Grow a Company Without Giving Away Equity

Whether your company generates $500,000 in revenue or $500 million, the common goal for most executives and business owners is growth. When people think about growing their company, they often assume that bringing in financial partners—whether through venture capital or private equity—is the only option. However, the idea of giving away equity and losing some control over the business can be unappealing to many owners and executives. Fortunately, there are several ways to finance company growth without diluting ownership or giving up equity.

In this blog, we’ll explore three of the best strategies to grow your business without selling equity: leveraging commercial credit, business development, and revenue-based financing. Each option offers unique advantages and flexibility, depending on your company’s financial needs and growth goals.

Commercial Credit

Commercial credit is an excellent financing alternative for businesses looking to grow without selling equity. It allows companies to access senior or subordinated loans that can be used to fund expansions, enter new markets, introduce new products, or make significant acquisitions—all while maintaining complete ownership.

The qualifications for commercial credit vary widely depending on the type of financing and the financial health of the borrower. A business with strong cash flow may qualify for one type of loan, while a company with valuable assets may qualify for another. Here are some of the most common forms of commercial credit:

Term Loans

Term loans provide a lump sum of capital that is repaid over a fixed period, often with a blanket lien on the company’s assets. These loans are particularly suitable for businesses that have tangible assets, such as property, equipment, or inventory, to offer as collateral. Term loans allow businesses to secure capital upfront and pay it off gradually, making them ideal for long-term growth projects or significant acquisitions.

Cash Flow Loans

Unlike term loans, cash flow loans are based on the borrower’s cash flow rather than physical assets. These loans work well for companies with strong, predictable cash flow but limited collateral. Cash flow loans provide the flexibility to fund growth initiatives, bridge working capital gaps, or finance seasonal business needs.

Equipment Financing

Equipment financing allows companies to purchase or lease essential equipment needed for growth. Lenders may buy the equipment and lease it back to the company or offer financing secured by the equipment itself. This type of credit is particularly beneficial for businesses where new machinery or technology can drive immediate revenue or profit growth.[/av_one_third]

Factoring

Factoring involves selling a company’s receivables to a lender at a discount. The lender provides immediate cash in exchange for the right to collect payment on those receivables. Factoring is a great option for businesses with a steady stream of receivables that need quick access to working capital to fund operations or growth initiatives.

Accounts Receivable Financing

Similar to factoring, accounts receivable financing provides loans based on the company’s outstanding invoices. Unlike factoring, the receivables are not sold to the lender, and the business retains control over collections. Any amount collected over the loan value is returned to the company, making this a flexible financing tool for short-term working capital needs.

Inventory & Purchase Order Financing

This type of financing is a revolving line of credit that allows businesses to fund inventory or purchase orders. It’s especially useful for companies experiencing rapid growth or preparing for a large order, as it provides the capital necessary to fulfill customer demand without tying up cash flow.

Business Development

Business development is one of the most underutilized methods of achieving growth without requiring external funding. It involves building strategic relationships with other companies, individuals, or entities to create mutual benefits. While business development doesn’t provide immediate capital, it can lead to partnerships, expanded market presence, and increased revenue over time.

Companies engage in business development for several reasons, including:

  • Attracting new clients, vendors, or distribution channels
  • Increasing sales to existing customers
  • Accessing new technologies or product innovations
  • Expanding geographically
  • Improving operational efficiency through strategic partnerships

Here are some common types of business development relationships that can drive growth:

Partnerships

Strategic partnerships allow two or more companies to collaborate for mutual benefit. These partnerships may involve co-marketing efforts, shared technology development, or joint product launches, enabling companies to achieve growth that might be difficult or costly on their own.

Commercial Relationships

Developing strong relationships with new and existing clients, vendors, or distributors can increase sales and improve supply chain efficiency. Expanding your commercial network helps your company reach new customers and streamline operations.

Licensing Agreements

Through licensing, a company can either monetize its own intellectual property or gain access to third-party technology to improve its products and services. Licensing arrangements are a cost-effective way to innovate without the need for significant R&D investments.

Human Capital Relationships

Talent is one of the most valuable resources for growth. Business development efforts can focus on recruiting experienced executives, board members, or advisors who bring critical expertise and connections to the company.

By leveraging these business development strategies, companies can create new revenue streams, improve their competitive position, and achieve sustainable growth without seeking equity funding.

Revenue-Based Financing

Revenue-based financing (RBF) is a flexible, non-dilutive funding option that provides capital in exchange for a percentage of future revenue. Unlike traditional loans, RBF doesn’t require fixed interest payments, nor does it involve issuing equity or giving investors control over the business. Instead, repayment is tied directly to the company’s revenue performance, offering a highly adaptive financing model.

  • Advantages of Revenue-Based Financing
  • No Dilution of Ownership: RBF allows companies to raise capital without giving away equity or board seats, ensuring founders and existing shareholders retain full control.
  • Flexible Payment Structure: Payments adjust according to revenue fluctuations, making RBF a low-risk option for businesses with seasonal or inconsistent revenue streams.
  • Quick Access to Capital: The RBF approval process is faster than that of traditional loans or equity financing, with many deals closing within four weeks.
  • No Burdensome Covenants: RBF agreements typically come without restrictive covenants, giving businesses the freedom to operate as they see fit

Ideal Candidates for RBF

Revenue-based financing works well for businesses with steady and predictable revenue, such as SaaS companies, subscription-based businesses, and other industries with recurring revenue models. It’s also a great option for companies that need growth capital but want to avoid the complexities and time constraints of equity or traditional debt financing.

Conclusion

Growing your business without giving up equity is not only possible but, in many cases, preferable. Whether you choose commercial credit, strategic business development, or revenue-based financing, these methods allow you to maintain ownership while securing the resources needed to scale. By exploring these options, your company can achieve its growth objectives while preserving control and maximizing long-term value. If you’re unsure which option is best for your business, consulting with experienced advisors can help you make an informed decision. At ClearThink Capital, we specialize in helping businesses explore non-dilutive financing options and execute strategic growth plans. Reach out to us today to learn more about how we can help you achieve your growth goals.

Exiting: Sell Your Company or Go Public?

When the time comes for a company to consider an exit strategy, there are two primary options available: selling the company or going public. Both routes offer unique benefits and challenges, and the decision will depend on the company’s goals, market conditions, and the preferences of its shareholders. Understanding the nuances of each option is critical to making the best decision.

This guide will walk you through the processes, advantages, and disadvantages of both selling your company and going public, helping you decide which path aligns with your company’s long-term vision.

Selling Your Company

The Process

Selling your company requires strategic preparation, and the process typically unfolds in several key steps:

Due Diligence Review

The first step is conducting a due diligence review. This involves examining the company’s operations, financials, and legal standing to identify and address potential red flags that could deter potential acquirers. This review also helps the advisory team fully understand the business to effectively position it during negotiations.

Determining Ideal Acquirer and Sale Structure

Next, the company works with its advisor to identify the best-fit acquirer and determine the optimal sale structure. Factors such as cash vs. stock payments, upfront vs. deferred payments, and earn-outs are evaluated to structure a deal that maximizes shareholder value.

Valuation Analysis

Setting a realistic valuation is essential. This is typically based on revenue or EBITDA multiples of comparable companies in the same industry. The valuation provides a target acquisition price for negotiations.

Acquirer Outreach

Once the valuation and sale structure are established, the advisory team will begin reaching out to potential acquirers. Calls and meetings will be arranged to explore interest and align goals between the seller and the acquirer.

Negotiation and Transaction Management

The advisory team manages negotiations, ensuring that the company is not undervalued and that the terms of the deal are fair. This helps the company secure the best possible outcome while mitigating risks.

Working with an advisor whose interests align with the company, rather than the acquirers or capital partners, is essential to navigating this process successfully.

Advantages of Selling Your Company

Lower Costs: The M&A process is generally less expensive than the public offering process.

Immediate Liquidity: Acquisitions often provide a significant portion of the payment in cash upfront, offering immediate financial benefits to shareholders.

Disadvantages of Selling Your Company

Employment Obligations: Key employees are often required to stay with the company post-sale to ensure a smooth transition, which may limit their flexibility.

Lower Valuation Multiples: Acquisitions generally yield lower valuation multiples compared to public companies.

Missed Post-Sale Growth Opportunities: Shareholders cannot capitalize on potential post-sale value increases since they no longer own the company.

Going Public

The Process

Taking a company public is a more complex process than selling, but it comes with unique benefits. Here’s an overview of the key steps involved:

Due Diligence Review

The first step in preparing for a public offering is conducting a due diligence review. This process helps identify and resolve any potential issues that could arise during the public offering and provides a comprehensive understanding of the company’s financials and operations.

Financial Model Preparation

A detailed financial model is created to project future growth and support valuation discussions. Investment banks will use this model to stress test the company’s financials and determine an appropriate valuation.

Selecting an Investment Bank

Once due diligence and financial modeling are complete, the company is introduced to potential investment banks. The chosen investment bank will act as the underwriter for the public offering, raising the necessary capital to fund the business.

Bridge Financing (if needed)

Before initiating the public offering, some companies may secure bridge financing, often in the form of convertible notes, to maintain operations and growth during the preparation phase.

Public Offering and Advisory Support

Throughout the public offering, the advisory team assists the company, ensuring the transaction is structured favorably and that the company’s interests are prioritized.

Advantages of Going Public

Higher Valuations: Public companies typically command higher valuations compared to those sold through acquisitions.
Capitalizing on Post-Offering Growth: Shareholders can benefit from the appreciation in the company’s value after going public, creating opportunities for wealth accumulation.

Disadvantages of Going Public

Higher Costs: The IPO process tends to be more expensive than selling the company, including fees for legal, accounting, and underwriting services.
Resale Restrictions: Shareholders may face restrictions on selling their shares for a period after the public offering, limiting immediate liquidity.

Choosing the Right Exit Strategy

Ultimately, the decision between selling your company and going public depends on your long-term goals, growth strategy, and current market conditions. Selling may be a better fit if your priority is immediate liquidity and a streamlined process, while going public can offer higher valuations and long-term growth potential.

Both processes are complex and require expert guidance to achieve the best results. Whether you’re considering an acquisition or an IPO, working with a trusted advisor who prioritizes your company’s success can help you navigate the complexities and ensure a favorable outcome. At ClearThink Capital, we specialize in guiding companies through both M&A transactions and public offerings. Contact us today to explore the best exit strategy for your business.

What is Bridge Financing?

Bridge financing is generally a short-term debt financing that provides capital to a company to enable it to consummate another transaction, e.g., a terminal event, and is generally repaid from the proceeds of such transaction.

For example, if a company is closing a large funding in 90 days, it may require a smaller short term funding immediately to get to the larger closing and will use of portion of the proceeds of the larger funding to repay the bridge financing.

Is This a “Bridge” or a “Pier”?

Other than the terms of the bridge financing, the greatest concerns of a prospective investor are:

  • “what is the event that we are bridging to, e.g., the terminal event?”
  • “what are the terms of terminal event?” and
  • “how likely is that the terminal event will be consummated?”

Terminal events can be any event which either provides the necessary liquidity to the company to repay the bridge note, e.g., a public offering, a private financing, a contractual payment, etc., or could be an event designed to permit or require the investor in the bridge to convert their bridge note into securities of the company at a discount to the valuation used in the terminal event.

As a result of these factors, a bridge financing, even though relatively short-term in nature, is in many ways riskier than ordinary corporate credit. In addition to the overall credit risk associated with the company, there is the risk that the terminal event will not take place or that counterparties to the terminal event may be required to change as a result of market conditions or otherwise.

In general, bridge financing has the following terms and conditions:

Bridge financing terms and conditions

Interest

Interest can range from very reasonable to mezzanine level (4% to 18% per annum).

Maturity

Bridge debt tends to mature within one to two years.

Conversion

If issued in connection with a terminal event which is a capital transaction, bridge debt is often convertible into the securities to be issued in the terminal event at the lower of a discount to the pricing of the terminal event or at a fix price. Conversion may be at the option of the company or the investor, depending upon the transaction. In the case of public companies, conversion may be mandatory if market price and volume milestones are satisfied.

Prepayment

Non-convertible bridge financings tend to be subject to repayment without premium or penalty, although at times yield protection provisions will be triggered, resulting in an additional payment to the investor. Convertible bridge financings are usually subject to prepayment only with prior written notice with a sufficient time period to permit voluntary conversion by the investor.

Original Issue Discount

Particularly in the case of bridge financings conducted by private companies, although not exclusively, the bridge note may contain provisions requiring an original issue discount (e.g., a payment in excess of the principal amount invested and accrued and unpaid interest).

Equity Kicker

Bridge notes are often accompanied by equity securities designed to serve as an addition deal sweetener or “kicker”. This kicker can be in the form of warrants or shares of common or preferred stock.

Conclusion

Bridge financing serves a vital function by permitting companies with limited capital to continue operations and growth until important terminal events take place. As a result, bridge financing is often relatively expensive, but can be the perfect “fuel in the tank” which a company needs to execute its business and growth objectives.

Seeking bridge financing? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team below.

Is Your Company Too Small For Funding?

We often speak to companies that are earlier stage, and they ask us, are we too small for funding? The reality is that there are very few companies that are too small for funding. We’ve made a strong effort over the years to get to know a variety of different types of capital sources, so we can provide all of our clients with options when it comes to capital partners, regardless of the company’s size.

We’ve laid out below a number of different funding options for smaller companies based on a company’s size.

To learn about the funding options for larger companies, take a look at our free report: Funding Your Company: Finding the Right Partners.

Seed/Angel Stage (Pre-Revenue)

Investors in Seed/Angel Stage companies invest based on the belief that the management has the ability to create and grow the company to be something great. Seed/Angel investors expect a very large return on their investments as the company grows.

Family & Friends

Friends and Family are great sources of funding when other sources are less readily available. It is important to make sure that Friends and Family investors understand the risk of investing in Seed/Angel Stage companies.

Crowdfunding

Crowdfunding allows a Seed/Angel Stage company to raise capital from unaccredited investors. As we previously mentioned, Crowdfunding can cause problems later on, and when possible, non-equity crowdfunding such as product-based crowdfunding should be considered.

Venture Capital

There are all kinds of Venture Capital firms. Generally, an investment from a Venture Capital investor is more structured than investment from an Angel Investor. While most Venture Capital firms prefer to invest in companies with revenue, there are a large number of Venture Capital firms which will fund pre- revenue companies

Small Family Offices

Small Family Offices are similar to Angel Investors with regard to Seed/Angel Stage companies. Many Small Family Offices, however, prefer to invest in companies with a planned exit in the foreseeable future, whether it is an acquisition or public offering.

Angel Investors

Angel Investors invest in Seed/Angel Stage companies. Angel Investors generally look for very early companies that have the ability to provide them with an exponential return on their investment.

Early Stage ($0-$2M of Revenue)

Investors in Early Stage companies have a similar mindset to that of investors in Seed/Angel Stage companies, however, they expect to have more successes out of their portfolio companies. As a result of the company’s revenue, visibility on revenue, or a commercial viable product/service, the pool of potential funding sources increases.

Venture Capital

Early Stage companies are the focus of a large percentage of Venture Capital firms. From their perspective, the company has proven itself by creating a commercially viable product or service, or has generated revenue.

Small Family Offices

Small Family Offices are more likely to invest in Early Stage companies than in Seed/Angel Stage companies, due to lower perceived risk.

Small Investment Banks

If a business has the potential to scale and expand greatly, an Investment Bank may have an interest in raising funds for the company. Most Investment Banks prefer to work with later stage companies, however, there are many that prefer to work with emerging growth companies.

Expansion/Growth Stage – Late Stage ($3M-$9M of revenue)

The funding options for Expansion/Growth Stage companies and Late Stage companies are very similar, which is why we decided to group them together.

Venture Capital

Expansion/Growth Stage companies get a great amount of attention form Venture Capital investors, similar to Early Stage companies.

Small-Mid Family Offices

As a company grows, larger Family Offices will become interested in investing. Many family offices do not have the resources to invest small amounts in many companies. They prefer to invest larger amounts in fewer companies.

Small-Mid Tier Investment Banks

Mid Tier Investment Banks start to become interested as a company grows. Investment banks will also consider more transaction structures such as public offerings as a company becomes larger and more established.

Alternative Commercial Credit

Most Expansion / Growth or Late Stage companies will have some form of collateral that can be used to obtain commercial credit. Alternative Lenders will consider anything from physical assets to recurring revenue.

Strategic Investors

At this stage, Strategic Investors may begin to become interested in a company. Strategic Investors look for complementary products/services, and will often invest more or at higher valuations than purely financial investors.

Crowdfunding

As with Early Stage companies, Expansion / Growth and Late Stage companies can raise capital through crowdfunding offerings.

Seeking Capital? Let’s discuss how we can help. Get in touch with our team below.

Can You Finance Your Accounts Receivables?

For small and medium-sized companies, maintaining healthy cash flow is crucial for sustaining growth and managing day-to-day operations. However, unpaid invoices often tie up critical working capital, creating financial bottlenecks that can slow business growth or even threaten its survival. This is where accounts receivable financing can play a pivotal role.

Accounts receivable financing is a type of loan that allows a company to leverage its unpaid invoices as collateral to secure funding. Instead of waiting 30, 60, or even 90 days for customers to pay their invoices, businesses can access immediate cash to meet their financial needs, pursue growth opportunities, and maintain operational efficiency. For companies looking to finance growth, this option can be a game-changer, providing a steady stream of working capital without taking on excessive debt or diluting equity.

How Accounts Receivable Financing Works

The mechanics of accounts receivable financing are relatively straightforward. A company with outstanding invoices turns to a lender who assesses the value and collectability of those invoices. The lender then provides a percentage of the invoice amount upfront—typically 70% to 90%—as a loan, with the remaining balance minus fees released once the invoices are paid. This process gives businesses the flexibility to continue operations, fund payroll, purchase inventory, or finance new projects without waiting for their customers to settle their accounts.

Accounts receivable financing is particularly attractive for companies that experience seasonal fluctuations in revenue or operate in industries where long payment terms are standard, such as manufacturing, retail, and logistics. By converting unpaid invoices into quick cash, businesses can stay ahead of expenses and focus on achieving their strategic goals.

Alternative Lenders: A Flexible Option

When small and medium-sized businesses don’t meet the stringent credit or collateral requirements of traditional bank loans, alternative lenders offer a viable solution. At ClearThink Capital, we specialize in introducing companies to these alternative lenders, who are often family offices or specialized funds. Unlike banks, which tend to have rigid structures, alternative lenders provide more flexibility in terms of financing structure, interest rates, and repayment terms.

This flexibility makes accounts receivable financing accessible to a broader range of businesses, particularly those with inconsistent cash flow, limited credit histories, or unconventional financial structures. Alternative lenders are typically more focused on the quality of the receivables and the creditworthiness of the company’s customers, rather than on the borrowing company’s balance sheet.

How ClearThink Capital Works

At ClearThink Capital, we take a unique approach to helping businesses secure accounts receivable financing. Unlike some competitors, our compensation is generally derived solely from our client companies, not from referral fees or commissions from lenders. This means we are fully aligned with our clients’ best interests and incentivized to secure credit financing on the most favorable terms.

Our goal is to ensure that our clients not only gain access to the funds they need but also benefit from financing structures with limited or no covenant restrictions. This approach allows businesses to operate with greater financial flexibility and confidence.

What Accounts Receivable Lenders Look For

When evaluating whether to finance a company’s accounts receivables, lenders consider several critical factors. Understanding these can help businesses prepare and position themselves as attractive candidates for financing:

1. Contracts and Purchase Orders

The validity and enforceability of the contracts or purchase orders tied to the receivables play a crucial role in a lender’s decision-making process. Lenders will often review these documents to ensure there are no ambiguities or risks that could hinder the company’s ability to collect payment. Clear, well-drafted contracts increase the likelihood of approval and can also lead to more favorable financing terms.

2. Creditworthiness of the Obligors

One of the most important considerations for an accounts receivable lender is the creditworthiness of the customers who owe the invoices. Even if the borrowing company has a limited credit history or operates in a high-risk industry, having reliable customers with strong credit profiles can significantly boost the chances of securing financing. Lenders may even offer lower rates if the obligors are large, reputable companies or institutions.

3. Time to Payment

Accounts receivable lenders typically finance invoices with payment terms of up to 90 days. Invoices with shorter payment cycles are generally seen as less risky, which can result in faster approvals and better rates. For businesses with longer payment terms, it’s important to evaluate whether their receivables fit within this time frame before seeking financing.

4. Existing Liens

If the company already has liens on its assets, this could impact the lender’s ability to finance its receivables. However, many alternative lenders specialize in structuring accounts receivable lines even for businesses with existing liens. Companies should work closely with advisors like ClearThink Capital to identify lenders who can navigate these complexities and craft a workable solution.

Advantages of Accounts Receivable Financing

There are several reasons why accounts receivable financing has become a popular option for businesses looking to improve cash flow without incurring additional debt or diluting equity:

  • Improved Cash Flow: By converting unpaid invoices into immediate cash, businesses can cover operational expenses, invest in growth initiatives, and avoid financial disruptions.
  • No Equity Dilution: Unlike raising capital through equity financing, accounts receivable financing allows business owners to maintain full control of their company.
  • Fast Access to Capital: The approval and funding process for accounts receivable financing is typically much faster than traditional bank loans, making it ideal for time-sensitive needs.
  • Flexible Financing Options: Alternative lenders offer customizable terms to meet the specific needs of each business, providing greater flexibility than banks.
  • Growth Without Debt: Since accounts receivable financing is based on existing invoices, it allows businesses to grow without taking on long-term debt obligations.

Is Accounts Receivable Financing Right for Your Business?

For businesses with cash flow challenges due to delayed customer payments, accounts receivable financing can be a lifeline. However, it’s essential to carefully evaluate your company’s financial situation, customer base, and specific needs before pursuing this option. Partnering with an experienced advisor like ClearThink Capital can help you navigate the process, identify the best lenders, and secure favorable terms that support your growth objectives.

Accounts receivable financing offers a powerful tool for businesses to unlock the value of their unpaid invoices and fuel their growth. Whether you’re dealing with seasonal revenue fluctuations or need immediate cash to seize a new opportunity, this financing solution can provide the working capital you need to move forward with confidence. Contact ClearThink Capital today to explore how accounts receivable financing can support your company’s success.

State of M&A: 2018

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How To Finance Your M&A

Finding the right financing structure for an acquisition can sometimes be the most difficult part of the process. When structured correctly, a transaction will provide right amount of liquidity to the acquiree, without hindering the acquiror’s potential for future success and growth.

When contemplating mergers or acquisitions, whether buy-side or sell-side, it is important to select an advisor which understands proper transaction structure and execution, is highly experienced, and can assist in accessing financial and other partners necessary for a successful transaction.  ClearThink and its principals have extensive knowledge and experience as well as relationships with a vast network of potential partners.

Often, the structure of a merger or acquisition is driven by the acquiree’s need for liquidity at closing. While M&A transactions typically involve a combination of financing methods, these are the 6 most common types of M&A finance.

How to Finance Your Company’s Mergers and Acquisitions

Cash

Provided that an acquiror has the cash readily available, payment for an acquisition in cash is certainly the cleanest and least complicated alternative from the standpoint of both an acquiror and an acquiree.  In the case of cash acquisitions, acquirors usually require a “holdback” in which a certain amount of the cash purchase price is withheld until such time as the acquiror can be certain that representations and warranties are true and correct or covenants of the acquiree are satisfied.

Senior Debt

Debt financing allows an acquiror to purchase a company without diluting the equity in their company. If the acquiror and acquire on a pro forma basis, the acquiror, or the acquiree has positive cash flow, or will have positive cash flow within a short period of time, debt can be a great financing option. Debt financing for acquisitions is usually structured as a term loan, where the acquiror will be required to begin repayment of the lender after a set period of time.  For our smaller and more rapidly growing clients, we recommend alternative lenders over traditional banks.  Alternative lenders are more flexible with regard to transaction structure, and far less covenant heavy than traditional banks. Learn more about alternative lenders: Commercial Credit: What Alternative Lenders Are Offering

Mezzanine

Mezzanine financing is similar to debt financing. The biggest difference between the two is that Mezzanine finance is subordinated debt. As a result, Mezzanine interest rates are generally significantly higher than senior debt financing rates. In addition, may mezzanine lenders require an equity component to increase their return. Mezzanine finance is ideal for companies that are acquiring a cash flowing business, but are not able to give a lender Senior position.

Stock

An exchange of shares is fairly straightforward. The acquiror gives the acquiree a certain number of shares in the acquiror’s company as payment for the acquisition.

The acquiree should be careful when receiving payment in shares for two reasons. First, depending on how the transaction is structured, payment in shares can result in what is known as phantom tax, which is tax liability without the receipt of cash compensation.  Second, unless the acquiror company is publicly traded, it will be very difficult for the acquiree to liquidate their shares. As a result, the acquiree may be stuck with a large tax liability, and no way to liquidate their shares.

Stock payment is also used to incentivize employees or management of the acquiree to continue to work at the acquiror company. Typically, an employee will receive stock options at certain milestones after the acquisition. These milestones are structured in a number of different ways, including periods of time or sales targets.

Public Offering

A public offering is similar to an exchange of shares in the sense that payment is received in the form of stock. The difference, however, is that a public offering provides liquidity to both companies. Once the acquiror has acquired the acquiree and commences trading, the holders of both companies have the ability to sell shares in the public market.

Typically, there will be a period of time anywhere from six months to two years during which the acquiree must hold their shares. This period of time can vary based on a number of factors. These factors include the number of shares, the amount of cash, if any, paid up front, as well the other types of payment involved. Generally, the larger the percentage of the transaction paid in stock, the shorter the amount of time the acquiree will have to hold the shares.

Revenue Share/Royalty/Earnout

Revenue share and earnout structures are rarely the sole compensation for the purchase of a company. Usually, a revenue share or earnout is part of a larger compensation package, such as shares or cash at the time of closing. Revenue share and earnout structures are used in situations where the acquiror wants to ensure that represented financial milestones will be satisfied over a significant period of time post-closing. 

The ClearThink Capital team members are experts at the design and execution of creative acquisition, financial, and other corporate transaction structures. We work with companies to determine the best transaction structure to fit their needs, help prepare the company and its materials for acquisition or financial partners, match them with the most appropriate partners, and work as their advisor throughout the entire process.

Is M&A in your company’s future? Let’s set up a call to discuss how we can help. Get in touch with our team below.

The Venture Capital Reality: Is It The Right Path To Capital?

The Myth

For many years, the dream of receiving financing from a venture capital firm, whether from Silicon Valley, New York, or elsewhere, has captivated entrepreneurs and has been one of their central focuses. The image of plentiful venture capital readily available to creative entrepreneurs has been cultivated by the industry itself, as well as by the media. In reality, the image is a mirage or myth.

According to the American Venture Capital Association, the NVCA, in 2017, venture capital firms deployed an aggregate of $84.2 billion into 7,783 companies. While this fact on its face appears impressive, this represented the lowest number of companies since 2012 and includes both initial investments and follow-on investments. Indeed, the NVCA notes that overall there were fewer transactions taking place, that consummated transactions were at higher values and that companies were later stage, e.g., more mature. Specifically, 2017 saw a 6% decrease in terms of aggregate deals over 2016, yet a surge in total deal value of 16% year over year.

The Reality

Start-Up.co reports that 565,000 start-up companies are launched monthly in the United States and that the average funding of these companies is $78,406, resulting in aggregate funding, whether seed, early, growth, or late stage, and irrespective of funding source, of $531 billion per annum. Startupshepherd.com estimates that, of these companies, only 1,400 per year receive funding from venture capital firms. For purposes of illustration only, based on the foregoing, if we assume that 90% of all start-up companies in a given year would for various reasons be ineligible for venture capital investment, venture capital firms would still only be financing approximately 0.2% of eligible start-up companies in any given year. Indeed, Forbes.com notes that “Less than 1% of startup businesses actually get their financing from VCs or angels.”

Even with respect to the firms that do receive venture capital investment, the question should be “Why are you raising venture capital in the first place, instead of another capital structure?” Forbes.com

Nothing mentioned in this post is intended to be offensive to venture capital firms. ClearThink maintains active relationships with many firms and has advised numerous clients with respect to venture capital transactions. That being said, all entrepreneurs (ourselves at ClearThink included) need to recognize and plan for the reality that, in all likelihood, venture capital will not be in their future.

So …

The companies not financed by venture capital firms are obtaining capital from somewhere. But where?

  • Friends and Family
  • Angel Investors
  • Crowdfunding
  • Strategic Investors
  • Private Equity Firms
  • Investment Banks
  • Alternative Commercial Credit

Each of these capital sources have distinct advantages and disadvantages.

Non-Venture Fund Sources of Capital

Family and Friends

Family and friends tend to be the least sensitive to valuation and investment terms and tend to be the most patient. That being said, failure of an investment to succeed can result in some awkward family and social gatherings.

Angel Investors

Angels tend to be “accredited investors” under the Federal securities laws and provide capital and expertise to early stage companies. FundersandFounders.com estimates that the U.S. angel investor universe is approximately $21 billion, and that the average investment is approximately $37,000, as opposed to approximately $7.5 million for venture capital firms. As a result, angel investors make investments into far more companies annually than do venture capital firms. Score.org estimated that in 2014 there were approximately 268,000 angel investors in the United States.

Crowdfunding

Crowdfunding is a relatively recent structure created by the JOBS Act in 2012. In short, crowdfunding contemplates small investments by large numbers of generally unsophisticated individuals. According to the Securities and Exchange Commission, or SEC:

“With Regulation Crowdfunding, the general public now has the opportunity to participate in the early capital raising activities of start-up and early-stage businesses. Anyone can invest in a Regulation Crowdfunding offering. Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions. The limitation on how much you can invest depends on your net worth and annual income.”

Crowdfunding has had a lackluster history to date. Based on the SEC’s whitepaper, of 187 crowdfundings conducted, 24 were withdrawn. The remaining 163 sought to raise an aggregate of $101.1 million, but raised in the aggregate only $8.1 million or 8% of the amount sought. Further, of 104 crowdfunding offerings with terminal dates during 2016, 18 were withdrawn and only 33% raised their minimum target amounts.

As a result of the large number of resulting stockholders following a successful crowdfunding, companies availing themselves of crowdfunding have experienced substantial difficulty in raising additional capital in subsequent rounds, and institutional investors have tended to shun companies which have raised money through crowdfunding. In addition, as crowdfunding investors are generally unsophisticated, valuations utilized in crowdfundings have tended to be over-inflated, resulting in substantial down-rounds subsequently, which has the potential to result in investor resentment and potentially litigation.

Strategic Investors

Strategic investors are companies in the same or related industries or markets to the company seeking capital. Transactions are often structured to establish an ongoing business relationship between the investor and the recipient of the capital and have tended to have higher valuations than pure venture financing, especially reflecting adjustment provisions built into venture capital documents.

Private Equity Firms

Certain companies will appeal to private equity firms. Private equity is similar to venture capital, but focuses on later stage companies and can seek to provide control investments, minority investments, growth capital and other structures.

Investment Banks

Investment banking firms aggressively seek emerging growth companies in search of financing. Depending upon, among other things, the company, its industry, and market conditions, transactions can be structured either as a private offering or a public offering, and can range from convertible debt securities to pure equity. These offerings are highly regulated, although institutional interest for the right company and the right transaction remain high, and certain funds, known as transitional capital funds, have specialized in providing private capital to companies seeking public offerings in the near future.

Alternative Commercial Credit

For companies which qualify, there is a large community of family offices and funds which specialize in the provision of commercial credit to companies which would not otherwise qualify for bank financing. These firms can be creative in structuring lines of credit, asset-backed lines, purchase order financing, equipment financing, and other forms of commercial credit.

Is raising capital in your future? Let’s discuss how we can be helpful. Get in touch with our team below.

What is Due Diligence?

Perhaps the most important aspect of any corporate transaction, whether a private offering of securities, a public offering, a merger or acquisition or otherwise, is what is known as “due diligence”.

“Diligence is the mother of good fortune.” – Benjamin Disraeli

The Basics of Due Diligence

Due diligence requires the review of all material documents and other information with respect to a company in order to ensure that any disclosures which a company makes, whether in offering materials or an agreement, are true and correct and satisfies any applicable standard of liability.

What does “material” mean?

The Supreme Court has held that something is “material” if there is a substantial likelihood that it would be deemed important by a reasonable investor in making a decision to purchase or sell a company or its stock or as to how to vote their shares.

A due diligence review will inform you as to the material attributes of a company or person, including their commitments, contracts, and liabilities, their business, prospects, financial condition, and results of operations.

  • Does the company exist?
  • Who are the owners?
  • How does the business work?
  • Who are its customers?
  • How do you know that a company has the contracts it claims?
  • How do you know if the projected financial results are based upon accurate and reasonable assumptions?
  • What are the liabilities or contingencies?
  • The answer to these questions, as well as many more, lies with effective due diligence.

Due Diligence for Public and Private Securities Offerings

Securities offerings are governed federally by the Securities Act of 1933, as amended. Pursuant to Section 11 of such Act, as a general matter, if any disclosure with respect to an offering of securities contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the issuer of such securities, the officers and directors of the issuer, partners in the issuer, the investment bankers conducting such offering, and professionals retained by the issuer with respect to such offering, are subject to liable for such material misstatements or omissions.

While there are no defenses to the foregoing available to the issuer and only limited defenses available to the members of the board or executive officers of the issuer, the other parties listed above may rely upon what is known as the “due diligence defense”.

The Act provides that it shall be a defense to such liability if such other party had, after reasonable investigation, e.g., a “due diligence review”, reasonable grounds to believe and did believe that the statements in such disclosure were true and that there were no omissions to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

Due Diligence for Mergers and Acquisitions

In the context of mergers and acquisitions, due diligence serves the role of fact finding, disclosure checking, and confirmation, e.g., that the representations and warranties set forth in the operative transaction documents are true and correct.

While the standard of liability in this context can be modified by contract, a due diligence review ensures that the purchaser or purchasers are receiving what they believe to be correct.

Importance of Due Diligence

The failure to engage in a complete and effective due diligence process can be catastrophic and result in substantial litigation.

Below is a list describing some of the greatest due diligence failures of all times and some of the consequences that resulted.

ClearThink Capital’s Due Diligence Process

Any due diligence process is based upon organization: the company subject to the review will need to organize its material documents and descriptions of undocumented material facts so as to provide full disclosure in all material respects.

Although most companies can accomplish this process with little disruption, companies that have not kept complete and organized records and documents may be required to dedicate substantial time to establishing an organization process and adhering to the process.

ClearThink seeks to make the due diligence as easy and simple as possible and provides a form of initial due diligence request list that reflects the organization expected by transaction participants and provides a structure for the categorization of documents.

In order to expedite the transaction process and assure full disclosure, ClearThink does the following:

  • Dataroom: ClearThink will establish for each transaction an organized dataroom in the form expected by the transaction participants and corresponding to our initial due diligence request list.  ClearThink reviews and remediates the due diligence of its client in advance of disclosure to others
  • Report: ClearThink will review all due diligence materials provided by its client, as well as other parties to the contemplated transaction, will document its review, and will make suggestions regarding, and endeavor to assist with, remediation, amendments, or explanation required in order to provide full, fair and accurate disclosure
  • Gatekeeping: ClearThink will act as the gatekeeper to the dataroom, providing access only with the consent of the relevant parties, thereby minimizing the possibility of the compromise of sensitive data

As a philosophical matter, ClearThink is a strong proponent of full disclosure of both positive and negative information.  That being said, proper management of the due diligence process will assure that corrective measures are completed prior to disclosure to third parties, thereby maximizing the probability of a successful transaction.

ClearThink and its principals have extensive experience in the management of due diligence reviews, including reviews relating to 240 public offerings raising an aggregate of $9 billion of public debt and $6 billion of public equity for companies such as The News Corporation Limited, Fox, Comcast, TCI Communications, British Sky Broadcasting, and Liberty Media, among others, as well billions of dollars of mergers and acquisitions.

Planning a corporate or financial transaction? Let’s discuss how we can be helpful. Get in touch with our team below.

How To Raise The Friendliest Capital

When entrepreneurs raise capital, there are two things that are generally thought of as being most important: valuation and amount of capital raised. One attribute that is commonly forgotten is how friendly the capital is.

By “friendliness” we are referring to the covenants, adjustments, and resets attached to that capital.

Are there resets if you don’t hit certain milestones? Are there equity adjustments? How much control can this investor or these investors assert over your business? Do they have to consent to any major decisions?

In our opinion, the answers to these questions are far more important than valuation or the amount of capital being raised. Over the years, we have seen countless deals that start out 70/30 favoring the entrepreneur, and end 70/30 favoring the investor. We’ve seen entrepreneurs own less than 5% of their companies when they exited. ClearThink was founded to prevent these kinds of financial transactions.

When we founded our firm, we made the conscious decision to only be on the entrepreneur’s side of the table, allowing us to have no conflicts of interest when finding the friendliest capital for an entrepreneur.

What to Consider to Raise the Friendliest Capital

Whose Capital is it?

Does your capital source make investment decisions on behalf of a group of investors to which they answer or are they investing their own money? If they are making investment decisions on behalf of others, they are usually held to a higher standard with regard to the structure of their investments. Chances are, they will want more protection that an individual or family office investing their own capital.

We match our clients with our network of lenders and advise them through the credit financing process. Learn more ►

Explore Your Alternatives

We have found that many entrepreneurs, executives, and founders do not know all the funding alternatives that exist for your companies. Whether your company has no revenue or over $100M in revenue, chances are there are several different routes your company can take with regard to financing. We are always glad to discuss the potential options with a company.

Plan an Exit

This is the most important thing a company can do to raise friendly capital. Every investor’s fear is that they will become a captive minority in a private company and that management will keep increasing their salaries, and never plan any sort of liquidity event, thus making the investor’s shares in the company worthless. As a result, investors attach all kinds of adjustments to their investments.

The way to mitigate this fear, and thus raise capital on friendlier terms, is to plan a near-term, attainable exit. When appropriate, we like to structure capital raises in the public market. This gives investors the option to sell whenever they want and removes that fear of being a captive minority. That freedom makes them comfortable giving friendlier terms to companies.

Avoid Conflicts of Interest

Many people engaged to identify potential capital partners are receiving a commission from that capital source, as well as from the client company. As a result, they may be biased and bring you to entities that give them the highest commission, rather than the entities that give you the best terms, or be the best fit for your company.

At the inception of our firm, we made the conscious decision to only be on the entrepreneur’s side of the table. We do not receive any compensation from capital on transactions. This allows our interests to align with a company’s interests and allows us to be agnostic with regard to the capital source for a transaction.

Seeking capital? Let’s discuss how we can help. We are always happy to discuss the funding and growth options available to a company. Get in touch with our team below.