If you plan to finance your company by offering equity to private investors, you cannot use any investor funds until your offering closes. Until closing any money provided by investors should be held in an escrow account or in a bank account that is separate from your company operating account.
For example, if you have told investors that you will not close the offering until you have raised a minimum of $1,000,000 and to date you have raised only $500,000, you can’t touch the $500,000. The exception is if one of your early investors agrees to provide “upfront money”. By upfront money, I mean money that an investor has given permission to use prior to the full capitalization of the company.
The upfront money arrangement can be structured in a variety of ways including as an early subscription to the offering in which the investor waives the right of refund if the offering fails to close. If you use that mechanism, the investor waiving refund must acknowledge the possibility of losing all or part of her investment if insufficient funds are raised to complete the offering.
Another method of structuring an upfront money arrangement is as a loan which can later be converted to equity as part of the offering. Of course, remember that if the offering does not go forward, the loan is ostensibly repayable.
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