say

Summary

Ownership

Corporation Equity

Warrants

Limited Liability Company and Limited Partnership Equity

Raising Capital in Stages

Bank Loans

Small Business Administration (SBA)

Credit Cards

Home Equity Lines

Retirement Funds

Life Insurance Borrowing

Financial Brokers

Reverse Mergers

Factoring

Revenue Participation/Royalty Financing

Merchant Banking

SBIC Financing

Private Debt

Combining Equity and Debt Financing

Understanding Securities Laws

Brief History of Securities Laws

The Rise of Rule 506 of Regulation D

Disclosure Requirements

The Sale of Securities and the Issuer Exemption

Integration of Offerings

State Securities (Blue Sky) Laws

Notice Filings of Securities

Rule 504 and 505 Offerings

Regulation A Offerings

Follow-up and Closing an Offering

Licensing

Franchising

Business Opportunities

Friends and Family

Angels

Venture Capital

What They Look For

Valuation

Angel Networks and Entrepreneurial Forums

Content

The Presenter

Learning to Close and When

Declining Money

Registered Agents

Initial Reports

Annual Reports

Money and Accounting

Signing Documents

Bank Accounts

Corporate Governance for Corporations

Corporate Records

Corporate Governance for Limited Liability Companies

Attorneys and Accountants

Other Consultants

Sequence

Introduction

The idea for Financing Your Small Business came, in part, from the entrepreneurial seminars we have done in the past several years for IBI Global. While serving as faculty instructors, we have encountered literally thousands of students seeking to finance their small business. There have been successes and failures along the way. Many of the so-called failures learned from their mistakes and reinvented themselves, becoming stronger and wiser than before.

There are many reasons a small business may seek financing. If you are one of those people with an idea on a napkin, ready to seek fame and fortune, you may need to raise capital before you simply quit your day job and launch your business from ground zero. Among the things you may need at this point are:

a feasibility analysis to determine the viability of your idea;

corporate organizational documents (articles, bylaws, minutes);

a summary business plan (or at least an executive summary);

federal (and perhaps state) tax identification numbers;

a corporate bank account; and,

local licenses (if required).

If you have already started a business by using your own cash (sometimes called bootstrapping), you may need to raise additional capital to:

lease office space;

purchase office equipment;

develop a prototype of your product;

hire a president, chief operating officer (CEO), or chief financial officer (CFO);

design a logo to establish a branding and marketing program;

file for trademark or patent protection on intellectual property (IP); and,

pay yourself a salary.

The list could go on.

We have noticed that some of the books on financing a business focus on the narrower sense of the wordfinancing through debt. In this book, we address a broader sense of the term to cover both debt and equity. You can finance your business by borrowing, selling a part of the company, or a combination of both.

Our goal in writing this book is twofold. First, we want to provide you with a variety of simple techniques and resources to increase your chances of obtaining financing. Second, we want to provide you with the benefit of our experience in this field to help you avoid some of the pitfalls that can derail your business and steal your time.