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Risk vs. Return and the R & D of a Securities Offering

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            Your new company or project will generally be viewed as very high risk by most savvy investors; therefore, a very high return potential must accompany that risk, but not too high, otherwise it becomes unbelievable or a “too good to be true” scenario. The trick to attracting capital for start-up and early-stage companies is using differing deal structures to reduce the risk components of the securities being offered for the investor while maintaining the high return potential.

            The two most popular deal structures do just that. They slightly change the risk return continuum for the benefit of the investor. These deal structures allow for maximum upside while minimizing the downside. You can get creative with these structures by themselves or in combinations with each other.

If debt will be part of the company’s capitalization plan, you should consider getting in touch with a few banks and/or leasing companies before you contact any potential equity investors.  Use a securities offering document draft to approach these institutions so that they can see that you have an additional avenue – a securities offering of preferred equity – to pay off the loan, as well as through revenue generation.

Use a small personal survey to detect if there is any interest in the “Features and Benefits” of the preferred equity you will be offering. Due to the fact that you can advertise the preferred equity to the general public, once qualified to do so, you should set the state dividend rate as high as possible, to entice interest both from pre-existing relationships and then to the general public.

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