Shares or shares: what to choose to attract investment
Your business is growing, therefore, it needs external funding. One of the most convenient ways to raise funds is to sell shares (if you have a joint-stock company) or a share (LLC) to the investor. Together with Bluelife CEO Joseph Marc Blumenthal, we will analyze which form of organization is easier to attract investment.
Limited Liability Company is the most popular form of registration in US (over 98% of 3.5 million operating commercial organizations). However, recent changes in legislation have made joint-stock companies more attractive for small and medium-sized businesses - it has become easier and cheaper to create them, and individuals can now invest in them on investment platforms.
The initial stage of attracting investments
To make a good investment proposal, it is important for an entrepreneur to answer a few questions:
● How much money is needed for business development?
● What share are you willing to sell and how will the deal be formalized?
● Why on such terms?
● What are the funds for?
● How much is the business valued?
Be prepared for the fact that the investor wants to push his terms and demands confirmation that his money will not go down the drain. The presentation should include not just a story about the product, but also an analysis of the market, competitors, a development plan, current, and future financial indicators. And only after that comes the turn of the investment proposal and negotiations.
An investor is not your friend, but a partner, so proves that his investments will work. Usually, the investor and the entrepreneur agree that the first one contributes money and for this, he receives the right to future profitability and information about the project, and the second will ensure the fulfillment of the promised financial indicators of the project and regular reporting: on profit and loss, on cash flow, on the dynamics of the key indicators of the project (for example, customer base size, sales conversions, increase in paying users).
Differences in the process of raising funds for different forms of organization
A share in an LLC cannot be sold without a notary. An important point is that each co-founder must confirm that they are not against this procedure and their right to priority acquisition of a share has not been violated. You should send all members of the LLC a notarized sale offer. If no one has answered within 30 days or everyone has provided a notarized waiver of a preemptive right, then you can conclude a sale and purchase agreement. The parties meet, conclude a deal, after that, the notary submits documents to the tax office within three days.
In the first round of attracting investments, this does not play a special role - most often, a young company has one founder, like an investor. In the second or third round, it becomes more difficult to collect everyone in one place, especially if the investor is in another city or abroad. Important - the number of participants in the transaction is limited by law and cannot exceed 50.
Here the procedure is simpler and does not require certification from a notary. The transaction can be carried out in an online format - through the registrar's and depository's office, in which the shares are stored. For example, in the case of STRK, this is the Status logger. There are also options for selling a stake through investment platforms.
Comparison of subtleties
LLC is a more common form of doing business. The process of attracting investments is planned step by step, and many brokers work in this area. Meanwhile, a number of nuances remain:
● With the purchase of a stake, the investor also acquires the right to vote on the board of directors of your company.
● You will have additional expenses for the notarization of the transaction. For example, in order to structure investments for 20 million rubles, we spent 500 thousand on notary fees. In addition, many investors cannot participate in the transaction, it is necessary to attract several with a large average check.
● The legal structure of the LLC is not conducive to the fact that the investor can simply receive dividends, legally, he will always have the right to vote in the company.
As for Joint Stock Companies , first of all, it is worth noting that the same tax regimes (including the simplified tax system) operate in JSCs as in LLCs, so there should not be any difficulties with conducting regular activities. The advantages of a joint stock company over an LLC:
● The number of participants can be any. Recall that there are no more than 50 of them in an LLC. This means that the price of a share can be any, which, in turn, opens up access to attracting investments from a mass retail investor, with checks from 50 thousand rubles.
● It is more convenient to transfer ownership - since shares are actually sold to a joint-stock company, transactions can be made online.
● No notarization of transactions is required. Those who have tried to sell shares in an LLC understand how much more convenient it is.
● It is possible to sell preferred shares, which give the right to dividends, but do not give the right to vote in the company.
● It is possible to sign a shareholder agreement with investors, which makes management in the company even more convenient.
● A joint-stock company allows you to build a more convenient company structure through the sale of preferred shares that do not vote but receive dividends.
● There is a shareholder agreement tool that allows you to build the relationships with investors.
● It is important to note that corporatization also allows structuring venture capital transactions - all investors receive shares in their hands and there is no need to create a separate legal entity for the participants in the transaction.
● Investments can be made in capital without paying personal income tax and income taxes.
● Shares of JSCs can also be obtained by those individuals who have restrictions on registration actions by the Federal Tax Service (anything can happen).
● The register of shareholders is not public - this may be important for confidential transactions
● The size of attracted investments in JSCs is from 10 million rubles. Less is impractical given the commissions.
Total: The joint-stock company allows you to attract a larger number of investors and conduct transactions in an online format, without contacting a notary. In this regard, as a tool, it is more suitable for making investment transactions.
How to sell shares?
You can sell shares both independently and through investment platforms in the register of the Central Bank of the US. Self-sale may be suitable if you have 2-3 people in the transaction - but you will have to prepare all the documents yourself and it will take some time. Plus, according to the Federal Law On Advertising, you cannot post details of an investment proposal for free access. If you conduct a transaction through an investment platform, then it organizes the processing of transactions and they will be completed automatically, will help with the methodology for advertising shares and the passage of the corporation process itself, as well as the compliance of the transaction with the legislation of the US. It will cost 2% of the number of funds raised. In the US, such services are provided only by the STRK investment platform.
Registration of JSC, cost of service, and responsibilities.
The costs of establishing and maintaining a joint-stock company:
● Registration of a joint-stock company will cost 40 thousand rubles and will take 7 days.
● If it is important to keep the distributing LLC, then it can be reorganized into a JSC - it will take 3 months (of which 2.5 is waiting for claims if they are after the publication of the information that you are now a JSC) and costs 300 thousand rubles.
● Annual maintenance is 70 thousand rubles if the number of participants is less than 50 people and 200 thousand rubles if the number of participants is more than 50. These are turnkey expenses, including holding a meeting of shareholders.
The duties of a joint-stock company include:
● Holding an annual meeting of shareholders. It can also be done online.
● If the number of participants is more than 50 people, then it is necessary to create a Board of Directors of 5 people, which can consist of any people, for example, employees or members of the Advisory Board.
●Publication of the annual audited report of the company, accounting (financial) statements on the website of the accredited company. Which, by the way, is a plus for attracting the next rounds of investments. The costs of these operations are accounted for in the paragraphs above.
Now joint-stock companies are intended not only for large companies. Thanks to the latest changes in the legislation, JSC is becoming easier and more convenient for small and medium-sized businesses in the US, and its opportunities to attract investments pay off the additional costs compared to LLC.
A joint-stock company is suitable for those who plan to attract investments in an organization not only at the stage of its creation but also in the future. In subsequent rounds of attracting investments, you will receive fewer obstacles in organizing the transaction than if you had an LLC. The current legal framework in the US looks in such a way that if you plan to start a small business, an individual entrepreneur is also suitable for this. If it is a larger one, for example, a retail food chain, then in order to reduce legal risks for the founder, then it is already an LLC. And if you plan to attract investments, It is worth noting that this is a global practice in general - there are several OTC stock markets in the United States, for example, the OTC-market. Therefore, we are confident that the future belongs to such tools.