1. Have you considered the pricing of the shares for your PIPE financing?

As I mentioned in my previous Blog we will now look at two scenarios for pricing a company’s stock in preparation of an impending PIPE financing.

OTCBB Stock Priced at $5.00 a Share

First let’s assume that your company valuation is $20 million. The CEO wants to start the price of the stock at $5.00 per share. So the company has a total of 4 million shares issued and outstanding. The company seeks to raise $10 million and is willing to give up 33% of the company to the new investors. They expect to sell an additional 2 million shares @ $5.00 a shares. Good assumptions, right? Well, lets get a reality check.

The stock starts to trade at $5.00 a share. Simultaneously, the Company is making the rounds pitching their deal to various hedge funds. Now hedge funds are allowed to sell short or go long. The hedge funds think your company is great and agree to buy your shares at “market price” at closing, which usually takes 45 to 90 days to close. The hedge fund goes into the marketplace and starts to sell your company’s stock short starting at the $5.00 price. By the time you close on the transaction your stock is at $1.00 a share. You need the funding for your company so you have no alternative but to close on the deal. You now have to deliver 10 million shares at $1.00 a share. The hedge fund is elated because they have covered their short position, funded your deal and made a boat load of money. In essence they are already out of your stock upon the closing of the transaction. This is a risk free investment for them. The only problem is that you now have 14 million shares outstanding and you and the other investors have been reduced from an anticipated post funding ownership of 66.6% of the company to 28% ownership of the outstanding shares. So, your grand plan didn’t turn out exactly like you thought it would.

OTCBB Stock Priced at $1.00 a Share

Let’s use the same assumptions. We have a company valuation of $20 million but the CEO decides to issue 20 million shares at $1.00 per share. The CEO is still trying to raise $10 million but this time at $1.00 per share. While he is pitching his stock to the hedge funds he also has support in the marketplace from friends and family who start buying the shares at the low price of $1.00 a shares in the marketplace. The shares start to gain momentum and move up to somewhere between $1.25 and $1.50 a share based upon the future success of the company and the impending funding. The hedge fund managers are happy because they are buying the shares at a discount to market at $1.00 a share. So they have locked in a profit of somewhere between $.25 and $.50 a share. They fund your deal and start selling their shares into the marketplace a little at a time. In stead of crushing your stock they are working “with you” because your stock is on the upswing and has market momentum. You get your $10 million and still retain ownership of 66% of the company.

Moral to the Story

It is much easier to price your shares at a lower price on the OTCBB and build interest and momentum in your stock than try to support your stock at a high price and constantly fight short sellers.

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