What is a Private Capital Raise?
A private capital raise is a way to secure business funds from private investors instead of via public stock markets. Although it used to be common for companies in need of financing to borrow money from banks, a large number of funding occurs in private markets.
One of the biggest advantages of private capital raising is that it lets companies negotiate more favorable terms than what’s available in public markets.
Read the rest of this article to explore how a private capital raise works, how to structure a private capital raise, its advantages, and how a lawyer can help you through this process of raising capital for your business.
How Does a Private Capital Raise Work?
The steps to follow when setting up a private capital raise typically involve the following.
Pitching to Investors
When pitching the raise to investors, you want to be clear about what problem your business is trying to solve and how this private capital raise will provide a solution.
You should also try to showcase your market potential to appeal to investors.
Networking
For private capital raising, it’s important to network and build relationships with investors. When you have a strong rapport with investors, this will make it easier to reach out to them when your company is ready to start raising capital.
Selecting Investors
There are various types of investors you could collaborate with for a private capital raise, such as:
- Angel investors. These are people who provide industry expertise, so they are likely to invest in early-stage companies.
- Venture capitalists (VCs). They inject larger funds into businesses with high growth potential.
- Private equity firms. It’s common for these investors to invest in older companies who want to expand.
- Family offices. These investors typically manage high-net-worth individuals. They can behave like angel investors or VCs depending on their sophistication.
Investor Due Diligence
When investors are secured for the capital raise, they will get the chance to scrutinize the company’s finances and legal documents so they can finalize the agreement.
Drafting the Investment Agreement
Once the deal is finalized, an investment agreement needs to specify all investment terms, how much money is being raised, and what rights investors have. To ensure the agreement is transparent and legally sound, you should request a lawyer to draft it.
On ContractsCounsel, one of the largest online legal marketplaces, you can ask a vetted, experienced lawyer to draft the investment agreement so that it’s professionally done and avoids hidden risks. Here’s how to request assistance:
- Go to the ContractsCounsel marketplace.
- Post your request for an agreement drafting.
- Receive lawyer bids. Lawyers on the platform will send you multiple bids you can review.
- Review lawyer profiles. You can research the lawyers according to data on the platform, such as their expertise, years of experience, client reviews, and previous projects they’ve completed.
- Choose a lawyer who matches your requirements and hire them for the project.
How Do You Structure Your Private Capital Raise?
Companies might choose one of the following ways to structure the private capital raise:
- Equity financing. This is when a portion of the company is sold to investors for capital. The risk for company owners is that they’ll have to give up some ownership.
- Debt financing. This is when capital is borrowed from investors that will be paid back with interest at a later stage.
What are the Pros of a Private Capital Raise?
Raising private capital has various advantages to know about.
- It provides companies with quality investment opportunities. This is because companies can interact with a select number of investors instead of dealing with highly competitive public markets.
- It gives investors more control over the investments. Investors usually have more of a say in the terms of the investment, enabling them to be more engaged with the company.
- It secures stronger relationships between companies and investors. By building strong relationships with investors, companies can have successful investments and even secure future resources.
- It enables faster decision making. As compared to public markets, private capital markets offer a more streamlined process because they have more flexible terms and move faster. This can help your company raise money quickly.
- It can result in higher returns for investors. Since private capital raise enables investors to take early risks, if the company grows they can benefit from it.
How Does a Lawyer Help You with Private Capital Raise?
Working with a qualified lawyer to raise private capital is beneficial. Here are some ways in which a lawyer will help you through the process.
- A lawyer will help you select the best way to raise money so that you avoid tax and other issues.
- They will draft and review all legal documents so that they’re legally sound.
- They’ll keep you compliant with all applicable laws so that you don’t make costly mistakes.
- They’ll negotiate voting rights, liquidation preferences, and other issues with investors for fair, favorable terms.
- They’ll protect company founders from losing too much control, such as by changing aggressive investor terms.
- They’ll prepare contracts and all relevant company documents for investors to conduct due diligence. This will reduce delays in the process.
- They’ll prevent disputes, such as by covering all your bases so that there are no misunderstandings that can lead to legal disputes.
Where to Find a Lawyer for Private Capital Raise
If you need to work with a lawyer for your private capital raise, you can find one on ContractsCounsel. Instead of having to do research into local lawyers or cold-calling traditional legal firms, the online platform puts you in touch with a range of lawyers who can help you.
Search for the right lawyer for what you require by reviewing the lawyers’ profiles, such as their education, expertise, years of experience, and client ratings for previous projects they’ve completed on the platform.
