What does it cost to set up everything I need to go raise money?
The costs will vary depending on the professionals (i.e. lawyer and accountant) you hire but shouldn’t be too onerous relative to the money you’re looking to raise. You’ll need a lawyer to draft or finalize your subscription agreement (sample here) and an accountant or tax lawyer to write an opinion letter to confirm the shares in your company are in fact RSP eligible (sample here). The subscription agreement should cost a couple thousand dollars at most and the RSP opinion should be in that range as well but may be a bit higher.
How much should I sell shares in my company for? What's my business worth?
First, it depends on whether you’re selling common shares or preferred shares. A preferred share is much like a debt so the value is usually equal to the amount of money received from the investor. Common equity is more complicated as it requires you to figure out what your business is worth. There are numerous ways to do this. Businesses are most commonly valued on a multiple of their last twelve month’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). In addition, investors will give consideration to your current balance sheet and track record in the past number of years, with 5 often being the benchmark. It’s wise to engage a professional to help determine what the right price is. Fair Market Value (FMV) is the price at which an arms-length investor is willing to pay for a company’s shares but that’s not necessarily indicative of what they’re worth
Who do I have to tell about the money I've raised? Do I have to file with the Securities Commission/etc?
Your small business is a “private issuer” if you have less than 50 security holders (excluding employees) and your formative documents or security holders’ agreements (for instance, your articles of incorporation) contain restrictions on the transfer of securities. As a private issuer, some of the key people you can raise money from are; friends, family, business associates, and accredited investors.
If your small business uses the private issuer exemption, you are generally not required to file a report with securities regulators. As long as your business continues to meet the definition of private issuer, your security holders can transfer their securities to one of the types of people listed above, provided the directors consent to the transfer of shares. No other transfers of securities are permitted.
I’ve only issued common shares from my company. Do I have to do anything special to issue preferred shares?
The first thing you have to verify is that your articles of incorporation allow for the issuance of different kinds of shares, in this case one or more classes or series of preferred shares. If they do, you’ll have to verify that the attributes of the shares you’re permitted to issue match what you want to offer investors. If they don’t, or if you aren’t authorized to issue them at all, you’ll need to modify your articles which will require both a shareholders’ and directors’ resolution (ALBERTA based samples: Shareholders' Resolution / Directors' Resolution). It is highly recommended that you engage a lawyer to assist you with revising your articles and preparing the necessary resolutions before proceeding to engage investors.
Do the new investors I sign up get a right to vote on matters affecting my company?
It will depend on what types of shares you issue them and the rights attached to those shares. Common shares most often have voting rights attached to them whereas Preferred shares often do not. Regardless of whether the shares issued generally have a right to vote, all shareholders have rights to vote on certain matters including the sale of the majority of a company’s assets and the right to receive audited financial statements.
How do I know if the shares in my business are RSP eligible? What does "Active Business" mean?
In order to qualify, 90% or more of your company’s assets must be used in an active business carried on in Canada. An active business is generally one which earns income from a business providing goods or services rather than receiving passive income (say from rental payments or licensing arrangements). However, even a business earning passive income will qualify if it employs more than five full-time employees.
Just because a company’s shares are eligible though, it doesn’t mean that just anyone can invest their RSP in the company.
There are also ownership requirements for a qualifying private company.
The shareholder contemplating putting the shares in his RRSP may not at any time own 10% or more of the shares of any class of the company.In addition, the company cannot be controlled, directly or indirectly, by foreign persons.
The company must also deal at “arm’s length” with the RRSP shareholder. This ongoing requirement means generally that the RRSP shareholder can’t be related to the persons controlling the company, and all parties must deal with each other on commercial terms.
What kind of lawyer should I be looking to hire? Is there a list of qualified professionals you can provide?
This is a specialized area of law that requires familiarity with securities legislation and a good understanding of corporate commercial law. A list of a select group of lawyers familiar in this area can be found here, however there are many other professionals familiar with this area of law across Canada.
I’m an investor interested in purchasing private company shares. What should I be looking for? What do I need to know?
First off, the failure rate of start-up businesses is high compared to established businesses with a history of successful operations. A failed business is unlikely to return your capital, let alone give you a return.
Second, securities of private companies are usually subject to very strict resale rules. These restrictions mean that you may not be able to get your money out when you need or want to. Ultimately, you may never be able to sell your shares.
Outside of risks relating to the company and investment itself, there are RSP specific risks when investing in a private company. For example, should the shares cease to qualify under the rules and become a“prohibited investment”, the potential penalties to the new shareholder are significant.
There is an abundance of publicly available information for those considering investing in private companies. While not exhaustive, the websites below are a good place to start.https://Getsmarteraboutmoney.cahttps://www.investright.org/investing-101/the-basics/private-placement-market/https://checkfirst.ca
Investors should consult with a lawyer, accountant, and/or other professional advisor when contemplating investing in any private company.