Down Round

A small business may raise funding in stages through a series of offerings or ‘Rounds.’ It is hoped that each new offering will be priced higher than the previous one as the business grows in value through expanded revenues and profits. Sometimes, the business finds itself in a situation where things do not go as planned, yet it still needs to raise more funding. To obtain this funding, the business may need to reduce the price in the new offering from the price set in the prior offering. This is referred to as a ‘down round.’

?If the prior offering was properly presented in conformance to securities regulations with all required disclosures, and if there is no restriction stated within the investment agreement, setting a lower price in the new offering is legal.

?The investors in the prior round will be unhappy that investors in the next round may purchase the investment at a lower price. In the language of the capital industry, the prior investors are ‘taking a haircut.’

?The small business must communicate carefully with its existing investors to address their concerns about this result. All businesses have their ups and downs. It is not uncommon for a business to miss its projections. Despite the missed short-term projections, it may still be possible for the small business to reach its long-term projections and achieve the originally projected rates of return to its investors.

?Statements regarding the situation should acknowledge the situation without inviting legal action. If an error or misstatement was made in the prior offering, the small business should consult legal counsel on appropriate action.

?Remember that the price was set based on financial projections made by the leadership team regarding a future valuation. Projections are not a guarantee. The small business has no legal obligation to meet the projections. However, since the projections were wrong, the small business may take steps to align the new projections with the pricing of both future and past offerings.

The small business may take action to reduce the negative impact on investors:

·?????? Existing investors may be offered a greater ownership position without additional cash payments (retroactively reducing the price set in the prior offering with a resulting dilution of the founders, which may be offset with a clawback provision)

·?????? Existing investors may be offered an opportunity to invest in the next round at a price discount

·?????? A new business venture or spinoff may be started where existing investors are given a founder’s position without additional cash payments

?In addition to the extra work with existing investors, additional work will be required to tell the story of the small business to new investors. The failure to meet short-term projections and offer investments at a reduced price will be viewed negatively. Investors seeking only a return on investment may be unwilling to invest, choosing instead to invest in another business with a better track record.

?The small business should consider the possibility of missing projections within its capital strategy and how it may impact future funding rounds.

?Successful Funding

?Chris Miller will be my guest on the seventh Succesful Fundin show on Tuesday, March 5 at 8 am MST. Chris is Chairman of the Board of the National Center for Community Capital (NC3). NC3 is advocating for the establishment of Diversified Community Investment Funds – locally owned and operated funds to address the capital needs of a community, including its small businesses and community projects.

?You can register to attend this event at:

??https://www.dhirubhai.net/events/successfulfunding-communityinve7168640919682945027/theater/

?Arlen Meyers was my guest on the sixth Successful Funding show on Tuesday. Arlen, a physician, educator, and advocate for entrepreneurship, was the founder of the Society of Physician Entrepreneurs. https://sopenet.org/ We talked about the challenges of becoming a physician entrepreneur, which spans a wide range of issues from higher education, funding, and public policy focused on ‘sick care’ and not on healthcare. Arlen concluded that the greatest investment that anyone may make in improving our healthcare system is to cast a ballot in every election.

?https://www.dhirubhai.net/events/successfulfunding-physicianentr7167913369620926464/theater/

You may view all of the Successful Funding shows in my Posts on my LinkedIn profile at: https://www.dhirubhai.net/in/karldakin/

?The Successful Funding show on my LinkedIn profile will repeat weekly at 8 am MST on Tuesdays. You may register to attend by going on LinkedIn, searching for Events, clicking on the Events button, searching for Successful Funding, and then clicking on the Attend button. You should receive an email with a link to save to your calendar. You can also click on the Share button and obtain the URL link to the show to put it in your calendar.

?Superpowers for Good

?I had the pleasure of being interviewed by Devin Thorpe on his SuperPowers for Good show, which is affiliated with the Impact Cherub Club and SuperCrowd. We discussed impact investing, investing in small businesses as a wealth-building method, and access to capital through investment crowdfunding. Devin advocates supporting small businesses through Reg CF crowdfunding and firmly believes that systematic investment ($100/month) in small businesses will build wealth at a rate comparable with more common investments in Wall Street or real estate.

?The show may be viewed at the following link:

?https://s4g.biz/13feb24

?Don Cohen

?Next Wednesday, I will be a guest on Don Cohen’s show.

?More information will be posted soon on his LinkedIn profile.

?https://www.dhirubhai.net/in/doncohen/

?Founded in FOCO

?Next week, I will present a workshop on What is Your Funding Potential? on March 8 from 11:00 am to 12:30 pm in Fort Collins, Colorado, at the Founded in FOCO event.

?The five-day event offers 100+ sessions with 100+ local experts to help you?spark innovative ideas,?learn from peers, and?build relationships.

https://foundedinfoco.com/about/attend/#rsvp

?SuperCrowd 2024

?I will co-host the SuperCrowd 2024 event, "The Impact Crowdfunding Event of the Year,” held online on April 17th and 18th.

?https://thesupercrowd.com/supercrowd24

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Karl Dakin, the Capital Coach

Dakin Capital LLC

[email protected]

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