Contemplating Private Placements, Equity Or Taking On Investors, Read This First

Company's seeking investors in equity for their private placement should consider

three things when making such a decision: How do the investors produce their returns, the model of the investment and the market optics of any such placement.

How do Investors Produce Their Returns

The method the investors utilize to produce their returns will speak volumes about their motivations. Those who produce returns no matter the outcome of valuation will only be interested in selling discounted shares at the peril of the company valuation. Those investors who obtain returns linked to valuation gain are truly incentivized for the long haul. Valuation linkage may be determined in the model. Additional clues to the return motivation is to be found in the due diligence process the investors put the company through. Due Diligence centered on the shares of the company points to an investors who is looking for a short term exit. Due Diligence centered on the financials, projection model and the future valuation potential of the company bode well for a return based on valuation growth.

What is the Investors Model for the Equity Private Placement

Many private investment into public equity ("PIPE") offerings are structured as discounted equity lines of credit. The issuer essentially is doing a flow through public offering through a registration to the market. The "Investor" is nothing more than a trading group who will sell the shares for you. Most of the investors in this space are open about the fact that they will be selling your shares into the market. This is a clear indication that the investor is not interested in the long term value of your company. These types of offerings are well suited for short bursts of capital injection, but not suitable for longer term funding needs. Search instead for Investors who will invest against the long term growth curve of the company.

How Will the Market Respond to the Offering Model

The market rewards alignment between the investors and the management. Discounted sales offers are typically penalized because the fully diluted share number becomes unknown if the Issuer has an open checkbook. Having a known dilution and known metrics is far more conducive to a receptive marketplace than any equity line.

An even better model is one where the Investors are purchasing equity at the outset of the offering at market or higher. Most Investors will not consider this and call it risk. Catwalk Capital (www.catwalkcapital.com) is one group who does invest through advancing valuation curves. These types of offerings are typically less dilutive, more value enhancing and better received by the market.

For more information on Catwalk Capital, visit www.catwalkcapital.com or www.fermegroup.com.

by: fermearticles

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