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Equity Structure


MNDistillery

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Curious for those who had/have investors, how you structured your equity.

How did you set it up?

What do you wish you would have done?

I'm looking for about 500-600k from 3-4 investors for an overall total project cost of $8-900k.

Products are already in market via private label route.

Interested in being able to buy back ownership as well.

Thanks for any insight!

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I am a LLC, but with way too many small equity members. We will change the structure to a corporation or Sub S Corp.

Then stream line the company by buying out the smaller members. Would have preferred a few larger members, but I have

to maintain Majority control and other big will want big control. I was a long shot when I started, so this is how it played out.

Remember Chip Tate, and the whole Balcones Whisky debacle.

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The details are all in the operating agreement. You can hold 1% of the equity but have majority voting rights. This is where you want to get a shrewd business lawyer involved. Unless you're going to offer shares to the public, I think you'll want to form as an S corp (or convert it your an LLC / LLP) rather than a C corp.

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Pro tip: if you're discussing deals or enticing investors, have your (ideal) business structure completely locked in before you breathe the first word. Protect thyself: Hire a good lawyer, set a plan, then talk to others.

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We did an S Corp for the first two years. We started with about 20 investors, however our close family members held more than 60% of the stock and all of the super voting stock (B shares). Then we switched to a C Corp after two years because we had some venture capital types interested in our distillery. We turned down the venture capital group and decided to just stick with rich individual shareholders that don't want majority control.

The Chip Tate / Balcones situation was a big factor for us avoiding any single outside investor obtaining a controlling interest outside of our family.

We now have about 40 shareholders. One of our investors recently loaned us money (are a good rate) to fund our building expansion. Much easier and quicker than dealing with a bank.

When we were a paper business plan in late 2011 we sold shares at $1.00 per share with a minimum investment of $10,000.

Our most recent shareholder paid $11.00 per share.

It was difficult to raise money when it is just a paper business plan. But after you have a real product and sales revenue, it is much easier. Investors start knocking on your door.

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  • 2 weeks later...

Reading through this thread, I did not see any mention of the Private Placement Memo. Has anyone had any experience with that document/instrument, and or advice relating to it? We've been advised to have a PPM for distribution to investors, and 2 attorneys have offered to craft on for us for the mere sum of $20,000. What is the PPM all about?

Boom

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On the surface it is a way to sell stock to only a select group. You are buying money from a private person, not a bank. Investors have to be QUALIFIED, as having a net worth over one million usd.

With an Initial Public Offering anyone and everyone who wants to buy, must be accommodated. SEC regulations will be more stringent for IPO.

With the PPM, you select who you offer to and no one else. Number of investors is also limited...I can't remember how many. You also get relief from ALL SEC Regulations. With a PPM you don't have to prove your companies solvency to the Department of Treasury. You do not have to report profit or lose to the SEC. The SEC will not get involved in a dispute.

I would assume that for $20,000 the lawyers are writing the document (there are boiler plates), finding investors and managing the term to payoff. Some lawyers would do this for a percentage...if the amount raised were big enough they might do it for 1-2% a year.

Again, I would not sell them part of the "distillery". Sell the ownership of the company that owns the distillery equipment.

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There are places for attorneys and this is one of them. I'm not an attorney. But, if you can't understand it, don't do it, is a good non-attorney rule of thumb. And don't nod like a bobble head just to give the appearance that you know. Really understand what you are getting into or avoid it. Complicated schemes are complicated for a reason. They weave a sinuous path. There are laws, they try to find a way around them, and if they don't do it right, you are screwed.

That is general advice. I won't pretend to give advice on PPM's.

Flying Red Pig is correct, PPM's appear to be boilerplate in a lot of instances. That is why you can find attorneys on-line who will do the memorandum for $2,000 or so. guaranteed in all 50 states, etc. I have no idea if that is a good idea, but m leary of schemes concocted by the MBA's in fiance who create deals - not spirits - as a way to make money.

Further, the $1M requirement means that you are not going after money from typical friends and family. So, unless you know people with a bankroll, it would appear that the PPM is not going to do you any good. PPM's belong to the realm of games that are played above the rim. I'm happy to be the old white guy who can't jump.

Ask yourself honestly, what have you got to offer that will attract persons who have large hunks of cash they want to invest. If the answer is that you have nothing, then why bother to worry about structuring sophisticated deals in the first place?. The poet and monk, Thomas Merton, once wrote, "Isn't life absurd enough already without our adding to it our own fantastic frustrations and stupidities? There are a lot of LLC's out there that are formed without any regard to a PPM. There members just want to distill. Isn't getting into the business of being a distiller absurd enough without schemes? Why add the potential frustrations and stupidities of PPM's. Unless you are in the business of crafting deals instead of bourbon, why would you want to do that.?

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I like dhdunbar's reply.

To get at the same...why would a distillery go PPM?

A. Because they can't get a loan from a normal bank or a trusted angel.

Why would an investor fund by PPM?

A. Because they are going to get a better / higher return than from a bank,because it's a risky investment.

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Reading through this thread, I did not see any mention of the Private Placement Memo. Has anyone had any experience with that document/instrument, and or advice relating to it? We've been advised to have a PPM for distribution to investors, and 2 attorneys have offered to craft on for us for the mere sum of $20,000. What is the PPM all about?

Boom

$20,000 seems crazy expensive to me for a startup to raise money.

I wouldn't pay that. I have had lawyers involved in fundraising ask for that also. They are also claiming they will put you in touch with other investors. But they want their $20,000 upfront before they do anything. Then their promises are really just, "best efforts". But your $20,000 retainer is already in their bank account. No thanks. Most lawyers are worthless scammers.

We found it much easier and less complicated overall to just deal with angel investors and local wealthy people that want to be involved in the local distillery. Our documents for the subscription agreement are very boilerplate. We have not had any problems.

We have also turned down a few investors that seemed like they might be troublesome.

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$20,000 seems crazy expensive to me for a startup to raise money.

I wouldn't pay that. I have had lawyers involved in fundraising ask for that also. They are also claiming they will put you in touch with other investors. But they want their $20,000 upfront before they do anything. Then their promises are really just, "best efforts". But your $20,000 retainer is already in their bank account. No thanks. Most lawyers are worthless scammers.

We found it much easier and less complicated overall to just deal with angel investors and local wealthy people that want to be involved in the local distillery. Our documents for the subscription agreement are very boilerplate. We have not had any problems.

We have also turned down a few investors that seemed like they might be troublesome.

Thanks for the reflections. We've turned away from the $20K offer for help too. Just didn't make a lot of sense. And, while turning away, we suggested to the lawyer that if he'd bring a demonstration of interest from the prospective investors he mentioned, we gladly revisit the decision to have him do the PPM. Seems we sort of trapped him in his pitch, on the one hand he's supposed to be telling others about our great business opportunity, then he'd have to hand off a PPM that reveals all our warts, and weaknesses. Haven't heard any more from him on the matter.

Did get a 'Blue Sky' assessment of the needs, and requirements for selling securities in the immediate 4 state area, from a different firm, and discovered the the rules for filing a PPM with each state vary somewhat. But the requirements of the PPM are basically stipulated by the SEC, and, while not a simple task, an adequate job can be done with a lot of elbow grease and plenty of outside reviewers.

Bottom line is, we now have a PPM, which we will use as the 3rd step in our invester-document presentation package. Our first level of interaction, beyond conversation, is an NDA. If that flies, we'll pass along our Biz Plan, and an investor qualifier document. If that flies, and the prospect qualifies, we'll send along the PPM, and register it with the appropriate authorities. If that flies, we'll consider an offer, and if not, at least we'll have made a token effort to protect our flank from someone trying to hijack our strategy.

BTW, I love the Teton valley, spent many years camping, hunting, skiing, fishing, and chasing girls around the valley between the 60's and the 80's. Sometimes I miss it, alway's will love it, Especially now, it's spring time.

Regards,

Boom

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