Community-Funded Wool and Fiber Mill Nearing Completion!

Community-Funded Wool and Fiber Mill Nearing Completion!

I met John Kuhry many years ago.  He was running a small Community Development Financial Institution that invests in Mendocino and Lake County in California.  He was passionate about creating opportunities for more people in his region to invest locally.  So, I helped him and his team at the Economic Development and Financing Corporation (EDFC) launch a Direct Public Offering.

They registered the offering with the state of California so that they could publicly advertise the offering and anyone could invest.  They offered a promissory note which pays 2% interest annually.  The minimum investment was $1,000.

EDFC raised over $350,000 which they invested in a start-up wool and fiber mill in Mendocino County.  The mill will soon open its doors and will produce 100% locally sourced, processed, and dyed yarn.  For details, check out this local news story.

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Frequently Asked Questions from Investors and How to Answer Them

Frequently Asked Questions from Investors and How to Answer Them

I strongly recommend approaching all kinds of investors, including those who may have never invested before and don’t think of themselves as investors.  These people can be amazing supporters and allies.  The challenge is that sometimes some education is needed to help these folks even consider an investment in a small business.  They have been told for so long that “investing” is something done by VCs and hedge fund managers, not regular folks like them.  Here are some questions they might ask and how you can respond.

Is this crowdfunding?

It depends on what you mean by crowdfunding.  One very common type of crowdfunding is where you post some kind of a project on a crowdfunding site like Kickstarter and solicit donations.  Donors are often promised something in return for their donation like a t-shirt or a thank you note.

That is not what I’m doing.  I’m actually raising investment capital.  This means that if you decide to invest and things go as planned, you will receive a financial return on your investment – just like you do when you put your money in the bank or invest in the stock market.

How is that legal?  I thought it was illegal for small businesses to ask for investment from regular people.

Some lawyers and financial advisors might tell you that but it’s actually not the case.  My offering is being done in compliance with both state and federal securities law.

I’m not an investor.

Actually, if you’re like a majority of the US population, you are an investor!  You may not think of yourself as an investor, but if you have retirement accounts, bank accounts, mutual funds, etc., you are an investor!  And you have options about where you can put your investment dollars.

Are you paying a market rate return?

The term “market rate” is very subjective and hard to define.  What I’m offering is an X% annual payment in the form of [interest/profit distribution].  This return is much better than what you would get if you put your money into a certificate of deposit at a bank, where you can get currently get X% interest.  Of course, there is more risk if you invest in my business because your investment is not insured by the FDIC like a bank deposit is.  The return I am paying to my investors is based on my projections about the future of my business.  I want to pay enough to fairly compensate my investors while also making sure that I don’t promise more than I can realistically afford to pay and still keep my business healthy.

Remember that all investment is risky!  Even an investment in an indexed stock mutual fund can be quite volatile and is affected by factors that are completely out of the investors’ control.

Also, there is a lot of hype about what a market rate return is.  For example, you may hear some investment advisors say you can expect a 6-8% return if you keep your money in the stock market over the long term.  The reality is that the Dow Jones Industrial Average annual return for the last ten years is a less than 3.25% and past returns cannot be used to predict the future.  Some experts are saying that the world’s financial markets are likely overvalued by at least $20 trillion due to stranded fossil fuel assets and a recent analysis cited in the Wall Street Journal predicts a 17% stock market drop caused by a pulling back from liberalized global trade.

How will I get my money back?

You may have heard of the Silicon Valley model of investment where the investor gets paid back when the company is sold or goes public.  There are some stories of investors making millions when they got lucky and invested early in a company that ended up going big.  In reality, the majority of investments that depend on a big sale or IPO don’t succeed and the investors end up losing money.

CHOOSE FROM ONE OF THE TWO OPTIONS BELOW DEPENDING ON WHICH ONE IS TRUE FOR YOU:

That model doesn’t fit my business – I expect to grow modestly every year and I have no immediate plans to sell to a larger business or do an IPO.  That’s why I am compensating my investors by sharing my profits.  My plan is that by the Xth year, I will be able to pay back my investors their original investment, in additional to the annual share of profits.

OR

I do expect to sell my business someday, but I will not sell at any cost.  I will only sell to a buyer that I believe will stay true to the mission of the business and I want the freedom to choose whether or not to sell based on what I believe to be in the best interests of the business and its long-term impact.  However, in the meantime, I plan to compensate my investors by sharing my profits.

So are you saying this is a “lifestyle business?”

I have heard some people categorize businesses that do not follow the Silicon Valley model as “lifestyle businesses.”  This seems to mean a business that grows modestly and is not shooting for a unicorn exit.  In that sense, I guess you could say that my business is a lifestyle business.  I have noticed that some people think that these kinds of business are not “investable.”  Nothing could be further from the truth!  Investing in a business that shares a reasonable return from its profits every year can be a great investment, compared to an investment that gambles on that one in a million chance of a unicorn exit!

Isn’t this a risky investment?

Of course, all investment is risky to some extent and not all small businesses succeed.  You should only invest what you can afford to lose.

But here are some things to keep in mind when evaluating risk:

  1. Look at your whole portfolio and remember that diversification mitigates risk. If almost all of your investments are in the stock market, investing in a small business whose success is not tied directly to the ups and downs of the public markets can be a good way to diversify your portfolio.  Think about it – almost all of most Americans’ investments are in giant multinational public companies.  But 99% of US businesses are small private companies that account for half of all employment and half of all production.  Why put all of your investment dollars in only half of the economy?
  2. The stock market has been likened to a casino – it has become so opaque, trading is increasingly conducted by algorithms, and financial instruments have become so far removed from the real economy that it is hard to trust that it will continue to be a safe place to put your nest egg.
  3. Warren Buffett’s advice? “Never invest in a business you cannot understand.”  Most investors not only don’t understand the businesses they’re investing in, they don’t even know what businesses they’re invested in!  They just let they’re fund managers make all the decisions and hope for the best.  Why not invest in some of the businesses that you know and understand?
  4. Most of our investments are made through intermediaries (often more than one) like stock brokers, fund managers, and investment advisers. When you invest directly in a business, you eliminate the fees and percentages taken by these intermediaries and there is more transparency about what you are actually investing in.
  5. A business is all about the people who run it. When you invest in a small business, you’re investing in the founder based on your opinion of his or her commitment, integrity, and abilities.  A small business owner is generally going to be much more committed to her business’ success than a CEO of a multinational public company.  CEOs move around from company to company and get their golden parachutes when they leave.  Entrepreneurs usually start their businesses to express their most dearly held dreams and passions.  Their business is their baby so they will stick with it through thick and thin.
  6. When you invest in a business based on your relationship with the owner, that owner is going to feel personally responsible for your investment dollars. The last thing she wants is for someone she knows to lose money by investing in her business.  She will do almost anything to avoid having to tell her investors that she has lost their money or is unable to pay them as much as she had promised.  When you invest in a faceless multinational corporation, there is no similar feeling of personal responsibility to the investors.

Besides the financial returns, what are the other benefits of investing in your business?

When you invest in a small business, you often get benefits that go beyond purely financial returns.

These vary depending on the particular investment and business but they often include

  • Having the pride of knowing that you helped a business that’s important to your community
  • Being able to tell your friends and colleagues that you invested in a business they may know and love
  • Being part of a community of investors with similar values
  • Having the opportunity to learn from the business owner about the details of the business
  • Providing support to the business owner when she needs it – advice, contacts, business referrals, etc.
  • Having some ability to affect the success of the business as a customer and a source of referrals
  • Being invited to special events
  • Being recognized publicly as a supporter of the business
  • Discounts and perks
  • Knowing that your investment dollars are supporting something that is having a positive impact in the world

Remember, all investments have an impact – what impact do you want your investments to have?  When you invest in a mutual fund of public company stocks, does that create any positive impacts in your community or on things that are important to you?

Investing in small businesses allows you to invest in the real economy in a business that employs people and provides useful goods and services.  When you invest in public company stocks, your money doesn’t even go to that company – it just goes to the previous owner of the stock!

Why not use some of your investment dollars to invest in things that are important to you?  Community gathering places, alternative energy, businesses that create good local jobs, etc.  Imagine if everyone moved just a small percentage of their investment dollars to small businesses creating a positive impact in the world – we could create a better world by simply being more mindful about where we put our money.

Interested in learning more? Get in touch!

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A Great Way to Make a Small Change

A Great Way to Make a Small Change

Eve Picker was introduced to the concept of real estate crowdfunding in 2012.  As a real estate developer who focused on underutilized assets in struggling neighborhoods, she had long wrestled with the impediments to financing projects that banks thought were too risky.  When the JOBS Act passed, Eve recognized an opportunity to finance impactful projects with the help of the very people who populate these struggling neighborhoods and cities.  And so she launched the real estate equity crowdfunding platform, Small Change.  The platform is not just about investing for a return, but it’s about investing to do some good.

Small Change focuses on catalyzing neighborhood projects that make their communities and cities better. It’s the nation’s first Funding Portal dedicated to funding real estate projects.

When I first met Eve, I recognized her as a direct descendant of one of my heroes, Jane Jacobs, a brave and tireless advocate for great cities.

The Small Change platform includes a proprietary “Change Index” to encourage investing in real estate projects that change cities and neighborhoods for the better by increasing walkability and bike-ability, public transit access, access to green space, and other measures of improvements to quality of life.

To learn more about Eve, check out her awesome TedX talk about the cure for the common city.

Interested in learning more? Get in touch!

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Jenny Kassan Consulting is now a Certified B Corp!

Jenny Kassan Consulting is now a Certified B Corp!

My company was recently certified as a B Corp.

Certified B Corporations are leaders of a global movement of people using business as a force for good. They meet the highest standards of overall social and environmental performance, transparency and accountability and aspire to use the power of business to solve social and environmental problems. There are almost 2,000 Certified B Corporations in over 130 industries and 50 countries with 1 unifying goal – to redefine success in business.

I chose to become a B Corp because I believe that businesses working for positive change in the world is what we need to create a just and prosperous world for all.

In order to become a B Corp, I worked with my friend Carolina Miranda of Cultivating Capital who helped me complete the assessment process and gather materials like supplier and charitable donation policies.

One of my favorite parts of the B Corp movement is the “Declaration of Interdependence” that all B Corps sign.

The declaration says in part “We are each dependent upon one another and thus responsible for each other and future generations.”

I just love being part of a movement of businesses that recognizes that we are all in this together and must care for each other.

I did a little research and learned that others have also written declarations of interdependence starting as early as the 1930’s.  Here is an excerpt from a recent one from David Suzuki: “At this turning point in our relationship with Earth, we work for an evolution from dominance to partnership; from fragmentation to connection; from insecurity to interdependence.”  Amen!

Interested in learning more? Get in touch!

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Convertible note cheat sheet

Convertible note cheat sheet

Need help figuring out what to offer your convertible note investors?  Here is a basic overview of convertible notes and decision making tool to help you choose the terms of your note.

First, what is a convertible note?

It is technically a debt instrument but not everyone who invests in convertible debt thinks of it as debt.  A convertible note is very popular for early stage Silicon Valley style tech companies.  Here is how it works:

Let’s say you are just starting out with a great idea.  There are some angel investors that love what you are doing and want to invest.  They could buy an equity stake in the company, but it is so early that it will be difficult to agree on a valuation.  But you do know that you plan to raise equity sometime in the next couple of years.  A convertible note is a loan from the early stage investors that generally will convert into equity when you raise your first round of equity investment.  That first round of equity investment will set the valuation as well as the terms of the equity.  In exchange for coming in early, the convertible noteholders get a discount on the price of the equity when the conversion happens.  What if conversion doesn’t happen because you don’t end up raising an equity round after all?  Generally, you will have to pay back the noteholders just as you would if it had been a straight debt investment.  In a Silicon Valley style deal, investors often think of a convertible note as an early equity investment because they are expecting the conversion to happen.  But technically, it is debt.

A very simple convertible note will contain the following basic provisions:

  1. Term – when does the note mature? This is usually 18 months to five years.  In Silicon Valley deals, it is rarely more than two years.  This can be stressful because the pressure is on to raise equity before the end of the convertible note term.
  2. Interest rate – this is usually simple interest calculated annually – it generally is not paid in cash to the investor, but accrued. Another thing to consider is whether you want accrued interest to automatically convert into equity or would you rather pay the interest back in cash?
  3. What triggers a conversion of the note balance to equity? The trigger event is usually when the company raises equity investment at or above a certain amount.  Raising that amount will generally trigger the conversion of the convertible notes (both principal and possibly accrued interest) to equity automatically.
  4. What is the conversion discount? In exchange for the risk they take by investing in the hopes that they will be able to get equity in the future, convertible noteholders generally get a discount on the price of the equity they purchase when their note converts.  This is usually a ten to twenty percent discount on the price that the equity investors pay.
  5. What happens if the conversion trigger doesn’t occur before the note term ends? This usually will mean that the principal and accrued interest become due and payable on the maturity date.  However, some convertible notes either require or provide the option for the principal and interest to convert into common equity instead at a pre-determined price.
  6. What happens if the company is sold during the term of the note? There are various ways that this can be handled.  It is common to provide the investor the option to be paid back or to convert into shares of the surviving entity.

There are a lot more variations that can be included in a convertible note.  For example, professional Silicon Valley investors will often want a “valuation cap” included in the note.  This means that when the company raises equity, the price paid for the equity by the convertible note holders is the lower of (1) the discounted price discussed above (usually a 10-20 percent discount) and (2) the price they would pay if the company was valued at the valuation cap at the time of the conversion.  This can result in a very big windfall to the noteholders if the equity investors agree to a valuation that is much higher than the valuation cap.

You can also get creative with what triggers a conversion.  For example, maybe you want your convertible noteholders to be converted into equity if you achieve a certain milestone like the purchase of a building or a certain amount of revenues.  This conversion trigger could be automatic or optional.  If it is optional, it could be at the option of the company, the investor, or both.  If conversion is triggered by anything other than a “priced round,” i.e. the sale of equity, you will have to be determined how much equity the noteholders will be able to purchase.  This could be based on a valuation done at the time of the conversion trigger or it could be based on a pre-agreed price.  The pre-agreed price could be a set amount or it could be an amount arrived at by doing some sort of calculation – for example it could be some multiple of gross revenues from the most recently completed calendar year quarter.

Another term you can include is called “most favored nation” status – this means that if you raise more money in the future in the form of convertible notes and the future investors get better terms than the current investors that the current investors have the right to switch to the more favorable note terms.

Your Convertible Note Terms

  1. Term (i.e. years to maturity): ______________________
  1. Interest Rate: ______________________
  1. Conversion Trigger
    • Raise $_____________________ equity round
    • Other
  1. Is conversion
    • automatic when triggered
    • at the option of company
    • at the option of investor
    • other
  1. Choose one of the following:
    • Both interest and principal convert into equity
    • Only principal converts, interest paid in cash
    • Interest converts at option of company
    • Interest converts at option of investor
    • other: __________________________________________________________
  1. Conversion discount: ______________________
  1. If conversion trigger does not occur during note term
    • principal and interest are due and payable
    • principal and interest are automatically converted into common equity at $______________ (valuation)
    • principal and interest are converted into common equity at $______________ (valuation) at company’s option (otherwise payable in cash)
    • principal and interest are converted into common equity at $______________ (valuation) at investor’s option (otherwise payable in cash)
    • other: __________________________________________________________
  1. Valuation cap? Yes/No
    • If yes, amount: $______________________
  1. Any other terms?

If you need help with designing your offering for investors, feel free to contact us!

Interested in learning more? Get in touch!

If you are interested in working together, send us an inquiry and we will get back to you as soon as we can!

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