September 11, 2019
Short answer… it’s absolutely not.
Here is where it started…
There’s a common practice which lawyers and CPAs follow. I was given this code when I tried to break rank at a CPA firm trying to help clients.
“Matt, don’t try to get sophisticated with clients, just – Do what we’ve done before.”
I was told not to start changing things and helping the clients with new tax strategies as it will get them asking questions and wondering why we haven’t done this in the past.
“Matt, just repeat what we did last year.”
I quickly learned it was the same with the law firms.
“Just do what we’ve done before” is their motto.
With private offerings under Regulation D, I often have new clients fresh from the latest conference or real estate seminar that ask, “I hear investors want a 9% preferred return and 70/30 split…right?”
“No, there is no standard or “going rate” just like there is no standard or typical investor.”
If you follow the “going rate” on smaller deals, you, the sponsor/organizer may end up finding out you gave away the farm and financially, the venture was not worth your time and effort.
Look at some of the Regulation D 506(c) and Regulation A offerings by some of the well-known online and industry “influencers” out there, none of them have the same structure.
You’ll see they range from 6% preferred return and others are offering into the double-digits… with distributions of quarterly or monthly net profit splits all over the place.
Often times, the person gives you the “going rate” or “standard practice” is a lawyer just trying to get the legal documents (PPM) completed without much hassle. It makes things easier for them and justifying the routine by telling you this is “standard practice.”
There is no “going rate.” In the world of private capital, one size does not fit all.
If you can sell it to investors, and it’s worth your time and effort, it works.
My clients that have been the most successful in achieving their capital goals are the ones that can assess all the factors of an investment opportunity and shape an offering that’s a win/win for everyone.
Here are some very diverse examples of deal structures that some of my clients have successfully executed over the past year. Even within a single offering, there can be variations to accommodate different investors and offer incentives.
The reality is, you the sponsor have the freedom to fashion an offering that makes sense for everyone. Break the mold set by attorneys that want to rinse and repeat their last client’s Private Placement Memorandum.
There are no hard and fast rules.
One rule of thumb I like to share – on smaller deals, the sponsors should take a larger share of the pie compared to larger deals in order to make it worth their while. Then on larger capital raises, take a small percentage of equity/split.
But even this rule is not a hard and fast rule. I’ve had clients willing to give up a bigger piece of the pie – even on smaller deals – just to get experience and traction with investors… but that’s not for everyone.
Remember, you’re setting the bar when you bring investors to the table. Trying to reduce their portion of the pie on the next investment will be challenging.
Break from the “industry-standard” and get creative to attract investors for the long-term and not just for a one-off transaction.