Chapter 1: Introduction

"When it comes to raising capital, there are no guarantees…only degrees of probability. To further ensure success, simply increase the probability to the highest degree possible."

Timothy D. Hogan, Founder & CEO
Commonwealth Capital Advisors

This book is for serious professionals who desire to capitalize a start-up, early-stage, or even a seasoned privately or publicly held company and would like to increase the probability of raising capital to the highest degree possible. I will introduce you to some of the secrets, techniques and a simple process used by Wall Street to further that goal.

Wait! You do not have to take your company public. The process is for those who need substantial amounts of capital for a start-up or early-stage company or commercial project for which they want to maintain voting control and the vast majority of equity ownership - whether they choose to remain private or go public. It is a process used by Wall Street firms to raise capital for their client companies and you can use it to capitalize your company, as well. As you will see, once you are successful at raising capital in the private markets, opportunities will abound and you may decide to take the company public someday. This process gives you choices!

When speaking of raising capital for start-up and early stage companies, my primary focus is on passive rather than active capital. Passive capital means attracting investors who seek only a good rate of return on their investments and are not interested in any active management of the company. These investors are typically known as "Angels." Active capital means attracting professional investors who seek active management or strategic support of the company. We will address both types of investors throughout this book. Both sources of capital have their place, but in the early stages for most companies and entrepreneurs, too many cooks in the kitchen can distract from realizing the dream.

What is an Angel Investor? Originally, the term "Angel" was coined to refer to the people who financed Broadway plays when all else failed. Today this term has become common among the investment community to refer to a high net-worth individual that invests their own personal funds in various businesses. In the U.S., it is estimated that there are well over 250,000 angel investors that annually invest approximately $20 billion in American businesses. In 2003, over 42,000 new businesses in the United States received angel financing (it is believed this number is much higher as many of these investments go unreported). This represents roughly only 7% of what the banks are investing in, as well. Statistics show that this figure trumps that of venture capital investing and as much as 30 to 40 times more angel capital is invested annually than venture capital. Some estimate that angel investments have financed approximately twice as many firms as any other form of external equity investment, including institutional venture capital.

To understand and increase your company's chances of raising capital correctly, you should know how things currently are and what changes are taking place in the private, as well as, the public capital markets and get ahead of those changes to take full advantage of them. This, I explain in the next Chapter. Many concepts have been repeated to help you understand the full magnitude of the process.

A brief history of time that led to this book and the process defined throughout. I started my career in the securities industry in April of 1985 with Merrill Lynch, a venerable giant in the investment banking and securities industry. After the stock market crash of 1987, I joined the legendary E. F. Hutton in February of 1988, which was bought shortly thereafter by another industry giant, Shearson Lehman Brothers, which subsequently was acquired by Smith Barney, which was then acquired by Citicorp. Needless to say, I was heavily involved in an industry that was still in turmoil, due to the market meltdown on Black Monday, October 19th, 1987. I left the major firms in 1990 and joined one of the fastest growing regional investment banks in the Midwest. There, I rose up through the ranks to Director of Compliance within a year and a half. In that position, I oversaw the securities brokerage end of the firm and created and managed the investment banking division, the registered investment advisory division and was in the process of creating the commodities division. As I have said in the past, "my dollar to headache ratio went sour" and I was looking to get out of the industry - for good.

Shortly thereafter, I was contacted by my then step-father, a professional golfer, who had a need to raise several million dollars in equity to secure adequate debt to build, own and operate an 18-hole championship golf course with a surrounding real estate development project. In January of 1993, I left the regional firm and the securities industry for a short time. I created a $2,000,000 private placement memorandum (PPM) for selling securities under Regulation D 506 (an exemption from registration of those securities - the least expensive way to go). The PPM was complete by March 3rd and I immediately proceeded to solicit and sell the $2,000,000 in stock using techniques I learned working for those large Wall Street investment banks. I successfully closed the $2,000,000 in 5 ½ months, by August 14th of 1993 and obtained the necessary debt financing ($527,000) with a commercial bank shortly thereafter. I was able to push the debt amount to the federal legal limit the bank could lend (community bank) and I obtained it with no personal guarantees, as well. I was able to do this because I was in the process of creating another PPM to sell debt in the form of 1st mortgage notes to the general public. When the bank caught wind of what I was up to (attempting to compete for their depositors) they quickly assured me that they would fund the debt portion of the financing with no personal guarantees. More on this technique later.

Incidentally, the reason why it took that long to raise the capital, was that we did everything on a shoe string. I managed the company's overall administrative and construction operations as its CFO and Vice Chairman, in the morning, and physically managed the construction process by operating heavy machinery in the afternoon - it was a blast! One last thing, we built the golf course on time and $386,000+ under budget. Not meant to brag, but the point is to simply illustrate an answer to the most important question and entrepreneur can ask me: "What separates those who succeed in this effort and those who don't." Those who succeed do whatever is necessary to get the job done…period.

Suffice it to say, I received a lot of attention from the local professional community. The next thing I know I'm getting referrals from attorneys, accountants and bank presidents, who had clients that needed an extra million or so in working capital. So, in the subsequent years following up until Commonwealth Capital Advisors was created in the Spring of 1998, I served as a "serial CFO" of sorts, assisting a handful of companies with their capitalization needs.

I founded Commonwealth Capital Advisors in 1998 with a handful of managing directors, which included a corporate and securities attorney and a CPA. We threw up a website (an old one, not the one we use now) and the next thing I know we have entrepreneurs, primarily from California and almost exclusively in the "Dot Com" industry, hiring us to produce the appropriate "marketable" deal structures and creating securities offering documents to sell securities to raise millions for their start-up companies.

Things couldn't be better. At the ripe old age of 40 I'm playing a lot of golf; we were producing documents and assisting these entrepreneurs in their capitalization efforts. Success was everywhere - until February 2001. That month is generally regarded in the securities industry as the "Tech Wreck" or the "Dot Bomb" era. The "small cap" public markets fell apart and brought start-ups to a screeching halt. Now what to do?

I realized that through that high-flying era of hot dot com speculation, also coined by the then Federal Reserve Chairmen Alan Greenspan as "speculative exuberance" we had far too many prospective clients who simply didn't have a clue on what we did or how we did it. More importantly, even for those who did know how easy and successful a securities offering to raise money could be, most simply could not afford the process. Something desperately needed to be done.

Enter the creation of the Financial Architect System™. The idea of putting this extremely arduous and costly process into a do-it-yourself system and selling it over the Internet for an affordable price that thousands of entrepreneurs could use was a great idea. But, putting it into a workable system "so easy a child could do it" was a daunting task indeed. To create a system that is seamless and "so easy a child can do it" is most improbable - no matter the degree of sophistication the technological platform a system like this could be delivered on.

At that point, I wanted to grow the firm in several ways. I placed a career advertisement in the regional Wall Street Journal for a Managing Director in the greater Chicago area. Charles D. Dreher was one of the respondents with an investment banking background that I had a keen interest in hiring. During our several interviews, Charles asked me how many securities offering documents the firm created in the past four years, I told him Twenty Three. Then he asked, "what were the amounts of the capital raises?" I responded, "From $500,000 to $20,000,000 and everything in between." Lastly, he asked, "What percentage of the clients raised all the capital they were looking for?" I said, "78.2%." He said, "That's amazing. How's that possible?" I knew no difference so I hadn't had an opinion up to this point, but after some contemplation, I answered "Probably the proper deal structure combined with the client's commitment to the process."

Charles then proceeded to tell me that there are 25 million small business owners in America and that 600,000 new businesses are formed every year. He said, "Why not make your system available over the internet and see if we can drive down the cost?" We spoke to our attorneys and accountants and all agreed we should build the Financial Architect System™. It has taken over four years to create and beta test the system. The book you are now reading is the first of three interdependent components of the Financial Architect System™ - the educational component. You can judge the balance of the Financial Architect System™ based on what you're now reading.

What has been accomplished thus far, is the creation of a system that addresses the most important issues needed to start the process and that affords every entrepreneur a chance at a reasonable cost, both in time and money. The Financial Architect System™ is comprised of three interdependent components that serve as the fundamental basis of a successful securities offering. It is, in our opinion, as good as it gets.

Although we are former Wall Street financiers, we too are entrepreneurs. We saw a need for both side of the capitalization issue. Entrepreneurs need capital and financial institutions want to invest it, but only into "quality deal flow", which means companies that have a real chance of becoming very large very soon. The problem is that there is a huge gap between start-up and early stage companies' need for substantial amounts of capital and the financial institutions' desire to fund quality deal flow. The main mission of the Financial Architect System&rade; is to revolutionize the way capital is raised by start-up and early stage companies, not only in the U.S., but around the world.

The Financial Architect System™ is a patent-pending process designed to significantly reduce the cost and time involved in raising substantialamounts of capital through the issuance of securities and to do so in meaningful ways.

The Financial Architect System™ is not a business-planning program - although it can be used as one if a business plan has yet to be produced. The Financial Architect System™ evolves a business plan into a very expensive securities offering document, using the deal structuring and securities offering document production software templates, for a mere fraction of the standard cost.

More importantly, the Financial Architect System™ instructs the entrepreneur on how to legally and effectivelysolicit and sell securities in compliance with federal and state securities laws to actually attract investors and raise capital in any market environment, while maintaining voting control and maximum equity ownership of their company.

Although The Financial Architect™ System evolves over time, it is currently comprised of 3 interdependent components that are designed to be used consecutively to enable one to accomplish the task of raising capital.

The Financial Architect System™ is philosophically predicated on one overriding principal:Selling Securities directly to Individual Investors that meet their demands by conducting a series of securities offerings with "marketable" deal structures (to raise passive capital) over time.

The Financial Architect System™ is designed to increase your probability of raising capital to the highest degree possible. How can we make such a claim? We can because, without this process, Wall Street wouldn't exist. We've simply brought the "Wall Street" process to "Main Street" companies.

I can cite many case studies of entrepreneurs who've successfully raised capital using our Financial Architect System™ because these are the fundamental processes used on Wall Street. However, their success may not equate to your's. Without your belief in the logic, dedication and commitment to the process, the case studies are moot.

With that said, if you seek case studies, look at the 14,000-plus publicly traded companies listed on the major stock exchanges around the world. Most have used one or more of the processes described throughout this book. The Financial Architect System™ is a culmination of the most successful processes that have been used by the vast majority of publicly-traded companies in their start-up and early stages. This system is not simply a list of processes used by these various publicly-traded companies, but a focus on the combination of processes that work best in today's marketplace for start-up and early stage companies.

I mentioned that most publicly-traded companies have used one or more of these processes. What about the rest? The rest were most likely funded by venture capitalists, and in the end, the owners retained a very small percentage of the company when it went public or was sold to a strategic buyer. In my opinion, that is not a success by any measure.

To be clear, there is no magic bullet. The process involves education, application, commitment, and follow-through: e.g. "work"! Still, it's by far the most effective means to raise substantial amounts of investment capital while maintaining the vast majority of common equity ownership and voting control.

Anything worth doing involves work and no one else will do this for you, no one ~ legally that is. That said, you won't be alone because you will be hiring the right professionals (attorneys and accountants) to assist you and although you will pay for their time with the capital you raise, you'll still be in control. Your attorney and your accountant will serve as your primary advisors in this process, but you manage the process with the assistance of the Financial Architect System™.

On Wall Street, we were at the top of the proverbial food chain. Although the issuing client firm (our superior) hired us to get the capital raised, we had the access to it, the knowledge to get it and the required administrative protocol to comply with federal and state(s) securities laws, so that they could keep it, and we… our commission. Most often, the Wall Street investment bankers determined who would be the clients' legal and audit firms. The point being, you will learn the basics that will enable you to stay at the top of the food chain. Our concern is to make sure you are always in control of the process. Seemingly unimportant when you are just beginning and seeking expertise in the field, but remember, when money starts coming in the door - greed is always present. Without practical knowledge on how to maintain control of many matters, you could get taken.

Our principal aim, delivered through the Financial Architect System™, is to give every entrepreneur a chance at building their dream company. It's for those who normally could not afford the process, in time or money, to quickly, easily, and inexpensively get the required documents produced at a mere fraction of the traditional cost. To further entrepreneurial success in the capital raising process, the Financial Architect System™ is not designed to be just a securities offering document production program, on the contrary. Anyone can create a securities offering document inexpensively with ineffective securities offering document production templates and or services available on the Internet. The Financial Architect System™ is a holistic system of education, document production tools, investor contacts, compliance administration and more importantly; effective securities selling techniques to further assure that you do this right the first time. An old Wall Street mentor of mine used to come into my office at E. F. Hutton and say "Hogan…if you don't have time to do it right the first time how much time will you have the second time?" The point was taken. Do it right the first time or not at all.

For those who have tried to raise substantial amounts of capital from (and only to be rejected by) financial institutions, the information in this book may, at first, serve only to remind you of the time, money, and effort you have already wasted. On the other hand, you may now be glad to know you can control the process from now on. For those who have succeeded in raising substantial amounts of capital from financial institutions, such as venture capital firms, only to be hamstrung by ownership and/or voting dilution, this book will show you a way to get those financial institutions off your back…unless it is simply too late!

Know that it's only too late if you and your management team have lost voting control either through ownership and/or voting dilution or by funding agreements such as term sheets that limit your ability to raise capital or vote. If it's too late, then next time you build a company you will be armed with a new set of strategies that will enable you to dictate the terms of the deal and maintain the vast majority of your equity ownership and voting control.

For those who are just starting out or have bootstrapped their company to the degree that it can no longer grow with internally generated revenue, you may now realize that you must raise capital to continue building the company. If so, the information contained in this book should serve as an excellent guide for maximizing your productivity in this endeavor and to help you avoid many pitfalls you might otherwise encounter.

Raising capital from institutions or from individual investors is the biggest game in town because it involves the ultimate prize in a capitalistic system-the transference and use of "other peoples' money." Although you may have good or even altruistic intentions for your company, its employees, your community, your industry, your country, or for the world, at "the end of the day", it's all about the money. You can return money to your employees, your community and various other charities, but for now you need to put your investors' money first by designing a capitalization plan that ensures relative safety and a very good return on their investment.

Now, I am not writing this book to degrade the value of financial institutions. On the contrary, they have their place and serve many valuable functions. I am writing this book to teach for the benefit of your company. Once formidably capitalized through the company's own efforts, you may eventually choose to work with these financial institutions. If so, you will be able to from a relative position of strength that allows you to dictate the terms of the deal.

How do you deal with these financial institutions from a relative position of strength? By being in a position where they need you more than you need them!

Have you ever heard the maxim: "Banks will only lend you money when you don't need it"? In fairness to banks, that's not entirely true. They do lend money to those who need it; it just never seems to be enough.

The maxim should be "Banks will only lend you substantial amounts of money when you don't need it." Fine, how do you get to a position where you don't need it from them in the start-up or early stages of a company's existence when revenues, let alone profits, are slim to none? You simply compete for capital from individual investors just as financial institutions do.

Let's define financial institutions. Those would include traditional banks-commercial, community, or merchant-as well as investment banks, venture capital firms, private equity groups, insurance companies, pension funds, or any other formal institution that has been organized specifically to make investments on behalf of others.

What does "to make investments on behalf of others" really mean? It means that they are chartered through regulatory authority and/or by statute to make investments with funds they raise from individuals for the benefit of those individuals, first and foremost. Being true capitalists, they are allowed to make a profit, or in the case of a non-profit such as a pension fund to create revenue to cover their costs.

These institutions have a fiduciary duty to invest "other peoples' money" in a prudent fashion with the expectation of a return on investment from the efforts of others (primarily from the management of publicly-traded companies, commercial real estate managed by professional property management companies, and so on). The list goes on and on, but I'm sure you get the idea.

The point: All institutions raise capital from individual investors and your company can as well. At the end of the day, financial institutions do not own any money-people do. And if the institutions who invest other peoples' money cannot perform to the expectations of the individual investors, (people who ultimately own and control the money) they will move it. They will invest it elsewhere. For many, this is their full time occupation - investing.

So, if individual investors do move it, how can you capture it? By creating and selling securities that meet individual investor demand. Once you have been through one or more rounds of securities offerings, have ample capital on hand and or sufficient cash flow, consider creating and staffing a finance department (headed by a VP of Finance) within your company with those who have individual investor contacts and the skill sets that can carry out the tasks of selling securities and administrative compliance. Hiring a Vice President of Finance from the securities industry with the knowledge, skill sets, abilities, and investor contacts to further the cause. Early Stage Companies should consider this strategy as an option not a necessity. Rarely can a start-up company use this strategy. However, as one moves from start-up to early stage it should be seriously considered. More on this strategy in the Financial Architect System™.

Okay, that's all fine and good, but how do you pay for all this? You pay for it with the proceeds from your securities offerings, capital on hand and or current cash flow. How do I know the securities offerings will be successful? You cannot know. It's like deep sea fishing. You know there are fish in the ocean and you know they eat. You just need to be able to give them what they want to eat; have enough time to search for the best spot; and or hire professionals to assist you in the process. You can only increase the probability to the highest degree possible by training someone within your company (most probably yourself during the start-up stage) to handle the task of raising capital using the Financial Architect System™. You only hire someone new if they have the necessary qualifications and investor connections for the next round of financing. You could hire someone from the securities industry who might have the necessary qualifications and investor connections (with liquid funds for investment in your company) to handle the task. Do they need a securities license? No, as long as they are bona fide employees of your company. Do you need the Financial Architect System™ to go through the process? No, you can learn enough by reading this book, with the example of a Private Placement Memorandum (Exhibit A), and by perusing the Internet to get the job done.

However, if you would like to save a great deal of time, effort and money you can purchase the Financial Architect System™ from our website to create securities offering documents with marketable deal structures. Alternatively, you can hire a team of individual professionals or Commonwealth Capital Advisors to create your finance department and lead you through the process. In any event, it is the same process using the same system.

We, at Commonwealth Capital Advisors, originally conceived Commonwealth Capital Advisors to be the source of quality deal flow for Wall Street investment banks. To achieve that task, we had to address the organizational and capital structuring needs of start-up and early stage companies. We had the knowledge and skill sets to assist these young companies in properly preparing for the investment banking or venture capital relationship, we simply needed to give them the knowledge and tools to accomplish these tasks and develop the related skills on their own, hence, the need to write this book and to develop of the Financial Architect System™.

By enabling start-up and early stage companies to self incubate their capitalization needs along with developing the organizational and operational structures that make for "quality deal flow", we inadvertently became a source for start-up, early stage and seasoned companies' capitalization needs.

To further our cause, we had to position our company so as not to compete with other professional service providers, corporate and securities attorneys and accountants, who play a key role in the securities industry. In the natural course of events, we have become a key source of quality deal flow for those professional service providers, as well. Because we teach entrepreneurs to raise sufficient seed capital to employ the services of those professional service providers, these well-prepared and self-incubated entrepreneurs inherently become quality prospective clients for the attorneys and accountants.

We are former securities professionals and institutional financiers who have made a 180-degree turn on the securities industry. In the past, it was our job to extract as much flesh (equity ownership) from a company for as little money as possible without killing it. By law, our fiduciary responsibility rested with the investor side of the deal-making equation. Now, in contrast, our fiduciary responsibility rests with the entrepreneur's side of the deal-making equation. We have become the proverbial guard dogs for the entrepreneur.