All businesses (not just marijuana businesses) reach a point where they need money, either to get started or to expand and reach that next level of productivity and revenue.
This article assumes that you have tapped out your own savings and credit and that you have borrowed what you can from friends and family.
Now you need to go out and ask strangers — or at least distant acquaintances — for money.
There is a process and general procedure one follows when looking for private investment money for a business. It is a project that has its own set of rules and requires planning, discipline and effort.
Develop a Project Timeline
Raising investment money doesn’t happen quickly. You should plan on approximately three to six months to prepare all the documents and materials (the “offering”), identify potential investors, present the offering and close the deal(s) with one or more investors.
Assume that this is a reasonable project timeline (but expect delays):
– Figuring out what you need and what you need it for: 15 to 30 days
– Preparing the business plan with financial projections: 30 to 45 days
– Preparing a private placement memorandum (PPM): 30 to 60 days
– Preparing a subscription agreement: 15 to 30 days
– Seeking out and meeting potential investors and closing: 60 to 120 days
What You Need
This is very important, because there are a several of those general rules that come into play here:
- You only get what you ask for;
- New money tends to fund new or expanding opportunities, not fix old problems; and
- No one gives unless they also get.
You need to spend the time to really understand what you need for the business. A vague notion of how much and how you are going to use it isn’t going to be enough. People that have money usually don’t want to part with it unless they can be convinced they are going to get something in return.
The Business Plan
There are many formats and styles of business plans. Templates abound. I don’t think any one form is better than another. Plain text, full color, lots of pictures and charts, black-and-white, whatever. It is the substance that matters.
Remember that the financial numbers are the product of your business and they grow out of your vision, your understanding of the market and your products, management’s directly applicable experience and the ability of the company to execute on the plan. It is a mistake to misplace your priorities while you write this most important document for your business.
The financials are important. They are required and expected. They need to clearly demonstrate how you are going to make money for the investor. Remember, overly optimistic projected returns do not impress; they tend to do exactly the opposite.
The Private Placement Memorandum
The PPM is a relatively inexpensive insurance policy that does several things: it provides full and complete disclosure of all the risks associated with the investment; it is compliant with relevant state and federal securities laws; and it includes key portions of your business plan. The PPM is not a sales document, it is a disclosure document. Full and complete disclosure is what inoculates you from a potential investor lawsuit down the road.
This is where you should spend a good chunk of your budget for the project of raising money for your business. Even if not one single investor ever reads your PPM (the joke being that “Private Placement Memorandum” is Latin for “that which is never fully read”), the fact that you provided it and that it provided full and complete disclosure is what you are after.
Securities Law
When you go out with a private placement offering, you are engaging in the sale of securities. Some fall into the trap of thinking that they are too small to have to worry about such things. The sale of securities is something that the federal and state governments take very seriously. You should too.
You need an attorney who is experienced in securities law, and you need to follow the advice the attorney gives you about staying compliant in this area. If you go out and raise money willy-nilly, without consideration of the things you need to do for securities compliance, I can promise you that you are going to spend a lot more time and a lot more money cleaning up the mess than what you would have spent up front to do it right.
Finding Investors
This can be time-consuming and exhausting. Pitching your business and your vision for your business is a lot of work. You’ll want to prepare an effective PowerPoint presentation (the “pitch deck”) of about eight to 15 slides. This will be the engine that drives your presentation. Print out the pitch deck and make sure potential investors have a copy. It is a necessary sales tool.
You will also need to develop a concise, snappy and confident statement about your company, the investment and why they should invest. This is often called an “elevator pitch” because it should be short enough to present in the amount of time it takes to complete a normal elevator ride (30 to 60 seconds). Write it down, memorize it and practice it out loud. Sometimes the elevator pitch may be all you get to say — so say it well.
Once you get an investor ready to invest, they are going to “subscribe” by completing a subscription agreement and returning it to you. This is the contract between the company and the investor. A subscription agreement can come in many forms, some long and some short, depending on what you need. Working with your business attorney on this significant document will be important.
Final Notes
Think about raising money as a “project” with timelines, milestones and goals, like any other business project. Commit the project to paper, move through it methodically, have a team of professionals to support you. Then go do it.
David Kerr is of counsel with the Fifth Avenue Law Group in Seattle (www.fifthavenue-law.com). He is a leader in the complex area of marijuana business law, including buying or selling a marijuana business; navigating compliance and regulatory issues; facilitating business transactions; and state licensing. He has more than 20 years of experience working as in-house counsel, directing government affairs and working with state and local governments, and can be reached at dkerr@fifthavenue-law.com.