How a private capital raise is structured, start to finish

A founder asked me last month what a raise involves, and I handed over a list. Within a minute the follow up question arrived: which of these comes first. That question is the whole subject of this article. A private capital raise is a sequence with dependencies, and most of the confusion I see comes from people who know the parts but not the order.

What follows is the general shape of an exempt offering under Regulation D in the United States, written as a textbook rather than as a pitch. Nothing here describes a live transaction. The mechanics are the same whether the company is a two person software shop or a real estate sponsor with a long track record, and the order is the same too.

Decide the instrument before anything else

The first decision has nothing to do with investors. It is what the company is selling. Common stock, preferred stock, a convertible note, a simple agreement for future equity, a membership interest in a limited liability company, or a limited partnership unit are all different things with different consequences for control, tax, and the next round.

That choice shapes every document that follows. A convertible note needs a maturity date, an interest rate and a conversion mechanic. Preferred stock needs a charter amendment and a description of preferences. A limited partnership interest needs a partnership agreement that already exists or one that will be written for the purpose. I tell founders to spend a week here with counsel before anyone drafts a slide, because changing the instrument after the materials exist means rewriting the materials.

Pick the exemption and understand what it costs

An offering of securities has to be registered or exempt. For most private companies the working exemption is Rule 506 of Regulation D, which comes in two forms. Rule 506(b) permits an offering to accredited investors and a limited number of sophisticated non accredited investors, but forbids general solicitation. Rule 506(c) permits general solicitation but restricts purchasers to accredited investors, and it requires that the issuer take reasonable steps to verify that status. I go through the differences in detail in a separate article, so here I will say only that the choice governs how you are allowed to find people and what you must collect from them.

The exemption also brings a filing. Within fifteen days after the first sale the issuer files a Form D with the Securities and Exchange Commission, a short notice that identifies the issuer, the exemption relied on and the related persons. It is public and it is searchable, which matters later in this site when I write about filing data. Many states also require a notice filing, so the calendar has to include each state where a purchaser lives.

Build the capitalization table before the deck

A capitalization table is the ledger of who owns what, fully diluted, including every option, warrant and convertible instrument. Before a raise begins the table has to reconcile to signed documents, not to memory. I have seen more delays caused by an unreconciled table than by any investor objection, because a purchaser’s counsel will ask for it and will compare it to the charter.

The table also produces the number the whole raise depends on: how much of the company is being sold at what price. That arithmetic is easy on a clean table and impossible on a dirty one. A founder who cannot answer how many shares are outstanding today is not ready to say how many will be outstanding after the close.

Write the document set in reading order

The core set for a private placement is usually a private placement memorandum or an offering summary, the governing agreements for the instrument, a subscription agreement, an investor questionnaire, and a set of exhibits including financial statements and the capitalization table. The memorandum describes the business, the use of proceeds, the terms, and the risks. The risk section is the most important pages in the set. It is where the company states plainly what could go wrong, and it is written to protect the reader as much as the issuer.

I draft the set front to back, in the sequence a reader will actually follow, rather than in the order the pieces are easiest to write. That sounds like a stylistic preference. It is a control. A term stated in the memorandum has to match the term in the agreement, and reading front to back is how mismatches get caught. Counsel then reviews the whole set, and the business facts they were given determine the quality of what they produce.

Assemble the data room

A data room is the folder of documents a serious prospect will ask for after reading the memorandum: formation documents, material contracts, financial statements, intellectual property records, employment agreements, prior round documents, and the reconciled capitalization table. It should exist before the first conversation, because a request that takes two weeks to satisfy tells the prospect something about the company’s records.

The room is organized, which means it embeds a view of what matters. I keep an index at the top that states what each folder holds and when it was last updated. That index is often the first thing an experienced reader opens.

Run outreach inside the rules of the exemption

Now the raise reaches people. Under 506(b) that means people the issuer or its agents already have a relationship with, and no advertising. Under 506(c) the company may speak publicly about the offering, but every purchaser will have to be verified as accredited before the sale. Either way the outreach has a structure: a first conversation, a memorandum sent, a data room opened, questions answered, and a decision. A pipeline records which stage each person is in, and the stage is defined by an action the person took, not by how the call felt.

Two operating rules apply across the board. Every communication is consistent with the memorandum, because a statement on a call carries the same weight as a statement on paper. And every version of every document sent is logged against the person who received it, because the operative question later will be which version a given reader saw.

Take subscriptions and verify

A prospect who decides to invest completes the subscription agreement and the investor questionnaire, and under 506(c) provides verification of accredited status, which can be done through a third party service or through documents such as tax returns or a letter from a licensed professional. The issuer reviews the package, countersigns, and accepts the subscription. Funds move to the company’s account, or to an escrow account if the offering has a minimum that must be met before any money is released.

Verification is the step that shows whether an issuer means what it says about the rules. It is also where friction arrives at the moment momentum matters most, which is why the questionnaire and the verification instructions should be finished and tested before the first prospect ever sees them.

Close, then build the record

A close is an assembly of conditions rather than a single event. The last document to arrive sets the date. At the close the company issues the securities, updates the capitalization table to reflect the new holders, files the Form D if it has not already been filed, makes the state notice filings, and sends each investor a confirmation of what they hold.

Then the post close work begins. Investors are now owners, and they will expect reporting on a cadence. The systems that track who owns what, what they were told and when, and what the company promised become the operating backbone of investor relations. I write about that in the article on what investor relations does after the money closes.

The honest limits of a sequence

A strict sequence is a simplification. Experienced teams run several of these steps in parallel. The data room is assembled while counsel drafts, the capitalization table is reconciled while the instrument is chosen. But the dependencies are real. You cannot price without a reconciled table, you cannot send materials that do not exist, and you cannot take a subscription under an exemption you have not chosen. A founder who understands those dependencies can compress the calendar. One who does not will discover them in the middle of a conversation with someone who does.

The apparatus does not substitute for a business worth funding. It does decide whether a business worth funding gets funded on time.

Educational content only. Not legal, tax, or investment advice, and not an offer to sell or a solicitation of an offer to buy any security.