Equity Financing

Straight equity is easy enough to figure out. Your company sells restricted common shares of stock at a stated price, usually at a discount to the market, and the investors either get registration rights to sell those shares in 90 to 120 days or they wait the required 12 months to sell their restricted shares if you do not register them. The advantages of the equity financing is that you know exactly how many shares you sold and at what price. Provided you have sold your shares at a price that is close to the current market price you will not have to worry about large price fluctuations in your stock.

Many companies today also include a warrant attached to their equity financing. The warrant is usually priced anywhere from 25% to 100% about the initial price of the equity shares but gives the investors a period of three to five years to exercise their warrants.

For example, let’s say you sold shares in a $1,000,000 equity placement at $1.00 per share and you included a three year warrant exercisable @ $1.50 a share. This is usually referred to as a “Unit”. Now each investor who purchased 100,000 shares for $100,000 would also get an opportunity to buy an additional 100,000 shares for $150,000 anytime in the next three years regardless of how high the stock price went.

Now your company has raised $1,000,000 but it also has positioned you to raise an additional $1,500,000 from investors exercising their warrants. This gives the investors an opportunity to make additional profits and the company an opportunity to raise additional funds without having to pay additional legal fees for a second Private Placement Memorandum (“PPM”). You can also provide provisions in the warrant coverage that allows your company to repurchase the warrants at a substantial discount if the investors do not exercise their warrants within a certain period of time after the stock surpasses a certain price target. This is sometimes referred to as a “use it or lose it” provision.

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