If I bring Equity to a deal, what’s my cut?

Question

I was recently approached by a developer who needs equity to get the ball rolling on a development deal. He asked me to help him raise the capital in exchange for a % of equity in the deal

At a high level he needs:

$1MM for acquisition then a additional $3MM to secure financing and start up costs.

Depending on how much I raise, what should my % equity of the deal be? Any other suggestions on how I should structure?

Located in South Florida.

Greg Dickerson · Answer

@Alfredo Sanchez the first thing to be aware of are SEC regulations. You can not be compensated for raising capital for someone else’s deal. You must be a part of the sponsorship and have an active role. There’s lot of info on this topic if you google it or go to crowdfunding lawyers website.

If it’s all your money then you are fine and you would want to get a preferred return of at least 6-8% and a portion alone share of the equity in relation to the amount you are investing. (Pari-Passu) Ex. If the $1 million represents 25% of the total equity requirement you should look for 25% of the equity in the deal.

If the $1 million represents all the equity requirement you could look for a pref with a 50/50 split or straight pref or straight equity.

Lots of ways to structure the deal.

Greg Dickerson · Answer

You need to make sure the developer has the proper paperwork in place and you have everything in writing with the developer before you approach any investors. You and the develper really should make sure to consult with an SEC attorney before you approach any investors.

Don Konipol · Answer

@Alfredo Sanchez

Let me clarify.  To raise investment capital without being licensed you must be a part of the entity raising the capital.  You can not be compensated based on the amount of capital raised.  You must be paid a salary, fixed fee, etc.

Further, the entity raising the capital must have the offering registered with the SEC, or be exempt from registration.  The most common exemption is the exemption for private placements, and the most common private placement exemption makes use of SEC Regulation D.

You can just go out there, find some investors, and then just try to sort it all out.  However, you will have violated numerous SEC regulations, and chance legal action from the SEC, state securities board, state AG office, and lose any definitive defenses should an investor decide to sue.

Paul Moore · Answer

I agree with @Greg Dickerson and @Ronald Rohde on this.  This is risky, and you should really understand what you are getting into. I have some info from attorney Mauricio Rauld on this if you want to reach out.

Ronald Rohde · Answer

Solicitation is the violation. have your paperwork prior to.

Alfredo Sanchez · Answer

@Greg Dickerson at what point do I have to part of the deal? Before soliciting potential investors or once we find financial parter we would iron it out then?

John Corey · Answer

Approaching this from a different angle.

1. Why would a developer approach you? What about what you do or what you said caused them to think you could bring cash to their deal?

2. Do you have skills, knowledge and interest to be part of a joint venture with a developer beyond fund raising?

3. What is you longer term vision or journey? If you can raise cash legally and there is good alignment, breaking into the business from the cash side is fine.

4. BIG WARNING. As someone else pointed out, raising funding for someone else's deal is heavily regulated. Since the 1930s. It is criminal to to raise money incorrectly. Yes, that can mean jail time. And it is a risk to you if you handling things completely legally and the developer oversteps the line with a project you are involved in. They might not know the rules.

The SEC sets the Federal rules and FL will have its rules. If any of the investors are from outside the USA, then their home country rules can apply. Tread carefully.

Kathy Utiss · Answer

I'm with Joe on that...12-18% but that sounds like a huge outlay...Might want to go for a percentage of the actual profit..As well. How much are they putting into the project? How much experience do they have? What are their finances truly like? Sounds like a lot of cash for apparent experience. Hope you know them well. Make sure there is nothing to uncover afterwards. That you know the truth of the situation. Make sure you have your banker review every fine detail.

Joe Villeneuve · Answer

If someone brought that kind of money to me, I'd pay them 15% SI over a 30 year period, or 12% SI over a 12 year period...but, that's me.  I've seen it higher and lower.

Dom Olsen · Answer

@Alfredo Sanchez all depends on the ROI. PM me. I may have funding options for you. All depends son the financials.

If I bring Equity to a deal, what’s my cut?

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