Entrepreneurs: How Can I Raise Angel Investor Money For Start Up Costs?

The following is a question I recently received from a client:

Do you have any ideas how I can raise money legally just for start up expenses?  The only real start up expenses left would be getting through our capital raising phase.  People want to invest – but I know that I can’t take their money as investors due to SEC rules.  What should I do?

As you can imagine, I get this question a LOT from my clients. Generally, this is referred to as seed capital and it is usually the hardest money to raise since it is almost always perceived as a highly risky investment. The inside joke in the investment community is that you can only find this kind of seed capital from three sources – The Three “F’s”: Friends, Family and Fools.

The double whammy is that raising seed capital is usually considered to be like all the other kinds of fundraising pursued by start up companies – meaning that you typically have to go through the usual Reg D offering rules including preparation of a private placement memorandum, or PPM, just like you would to pursue any kind of angel investor.

The one exception I know of: bringing in a co-founder, or co-founders, who contribute time, energy, effort and money to both start AND manage the new venture. Of course, this usually means that the co-founder(s) are going to want a significant ownership position in the company…and the more money they contribute v. your cash contributions, the more of the company they may demand. Plus, when you get around to really raising the capital you need to execute your business plan, you and the other co-founders will almost always be subjected to more dilution of ownership.

One of the keys in this is that the co-founder cannot simply be a passive investor. If they are a passive investor, then we are back to all the Reg D rules. This is based on my three decades of experience as an entrepreneur – since I am not a lawyer you should check with your own securities attorney to see if they have some legal maneuver around this constraint.

All of that being said, you and your idea and your vision – could be the very rare exception to all of the above. But the probabilities are not with you.

My usual suggestion to my clients: Try not to stop for seed capital rounds…do whatever you can to get the company formed and the initial products or services at least fully formulated with a well thought out action plan and business plan with realistic financial projections based on the action plan. Then, do what you have to do in order to combine all of this with a legitimate Reg D PPM.

Armed with this kind of planning, you will know that the numbers work and the idea is sound…and you will be able to offer a much more compelling investment opportunity to angel investors.