Comprehensive FAQ: SPAC Sponsorship & SPAC Mergers

We’ve compiled many of the questions we’ve been asked surrounding SPAC Sponsorship, SPAC Mergers, and general SPAC questions into one comprehensive FAQ.

If you’re looking for additional SPAC resources, download our:

SPAC Sponsor Handbook ►

SPAC M&A Handbook ►

ClearThink Capital + SPACs

ClearThink Capital offers advisory services to both Sponsor Groups or those looking to form a sponsor group, and companies seeking to merge with a SPAC. Learn more ►

Our Expertise

ClearThink Capital has extensive experience and expertise in SPACs and M&A. One of our principals worked on the first SPAC and negotiated the structure and related rules with the SEC in 1991 and 1992.

ClearThink and its principals have advised multiple sponsor teams and potential sponsor teams through the labyrinth of decisions, regulations, structures, and professionals, as well as represent target companies in executing their business combinations with SPACs.

ClearThink Capital has extensive experience advising operating companies through the decisions, regulations, structures, and professionals required to effect a M&A transactions, including Business Combinations with SPACs.

SPAC’s are highly complicated entities and proper guidance is a gating factor to successfully completing a SPAC IPO or Business Combination.

SPAC Sponsorship

How much capital does a SPAC Sponsor need to put up?

Historically, SPAC Sponsors needed to raise an amount to serve as risk capital or “sponsor capital” equal to between 3% and 5% of the projected public capital raise for the SPAC. Of the sponsor capital, the initial underwriting fees of 2% of the SPAC and the costs of the IPO will be deducted at the closing of the IPO, and the remainder will be utilized during the duration of the SPAC as working capital for compliance and costs associated with identifying a target for the initial business combination.

Today, as the proliferation of SPACs has resulted in the SPAC market becoming more competitive and institutions demanding revised terms, we advise sponsor team to seek sponsor capital equal to up to 7% of the projected public capital raise for the SPAC, as there may be requirements to overfund the trust established for the benefit of the public investors in the SPAC and to pay for time extensions resulting from shorter SPAC duration.

Can I create and sponsor a SPAC to roll up a number of companies?

Yes, with a number of caveats. Although there have been a number of exceptions, a SPAC is best used to make a single platform business combination followed by other business combinations. Whenever multiple companies are simultaneously or nearly simultaneously acquired, the level of complexity and the difficulty of valuation increases exponentially; notwithstanding this fact, a SPAC can be used to acquire multiple companies followed by a roll up.

Do foreign sponsor investors affect the IPO raise?

The quality, domain expertise, and domain access of the team has far more impact than the nationality. While there are certainly institutional investors which have jurisdictional preferences, as a result of which individual institutions may pass on participating, the SPAC investor marketplace is experiencing extremely robust growth and team nationality should not materially affect the IPO raise provided that their investment premise is consistent with the domain expertise and access and expressed business combination target preferences.

Do you need public company experience to run a SPAC?

Yes. As the SPAC is a public entity, failure to have at least one sponsor manager with public company experience would likely materially adversely affect the ability of the sponsor team to effect the SPAC IPO.

What is the lock up period for sponsors?

All of the sponsor shares issued and outstanding prior to the date of the SPAC IPO are generally placed in escrow with a trust company or transfer agent, as escrow agent, until:

(1) with respect to 50% of the sponsor shares, the earlier of six months after the date of the consummation of the initial business combination and the date on which the closing price of the common stock equals or exceeds a predefined public closing price per share (as adjusted for share splits, share capitalizations, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing after the initial business combination and

(2) with respect to the remaining 50% of the insider shares, six months after the date of the consummation of the initial business combination, or earlier, in either case, if, subsequent to the initial business combination, the SPAC consummates a liquidation, merger, share exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares for cash, securities or other property.

What are the differences between the classes of shares?

Although there are several structures currently in use in the SPAC market, the only functional differences between the shares held by the sponsors and those held by the public investors are as follows:

(i) sponsor shares are subject to restrictions on resale until some period after the consummation of the initial business combination, while the public shares have no such restriction (assuming they are held by non-affiliates if the SPAC)

(ii) the shares held by the public stockholders are entitled to the benefits of the trust established with the IPO proceeds and may seek redemption in the case of the consummation of a business combination or will receive their pro rata share of the trust in the event of the liquidation of the trust, while the shares held by the sponsors are not entitled to the foregoing rights

(iii) the shares held by the sponsors must be voted in favor of a business combination, while the shares held by the public holders may be bored as determined by the holders of such sares.

How do you pick the right underwriter, lawyers, and accountants for a SPAC?

When we assist sponsors in selecting investment bankers, we look at the following factors:

  • firm reputation
  • industry expertise and connections with fundamental investors focusing on the industry segment focused upon by the SPAC sponsor team
  • transaction size vs firm transaction size history and capability
  • firm transaction pipeline
  • firm history of successfully completed SPAC transactions

When we assist sponsors in selecting lawyers and accountants, we look at the following factors:

  • firm reputation
  • SPAC expertise
  • industry expertise
  • institutional acceptance
  • firm transaction pipeline

Can I target companies outside of the United States?

Yes

How are the underwriters paid?

Generally, investment bankers receive a commission of 5.5% of the SPAC proceeds, of which 2.0% is paid at the closing of the SPAC IPO and 35% is paid upon consummation of the initial business combination.

How is the SPAC management team compensated?

Generally, the SPAC management team is not compensated. The sponsor, of which management is generally a part, received a 20% equity carry in the SPAC (e.g., shares equal to 25% of the shares sold in the SPAC IPO) and additional securities purchased by the sponsor in exchange for the sponsor capital.

How much does it cost to go through the SPAC IPO process?

While costs can vary, we advise sponsor teams to budget $1 million.

What is the typical makeup of a SPAC management team?

A SPAC management team requires one or more individuals with the following skill sets:

  • extremely deep domain/industry knowledge and access
  • public company experience
  • merger and acquisition experience

Ideally, the team also includes one or more individuals with prior successful SPAC experience.

How many investors can participate in a sponsor round?

While there is no limit other than those ordinarily associated with private placements in the United States to accredited investors, the greater the number of investors, the more complicated amendments in response to market developments may be.

What happens if the management team needs more time to complete their acquisition?

Some SPACs have built in extensions, where they can invest additional capital monthly or quarterly into the trust to extend their duration. If a SPAC does not have built in extensions or must extend past their extensions, they can request that their shareholders approve their extension.

Due to the large number of SPACs seeking targets, it has become increasingly more difficult and time consuming for SPACs to complete their business combinations.

If a SPAC sponsor team is unable or reluctant to provide the capital to extend themselves, they turn to outside investors to raise this capital. This is referred to as “Extension Financing” or “SPAC Extension Financing”. Learn more about extension financing ►

How much capital does the management team themselves have to put up?

As much as possible. Institutions recognize that the more “skin in the game” a management team has, the better.

SPAC Mergers

What size does my company need to be to merge with a SPAC?

As a general rule, an initial business combination target needs to be valued no less than 3x-5x the amount of proceeds held in the trust. For example, if a company is seeking a $100 million SPAC with which to merge, the company must have at a minimum a $300 million to $500 million value.

What steps do I need to take before approaching considering a SPAC merger?

Our SPAC M&A Handbook ► outlines these steps.

What role do the sponsor investors have once the merger is complete?

Sponsor investors are generally solely stockholders and warrant holders following the consummation of the initial business combination. Sponsor managers may be requested by the acquired company management to continue in some capacity or may become unaffiliated outside investors.

What happens if the company merging in requires more capital than is in the SPAC?

In the event that the target of the business combination requires more capital than is in the SPAC, the SPAC will often structure a PIPE (private investment in public entity) which would close simultaneously with the consummation of the business combination in order to ensure that sufficient capital is available commencing at such closing.

Can my company only merge with a SPAC that targets our industry?

No. While SPACs often focus on a single or limited number of segments, they almost universally maintain the flexibility to look at other industries and segments.

What is more costly, a SPAC merger or an IPO?

In terms of cash alone, an IPO is generally substantially more expensive than a SPAC merger. If the dilution associated with the sponsor position in the SPAC is counted, it is difficult to say without analyzing the facts surrounding a particular transaction.

As a general matter, for other than the largest, most highly capitalized companies, the US IPO framework is outdated and largely broken. The general IPO process is premised upon the structure and view of the public markets in 1933. For nearly 90 years, the SEC has tried to update and improve the process with numerous legal amendments, rules, and policies, but the fact remains that the US IPO process is too time consuming, too expensive, and too risky for all but the largest, most highly capitalized companies. Indeed, even in the event of a “firm commitment” underwriting, there is no firm commitment until the underwriting agreement is executed the night before, or the morning of, the IPO.

Accordingly, notwithstanding the quality and investor interest in a particular IPO, external events such as terrorist incidents, market disruptions, etc., have the potential to cause an otherwise highly anticipated transaction to be terminated, while all of the associated costs remain the liability of the issuer. These costs can become existential threats to these companies. The SPAC, with its relatively short duration to business combination closing and limited roadshow, greatly de-risks the traditional IPO process.

ClearThink Capital offers advisory services to both Sponsor Groups or those looking to form a sponsor group, and companies seeking to merge with a SPAC. Learn more ►

General & SPAC Investors

What are the stages of a SPAC?

Our SPAC Sponsor Handbook ► outlines the stages of a SPAC

Why have SPACs become so popular?

As a general matter, for other than the largest, most highly capitalized companies, the US IPO framework is outdated and largely broken. The general IPO process is premised upon the structure and view of the public markets in 1933.

For nearly 90 years, the SEC has tried to update and improve the process with numerous legal amendments, rules, and policies, but the fact remains that the US IPO process is too time consuming, too expensive, and too risky for all but the largest, most highly capitalized companies.

Indeed, even in the event of a “firm commitment” underwriting, there is no firm commitment until the underwriting agreement is executed the night before, or the morning of, the IPO.

Accordingly, notwithstanding the quality and investor interest in a particular IPO, external events such as terrorist incidents, market disruptions, etc., have the potential to cause an otherwise highly anticipated transaction to be terminated, while all of the associated costs remain the liability of the issuer.

These costs can become existential threats to these companies. The SPAC, with its relatively short duration to business combination closing and limited roadshow, greatly de-risks the traditional IPO process for issuers, making them a preferred route to the public markets for many.

As a general matter, institutional investors keep undeployed cash in short-term US Treasury securities and other short-term instruments and are unable to assess fees against undeployed capital.

In the context of the SPAC, however, while the IPO investment made by institutional investors is deposited into the trust and invested by the trust into short-term US Treasury securities and other short-term instruments, the funds are deemed deployed by the institutional investor and fees can be assessed, making the SPAC a convenient vehicle to collect fees in a virtually risk-free setting.

What are the phases that SPACs go through? When it usually dips or bounces back, what are some of the major catalysts?

Many SPACs experience a decline in value between IPO and the announcement of identification of a target company for the initial business combination. Although the ability to receive redemption from the trust looms in the future, that certainty may be insufficient in the mind of investors sitting on the sidelines awaiting the announcement of the commencement of the initial business combination to maintain full value.

That being said, the value of SPAC shares pre-initial business combination would likely be discounted to reflect the perception of the public holders as to the likelihood of a successful business combination as well as by the value of the warrant included in the unit at the time of the SPAC IPO.

Generally, SPAC shares should trade better once a business combination is believed to be imminent, as the holders would, in the worst case, be close the time when they could request redemption from the trust.

What metrics or information should you look at the most when deciding which SPACs to invest in?

In our opinion, the most important factors in evaluating a SPAC would be, first and foremost, the sponsor team and their domain, M&A, and public company experience, independently and ideally together.

Additionally, a segment focus on an industry with a large number of potential, appropriately sized target companies for the initial business combination, and, assuming that the sponsor includes the SPAC management, a sponsor team which has made a material investment in the risk or sponsor capital.

As an investor, what would be the biggest red flags in SPACs?

In our opinion, the biggest red flags would be

  • a sponsor team without domain/industry expertise and access in the segment on which they are focusing
  • a sponsor team without M&A or public company experience
  • a great limitation on the number of potential target companies for the initial business combination in the size range appropriate for the SPAC
  • if the sponsor is also the management of the SPAC, management members with no “skin in the game” (e.g., that haven’t invested any sponsor capital or have raised the bulk of
  • the sponsor capital from persons or entities with whom they have no connection)

Do you see an increasing presence of the derivative market in the SPAC investing or will it remain with a select few companies?

While we have not seen an increase generally, given the popularity (and I believe the durability) of the structure, it is a possibility. I suppose that the issue is that SPACs are, by their nature, a short-term (generally 24 months or less) and uncertain (because of the unknowns regarding the initial business combination) entity, which makes pricing highly speculative as there are few operational fundamentals on which to rely.

Do you think SPACs are only popular temporarily because of the unique situation COVID brings? For example, some companies turn to SPACs for dire need of capital. Some turn to SPACs because a new imminent opportunity arose. Are SPACs here to stay? Or will they fade away once the world returns to normalcy?

No. we believe that SPACs are popular for three reasons:

  • the current US initial public offering framework is largely antiquated and in large part reflects a market that existed in 1933, which in today’s environment makes IPOs a highly expensive and risky proposition for issuers
  • the investment into an IPO is perceived by hedge and other funds as a fixed income investment because of the existence of the trust holdings in essence the entirety of the IPO proceeds in short-term Treasury or similar securities
  • hedge and other funds can connect fees from their investors for investing in SPACs, even when they might not be able to collect those fees if they invested in Treasury securities directly.

What are the most important factors when it comes to evaluating a SPAC, and where might one find some useful public resources for finding out more information about a SPAC that isn’t coming directly from the SPAC itself?

In our opinion, the most important factors in evaluating a SPAC would be, first and foremost, the sponsor team and their domain, M&A, and public company experience, independently and ideally together. Additionally, a segment focus on an industry with a large number of potential, appropriately sized target companies for the initial business combination, and, assuming that the sponsor includes the SPAC management, a sponsor team which has made a material investment in the risk or sponsor capital.

There are a number of sources for SPAC information and research available, although most of them do charge a fee.

With the massive amount of influx of SPACs, what makes this any different of a bubble then the ALT-coin mania happened when Bitcoin was 20k in 2017?

There is no doubt that there has been a massive amount of enthusiasm for the SPAC structure, particularly in the current cycle by hedge funds. The difference between this enthusiasm and the speculative enthusiasm of Bitcoin is the underlying value provided by the placement of the IPO proceeds into the trust.

Each public share of the SPAC is entitled at the earlier of the closing of the initial business combination or the expiration of the SPAC to receive their pro rata portion of the body of the trust (IPO purchase price plus interest at approximately the short-term Treasury rate for the duration of the trust). Bitcoin itself is not tied to an underlying body of assets providing certainty of value.

What did you think of the Muddy Waters description of the SPAC market and the bad management teams floating “hot garbage” on investors?

I do not believe the statement to be accurate. Like IPOs or any other transactions, there is a range of quality. As the SPAC market has become more crowded, institutional investors have favored quality management teams with deep domain knowledge over the less qualified teams which characterized many earlier SPACs.

With respect to the target companies, again, there is a range. Better management teams tend to be more demanding of the target companies, although given the proliferation of SPACs and the draconian consequences to the sponsor of not completing a business combination, there is only so far which a management team can push without becoming an unattractive merger candidate for quality target companies.

Given the fact that well over 100 SPACs have now entered the market roughly all at the same time in unprecedented fashion, to what extent do you think this will drive up deal values via SPAC vs. SPAC competition, thus hurting SPAC shareholders?

The proliferation of SPACs has not harmed the SPAC shareholders, but the SPAC sponsors. As sponsors have been forced to compete for hedge fund and institutional investor attention, terms have turned decidedly away from the sponsors and towards the investors: rights; over-funding of the trust, greater warrant coverage, shorter duration, etc. Deal values are relatively unrelated, other than the possibility of requirements to pay for rights on top of the $10/unit price.

Can you clearly lay out the advantages of a SPAC over an IPO for the Target company? It seems like the SPAC route only benefits companies that wouldn’t be attractive IPO candidates, and only those that are desperate or want an insanely high valuation would go with the SPAC.

The US IPO process is archaic; in fact, it is based principally on a view of the markets that existed in 1933. Accordingly, the SEC has spent the last 85+ years applying bandaids to a process that is too long, too slow, too expensive, and too risky when viewed from the perspective of all but the most highly capitalized private companies. Execution risk associated with a standard IPO is high for most private companies and the failure to close an IPO could be an existential threat to the company.

The SPAC provides a remedy: quick timeline; low risk; small/inexpensive roadshow; lower cost. Indeed, the capital is already in the trust and the capital risk is minimized with a conservatively priced transaction. The SPAC provides a welcomed accelerated and largely de-risked transaction. Large, highly capitalized companies will see fewer benefits, as the traditional IPO process does not require material expense or execution risk when viewed from their vantage point.

How much money does the management team walk away with after merger completion?

It varies dramatically based on the quality and pricing of the business combination and the relative bargaining power of the parties to the transaction.

From the point of view of the parties involved (not the general public investors), is there a reason to keep the share price from increasing too much until after the merger is completed?

Only with respect to pricing of the business combination. That being said, parties cannot ordinarily fight the conclusions of the market.

What is the process for determining target valuations?

The real answer is “it depends”. Some SPAC management teams see quality of revenue and quality of earnings data prior to determining valuation. Others do an analysis of the valuation of comparable companies based upon preset metrics as to period examined, etc.

How does a SPAC like ATCX, which had 99%+ redemptions, still manage to pull off completion of the merger? Why would a seemingly good SPAC like MNCL have 95% redemptions upon picking what seems to be a solid target?

Generally, the proxy statement/S-4 registration statement presented to stockholders requires two questions to be voted upon:

  • do you approve of the transaction
  • do you exercise your right of redemption. A stockholder can vote in favor of a transaction (e.g., I will not stand in your way), but not be sufficiently impressed with the transaction to remain a stockholder

The amount of cash in the at the time of business combination, giving effect to redemptions, is often a condition in the definitive merger documentation.

Several scholars and SPAC practitioners have mentioned that the cost of dilution from founder promote is born by SPAC investors alone, not the target company shareholders. Can you explain why this is (if true)? If the dilution causes the share price post-despac to decline, why does this not equally impact the SPAC shareholders who held through merger and the target shareholders.

The dilution associated with the sponsor carry affects both SPAC investors and the target company stockholders. SPAC sponsors have received their carry at a substantial discount to the IPO price.

During negotiations with a prospective target company, it is not unusual for the target company management to require the retirement or cancellation of a portion of the sponsor position, in order to ensure that the post-business combination price per share will materially exceed the value of what would be received upon redemption from the trust.

Are there any restrictions around you investing in other SPACs when you are managing one?

As a general matter no, as long as you do not become an affiliate of the SPAC in which you invested.

Are there any restrictions around you investing in other SPACs when you are managing one?

As a general matter no, as long as you do not become an affiliate of the SPAC in which you invested.

The Lifecycle of a SPAC

A SPAC goes through various steps and stages throughout its lifecycle. This post outlines the steps from pre-IPO through business combination.

The Stages of the SPAC Process

1: Prospectus Filing

The first stage in the SPAC lifecycle is the prospectus filing. This filing includes disclosure of the terms and structure of the SPAC offering and the target industry or segment focus of the SPAC.

2: IPO Marketing

During the IPO marketing stage, the underwriter arranges the roadshow, for the sponsor group to present to potential IPO investors. This roadshow is less extensive than that of a traditional IPO.

3: IPO Pricing

Today’s SPACs are based on a number of standard characteristics. One of these characteristics is the IPO pricing. The IPO units are priced at $10.

Learn more about SPACs

Download our SPAC Sponsor Handbook ►

Download our SPAC M&A Handbook ►

4: Announcement

At this stage, the SPAC management signs a Definitive Merger Agreement for a Business Combination with an operating business and announces the transaction.

5: Proxy Filing

After a Definitive Merger Agreement is signed and the business combination is announced, the SPAC files a Proxy Filing with the SEC disclosing the terms of the merger and seeking stockholder approval.

6: Stockholder Marketing

After filing the Proxy Filing, the SPAC management and SPAC IPO underwriters market the proposed transaction to the SPAC stockholders and other investors.

7: Closing or Liquidation

If the closing conditions are met, the Business Combination is closed. If not, the SPAC liquidates and returns the funds to stockholders.

The Basics of Mezzanine Finance

Quick Facts

Usage

Mezzanine Finance is generally used in combination with an acquisition, restructuring, or other transactions, to bridge the gap between the total purchase price and the equity and senior debt that’s available.

Costs

High interest rates, mid teens up to the low twenties, including an equity component

Term

3-5 years, often with yield protection

Seeking Mezzanine Finance? Let’s discuss how we can help. ►

Overview

Mezzanine Finance is indebtedness that’s junior to the senior indebtedness but is senior to equity. Mezzanine Finance is usually employed in connection with transactions where senior lenders won’t provide the full amount of financing, and there’s a gap between the amount of equity and senior that can be provided and the ultimate purchase price.

Mezzanine Finance is characterized by high interest rates, from the mid teens up to the low twenties, including an equity component generally in the form of warrants or stock.

The term is typically three to five years in duration. Many mezzanine loans come with what’s known as yield protection which provides that during the first several years it’s not permitted to be repaid unless the full amount of interest that would otherwise be payable during that period of time is also paid with prepayment.

Mezzanine Finance is ordinarily used in the context of transactions such as mergers or acquisitions, restructurings, or other transactions to bridge the gap between the total purchase price and the equity and senior debt that’s available.

There are many mezzanine firms, which range from family offices to private equity related firms and specialty credit funds. They are all characterized by those higher interest rates and the same types of provisions and equity coverage.

Let’s discuss how we can assist you with your Mezzanine Finance. Get in touch with our team below.

Increasing Your Chances of Raising Capital

Preparing for a liquidity event or capital raise is a pivotal moment in a company’s journey. Whether you’re seeking investment, planning a merger, or structuring a public offering, the key to success lies in thorough preparation and strategic decision-making. Investors and lenders want confidence that their capital is in good hands, and this requires more than just a compelling product or service—it demands a well-thought-out plan, a realistic valuation, and a seasoned team to execute the vision.

How to Increase Your Chances of Raising Capital

Planned Liquidity Event

A liquidity event is an event in which the shareholders of a company receive the opportunity to receive liquidity for their position in the company. Examples of liquidity events include:

  • Merger or acquisition
  • Public offering
  • Companies can also build in synthetic liquidity events for investors. For example, redemptions, interest, balloon dividend payments or extension payments.

A minority investor in a private company’s biggest fear is that the company will grow and become successful, but that they will continue to remain private with no liquidity events. If this was the case, the investor would have nothing to show for their stake in the company.

When a liquidity event is planned or structured for the near future, most investors are much more likely to invest in or lend to a company.

Realistic Valuation

You can spend weeks analyzing comparables for your company, but at the end of the day, your investors will determine your company’s value. Additionally, there are always ways to claw back dilution later on. We always say, the most important valuation is the one that get your company funded.

Prepare Company

Regardless of company stage, it’s very important to prepare your company prior to seeking funding. This includes preparing all of your corporate documents, preparing historical financials, preparing financial projections, and putting together an effective and aesthetically pleasing investor presentation.

Wondering what path is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team here ►

Experienced Team

When investors invest capital into a growing company, they are betting on the management team as much as, or more than, they are on the products or services. Knowing how to highlight your management team’s relevant experience can make the difference between an investor passing on an investment and putting in capital.

If your management team does not have very extensive or relevant past experience, it can help to add board members or other advisors who have great experience and can provide guidance.

Personal Relationships

Our approach depends upon accessing our personal relationships. Our experience is that personal relationships are far more likely to spend the time reviewing the opportunity, and more likely to invest.

Let’s discuss how our team can help you raise the capital you need. Get in touch with us below.

10 Questions to Answer Before Approaching Investors

Potential investors will have lots of questions for your company.

Prior to approaching investors, you should be able to answer all of these questions.

What is your business model/how is your company going to make money?

While it is important to focus on your product/service and acquiring customers, it is just as important to figure out your business model. How is your company going to charge for its product or service? Are you selling to the end consumers or to suppliers and other businesses?

Who is your target market?

Knowing who your ideal customer is will help your company focus its marketing and sales efforts.

Who are your competitors?

Almost every company has competitors. You should be able to discuss each of the competitors in your company’s pitch deck or investor marketing materials.

What sets your company apart from and makes your company better than the competition?

In addition to highlighting the competitors, you should be able to discuss the things that set your company apart, and why your company is more likely to succeed.

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team here ►

What are the risks and how does your business model minimize those risks?

Investors understand that every company faces risks. An investment without risk would provide little return.

It is important to be able to acknowledge the risks associated with your company, discuss the factors affecting those risks, and explain how your company plans to mitigate or minimize those risks.

What are your financial projections based on?

Anyone can put together a document showing exponential growth for their company over the next few years. What is far more important is the data behind that growth. Your company should prepare an extensive financial projection model that shows all the variables that drive growth.

For example, if you raise $3M, how would that affect your growth? What if you raised $6M instead?

What prior successes does your management team have?

With most early and growth stage investments, investors are betting on the company leadership just as much as the company itself.

What have the members of your management team done in the past that will help them succeed at this job? What skill sets do they bring to the table?

What is the use of the investment proceeds?

Investors want to make sure that their investments are going to good use. You should have a detailed use of proceeds ready to present to investors.

Will you have to raise more capital? If so, when and how much?

More capital raising = more dilution. Investors want to be able to factor into their investment decision their expected dilution over time.

What is your exit strategy?

In many cases, investors do not make anything on their investments until a company sells or goes public. Having a clear exit strategy will make an investor much more likely to invest.

Planning to raise capital? Let’s discuss how we can be helpful. Get in touch with our team below.

The Different Types of Capital Partners

Depending on a company size, needs, and industry, there are many types of available capital partners. This post outlines several different types of financial partners available to companies.

The Types of Capital Partners

Angel Investors

Angel Investors are generally wealthy private individuals who invest in pre-revenue companies. They are may invest individually or as part of a fund or larger organization or network focused upon seed level capital. Investments from Angel Investors are generally less structured than investments from Venture Capital.

Venture Capital

Venture Capital Investors have funds that invest in companies with specific characteristics such as industry, company size, investment size, and geographic location. Venture Capital investments are generally highly structured products with extensive governance provisions, consent rights, and liquidity preferences. Venture Capital investors will often hold their investments for a set period of time and expect an exit by the end of that period.

Small Family Offices

Small Family Offices are similar to Angel Investors, but may manage their own capital as a fund. A family office manages either a single family’s wealth or a small number of families’ wealth. Family Office Investors are often more flexible and patient than Venture Capital Investors as they are investing their own capital, and generally do not require extensive governance provisions and consent rights.

Friends & Family

Earlier stage companies often raise capital from friends and family. Individuals with whom a founder has an existing relationship are often more likely to invest in a business at the idea or pre-revenue stage than an angel investor. Having friends and family invest in your company can, however, be tricky if things do not go well.

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team here ►

Crowdfunding

Crowdfunding is a way for unaccredited individuals to invest in your company. Crowdfunding can make larger capital raises and exits much more difficult later on due to the large number of unaccredited investors in the company. Crowdfunding a product through a platform like Kickstarter can, however, be a great way to get startup funding without giving up equity.

Investment Banks

Investment Banks actively seek all types of investors, including institutional investors and retail investors. Investment Banks will consider many transaction structures such as private placements or public offerings depending on, among other things, a company’s size and needs.

Alternative Commercial Credit

Alternative Commercial Credit providers are either family offices, funds, or other lenders that invest in emerging growth companies or companies not qualifying for mainstream commercial finance. Compared to traditional bank loans, Alternative Commercial Credit providers are more flexible and offer a variety of transaction structures such as term loans, factoring, receivables financing, inventory financing, among many other structures.

Strategic Investors

Strategic investors are investors in similar or connected industries and may invest in earlier stage companies as a result of their desire to access technology, their desire to build a commercial relationship or other reasons.

Private Equity

Private Equity investors are similar to Venture Capital investors. They too invest in companies based on specific criteria, and generally offer very structured financial products. Private Equity investors generally invest in larger and later stage companies than Venture Capital investors.

Hedge Funds

Hedge Funds are relatively large diversified pools of capital generally investing in more liquid investments, such as stock, bonds, options, futures, and commodities. Many Hedge Funds do, however, allocate capital to what are known as “side pockets”, where a portion of their available investment funds can be utilized for special situations or projects, such as earlier stage, illiquid investments.

Other Funds

There are many funds that are more specialized and which may provide capital to companies prior to or following a public listing. Transitional Capital funds, for example, invest in companies transitioning from being private to obtaining a public listing. Likewise, PIPE (private investment in public equity) and special situation funds may invest in earlier stage companies from time to time.

Let us help you navigate the capital raising process. We are always happy to discuss the funding and growth options available to a company. Get in touch with our team below.

How to Build a Virtual Data Room

When contemplating financial, corporate, or M&A transactions, it is important to have a comprehensive data room in place. Any potential partners, whether investors, merger partners, or strategic partners will want to review all of the company’s documentation relating to their corporate structure, operations, and financings.

The Steps to Building a Virtual Data Room

Step 1: Find a Data Room Provider

There are many data room providers out there. Some of the important differentiating attributes to consider are:

  • Permissioning: most data room providers allow permissioning, with which you can grant different file access to different individuals. This can be useful if you have multiple types of potential partners accessing the data room at the same time. Most platforms can also limit file downloads so that certain people can only view files on the web, not download.
  • Auditability: it can be very helpful to know who is looking at what files, for how long, and how often. This can help you gauge the interest of potential partners. For example, partner A may tell you they are interested in pursuing a relationship but they’ve only looked at three files and only logged in once, while partner B may have logged in numerous times and looked at every file in the data room.
  • Pricing: pricing can vary dramatically between platforms. Some platforms charge flat fees while others charge per user.
  • User Interface: the user interface can affect how potential partners view the process of conducting due diligence on your company. If the interface is slow, it may cause potential partners to fatigue of the process. Additionally, it may be important to choose a platform where users granted access to the data room cannot see who else has been granted access.
  • Storage/File Size/File Type Limitations:some data room providers have very strict limitations on the file types and file sizes allowed as well as the total amount of storage available. It is important to understand these limitations prior to selecting a platform.

Here is a list of some of the top rated data room providers from G2 Crowd.

Step 2: Determine Data Room Structure

Having a cohesive data room folder structure can make the process of conducing due diligence much easier. This is the structure we use for our clients’ data rooms:

  • Corporate Documents and Corporate Matters
  • Securities and Securities Matters
  • Financing Documents
  • Properties/Leases/Insurance
  • Intellectual Property; Rights and Permits
  • Other Contracts/Agreements
  • Products and Inventories
  • Regulatory Documents/Litigation
  • Employees and Consultants
  • Financial Information
  • Environmental Matters
  • Miscellaneous

Building a data room? Download our full due diligence list here. This due diligence list is in the form generally used by investment banks, private equity firms, venture capital firms, family offices, strategic partners, and M&A partners.

Step 3: Upload and Organize Files

When uploading files, you should rename files so the user knows what the file is without having to review it. For example, documents with names like “scan” and dates should be renamed to the actual file type. Additionally, consistent filing nomenclature and format should be used.

Text-based documents should be uploaded as PDFs which makes them easier to view. Financial documents should be uploaded as Excel files when applicable. This allows data room users to manipulate numbers to see how changing variables affects financials.

Step 4: Grant and Monitor Access

Once your data room is built, you are ready to grant access to users. Make sure you pay close attention to the permission settings for each user.

If your platform has auditability features, check frequently to see how active users are and what files they are viewing most. If you see that many users are accessing the same files multiple times, these may be critical files or they may have issues.

Let’s discuss how we can guide you through your transaction. Get in touch with our team below.

Raising Capital: Frequently Asked Questions

Whether you’re funding expansion, developing new products, or stabilizing cash flow, the timing and strategy behind raising capital can significantly impact your company’s trajectory. However, there’s no universal answer to questions like when to raise capital, how much to raise, or which investors to approach. The right decision depends on your business’s unique goals, stage, and financial needs.

In this blog, we’ll break down the key considerations for raising capital, helping you evaluate when the time is right and how to prepare. From determining your company’s valuation to choosing the best capital partners, this guide will provide actionable insights to set you up for a successful capital raise. Whether you’re a startup founder or a seasoned executive, understanding these principles can make the difference between closing the funding you need and falling short. Let’s explore everything you need to know to raise capital with confidence and clarity.

The most frequently asked questions by companies raising capital

When is the right time to raise capital?

There is no single right answer to this question. Some companies may be raising capital for growth while others may be raising capital to stay in business.

Ideally, a company should raise capital when that injection of funds will allow them to significantly increase the company’s valuation and growth. If a company keeps raising capital without increasing the valuation, the founders and existing equity holders will be increasingly diluted and could end up owning very little of their company.

How should we value our company?

A company’s valuation should be based on comparable companies. One can find similar companies with similar transactions in the past and garner revenue and EBITDA multiples from those transactions.

For example, there are many third party data services like PitchBook that provide valuation metrics for different industries. You can also research public companies in the same industry and value your company based on their enterprise value/revenue multiple. It is important to note that privately held companies tend to trade at a discount to publicly held companies.

Some factors that affect valuation multiples are: growth rate, profitability, and debt.

We say that the most important valuation is the one that gets your company funded. There are ways to allow management to earn back some of the dilution over time through methods like option plans and claw backs.

How much capital should we raise?

The easiest answer to this question is as much as you need. You don’t want to raise so much that you are giving away more equity or taking on more debt than necessary. On the other hand, you do not want to constantly worry about capital, and, as a result, be distracted from operating at fully capacity.

What types of investors should we seek?

Different types of investors provide different value to companies. For example, Venture Capital and Private Equity investors tend to be more hands on than Family Office investors.

If your company is looking for significant guidance as well as capital, venture capital and private equity investors might be the right partners. The downside of the guidance is that it comes with increased control over the company’s operations.

Family office investors tend to have many investments and often run their own businesses as well. They are generally less interested in being involved in a company’s operations and are more interested in being passive investors.

Different types of investors are also interested in different sized companies.

Download our report Who is the Right Capital Partner ►

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team here ►.

How many investors should we approach?

It’s always better to approach a number of investors. We like to say, “it’s not closed until it’s closed”. Approaching multiple investors may also get you different term sheets, some with better terms than others.

Even if your company prefers one investor or another, there is usually not a reason to reject an investor until the funds are in your bank account.

Should we raise debt or equity?

There is no simple answer to this question. Debt can be great when the increase in revenue or valuation from the additional funds is so great that paying back the debt won’t be an issue for the company. Debt financing can also be great to finance receivables, purchase equipment, finance a purchase order, or to finance an acquisition.

Equity financing is often preferred by companies because there is no need to pay back the investor. Equity financing does however come with a much greater amount of control. Equity holders are also diluted by bringing in additional equity capital, which may not be preferable if an acquisition or exit is in sight.

Equity financing is also used when a company has existing debt or there is something preventing them from taking in additional debt financing.

Investors often structure their investments as a hybrid between the two, such as convertible notes. These types of structures protect the investor in the event of failure, but allow them to take advantage of the upside in the event of success.

What value does ClearThink Capital provide to companies raising capital?

When we work with companies, we bring our decades of capital raising experience to the table. We work as our client’s advisor and assist them by:

  • Conducting a full due diligence to remediate any potential issues prior to meeting with investors
  • Introducing the company to potential capital partners, including investment banking firms
  • Structuring the transaction to be client advantageous
  • Advising as to transaction terms
  • Preparing the transaction related documentation

Do we need an audit?

While some investors will require an audit, many will not. Venture capital, private equity, and strategic investors are more likely to require an audit, while family offices are less likely.

Do I need to put together a data room?

Almost all investors will require the company to put together a data room with all their corporate documents. It is best to put the data room in place prior to starting the capital raising process.

Download our due diligence list here ►

How long does the process take?

The amount of time it takes to raise capital can vary dramatically, but the timing is mostly dependent on the company. To ensure the quickest capital raising process, make sure to:

  • Create and populate a data room prior to beginning the process
  • Respond quickly to document/data requests from investors
  • For most companies, the capital raising process takes three to six months.

Should I raise capital through a crowdfunding platform?

While platforms like Kickstarter and Indiegogo can be great for crowdfunding products, we generally advise against raising capital through equity crowd funding. In 2018, the average crowd funding investor invested $741. As a result, companies tend to have thousands investors to manage.

Additionally, having such a large number of investors turns off most institutional investors, and will make it much more difficult to raise large amounts of capital in the future.

Taking a look at the statistics from 2018 crowd fundings:

$161K Average funds raised per unique offering

61% Successful offerings

$741 Average investment per investor

State of M&A: Q3 2019

Read more

5 Things To Ask Potential Investors

When taking in a capital partner, people tend to focus most on the amount of money the partner is investing into the company and the valuation. While these are both important things to consider, there are many other things a company should ask potential capital partners.

Ask your potential investors these five questions

How involved do you like to be in your portfolio companies?

A capital partner’s involvement in a company can vary dramatically. Venture and private equity firms tend to be highly governance-focused, which means that they impose substantial limitations on management autonomy and have substantial additional consent and other rights. Some capital partners want to know every detail of a company’s business with updates multiple times a week, while others want an update once a quarter.

Our experience has been that family offices generally tend be less focused upon governance and want to be kept current on company progress, but prefer not to assume operational or board roles within their investments.

Generally, we prefer to match companies with capital partners that do not desire to be actively involved in the company’s operations. When we work with a company, we do so because we believe that the company’s management team has the ability to lead the company to success. Partners should be able to provide advice when requested, but should not interfere with a company’s ability to execute.

What is your history of conversion vs repayment?

Many capital partners prefer to structure growth capital transactions as convertible notes, rather than straight equity. A convertible note is debt with the option on the part of the investor to convert the debt into equity.

Investors look at convertible notes two different ways. The first group looks at convertible notes as essentially an equity investment with protections in the case that things should not go as planned. The second group look at convertible notes as a loan to the company, with the ability to take advantage of the upside if they should choose to do so.

It is important to understand a capital partner’s plans relating to conversion so as to give the company the opportunity to plan for repayment or equity dilution.

How important is a liquidity event and when?

Liquidity events are events in which company holders have the ability to sell or otherwise capitalize on the value escalation of their position in the company. The two most common liquidity events are public offerings and acquisitions, although contractual liquidity events, such as redemptions, as common as well.

Depending on the capital partner, a realistic plan for a liquidity event may be very important. From the investor’s perspective, their biggest fear is becoming a captive minority holder of equity in your company.

For example, an investor can purchase equity in a company, only to have the management team pay themselves higher and higher salaries, with no plan for a liquidity event. As a result, the capital partner is left with a lost investment and no return.

Do you engage in a lot of litigation?

It is not uncommon for emerging and middle market companies to experience delays when either repaying debt obligations or paying redemption prices. Growth requires substantial capital and many companies inaccurately budget for these events.

Most capital partners are understanding, to a degree, and will afford their portfolio companies leniency as to timing; others have no tolerance for delays and are quick to assert their rights. While many companies would accuse the latter group of “not being team players”, it is an unfair characterization as investors are entities to the benefit of the terms of their investment.

Understanding the character of your capital partners and their history, as well as proper planning and budgeting, can spare you a great deal of angst when payment deadlines are approaching.

What management positions have you held and boards of directors have you served on?

An investor’s past experience can be very valuable to a company. Many times, capital partners have past experience running and growing their own companies or companies.

Whether or not their past experience is in a similar industry to the company in which they are investing, having someone else with experience on a company’s team can help with strategic decisions. An investor can also provide access to influencers, clients, supply chain partners, and additional capital.

Wondering what is best for your company? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team below.