In the face of rising interest rates, many companies are seeking alternative ways to secure the necessary capital for their business operations, growth, and exciting new ventures. Equity capital raising offers an attractive solution, allowing businesses to issue shares or equity in the company to investors. In this article, we'll explore 3 common options for raising equity capital, each with its own unique characteristics. Whether you're an entrepreneur seeking funding or an investor looking for opportunities, understanding these options can help you make informed decisions when it comes to how to raise capital.
Convertible Notes
Convertible notes represent an agreement between a company and an investor, where the investor can choose to convert their investment into either shares in the company or a repayment of the investment (with interest) at a specified future date. These notes are considered a form of loan or debt in the company's accounting records until the conversion occurs. Key aspects of convertible notes include the investment term, investment amount, interest rate, valuation method, and triggers for conversion events.
Get Familiar with the Key Convertible Note Terminology
Term
The period between the note issuance and the date of conversion or repayment.
Investment Amount
The initial payment made for the convertible notes.
Interest Rate
Typically similar to an unsecured loan rate (8-15%).
Valuation Method
Determines the company's pre-money valuation used to calculate equity issuance upon conversion. Often includes discounts or valuation caps to entice investors.
Conversion Events
Triggering events that give the investor the option to convert their notes into equity. Events may include the note's maturity, a company's equity-focused capital raise, or an exit event like a business sale.
SAFE Notes
SAFE notes, or Simple Agreements for Future Equity, are a more streamlined version of convertible notes. Like convertible notes, investors contribute funds in exchange for notes, but there are no loan or debt obligations, and no interest is involved. The main promise is that equity will be issued upon the occurrence of a conversion event. Unlike convertible notes, SAFE notes have no maturity date, giving flexibility for conversion at any future time.
Fixed-Priced Equity
The fixed-priced equity approach is the most straightforward and familiar method for capital raising. In this model, a company issues new shares or securities to investors at a pre-agreed price, often based on the company's pre-money valuation at the time of investment. While this option is easy for investors to grasp, it offers limited flexibility for the company, as the valuation is usually predetermined. For early-stage companies or those yet to generate revenue, this valuation might be lower than the potential future value of the company.
Choosing the Right Option for Raising Capital
Each equity capital raising strategy has its unique attributes, making the selection process crucial for the success of your company or investment. Consider the following factors when making your decision:
1. Funding Amount
Evaluate the amount of capital required for your company's growth and expansion plans.
2. Company Stage
Assess your company's current stage of development to align with the best-suited option.
3. Risk Appetite
Consider the risk appetite of both your company and potential investors to find a mutually beneficial arrangement.
Talk to BlueRock’s Capital Raising Advisors
Equity capital raising presents a diverse range of opportunities for both companies and investors. Whether you opt for fixed-priced equity, convertible notes, or SAFE notes, understanding the characteristics of each option is vital for making an informed choice. By aligning the right approach with your company's needs and investor preferences, you can pave the way for successful growth and exciting new possibilities. If you need assistance with capital raising or investment opportunities, don't hesitate to reach out to our capital raising advisors for support. Happy fundraising!
