It is a truth universally acknowledged that most public companies will, eventually, want money. That's because if there is one thing that publicly traded companies are good at, it is spending money. Certainly this is the case for anyone who oversees investor relations for a company in a capital-intensive industry like biotech, mineral exploration, or technology.

That’s why determining the best approach for raising money to finance a company’s operations or a major capital expense – sometimes before a company is even generating revenue – is often a key part of its strategy. Here are some critical things that you, as an IRO, will want to think about as you work with your management team to develop the financing option that’s right for your company.

Is it the right time?

The best time to finance is when you don’t need to finance. If you can, start planning for a financing while the company still has cash to spare. Doing so will give your company more options regarding the type of financing, terms and participants. It will also mean that you can postpone a planned financing if, for example, your share price is underperforming, and wait until it stabilizes at a price that’s more consistent with overall performance.

Be cautious about announcing your intent to finance. When a market senses a financing is on the horizon, downward pressure on the stock can follow. Avoiding that is a delicate, difficult balance that many public companies struggle with, and is often easier said than done.

Plan ahead

Think about the different kinds of financings you might use, and get a head start on preparing any regulatory documents you might need to file. This could be as simple as filing an updated Annual Information Form. Or it could mean preparing a prospectus, a legal document with details about an investment offering. You could consider preparing and filing a shelf prospectus, which is not for a specific financing but provides all the information of a prospectus in advance of a potential financing sometime in the future.

It’s also helpful to keep a list of investors who have expressed interest in participating in a financing. You should note if they say how much they would be prepared to invest, or what type of financing vehicle they prefer.

Determine the right financing for your company and its strategy

As with timing, you may not always have much say in this. Sometimes the right financing is the one that’s available to you when you need to keep the lights on. But wherever possible, you want to consider all the options that are available to you before determining the path forward.

There are three types of financing: debt, equity, or a combination of debt and equity.

In a debt financing, a company sells bonds, bills, or notes that must be paid back plus a rate of interest within a certain period of time.

In an equity financing, the company issues more shares to sell them to investors at a certain price; in this case, the investors are becoming part owners of the company in exchange for their investment. Sometimes equity financings include warrants, which is an option to purchase one share or a part of a share at a specific price for a period of time. (It’s worth noting that while many brokers like warrants, they add to dilution and can create a ceiling on a share price until the warrants expire.)

An equity financing might be a:

• private placement: a non-public offering under which the company sells its shares to a selected group of investors. These often have a lower regulatory burden and can be a good way to do a small raise by passing the hat to friends and family.
• bought deal: a public offering under which a broker or other intermediary guarantees the financing by committing to buy and place a specific number of shares at a specific price. Some bought deals are guaranteed by a syndicate of brokers led by one broker in particular.
• non-bought deal: a public offering under which a broker or other intermediary helps a company sell a specific number of shares at a specific price but does so without guaranteeing the financing.

When you work with a broker on a bought or non-bought deal, your company will often contribute a President’s List, which is a list of people that the company is bringing into the financing and may be excluded in the broker’s fee calculation.

Some other types of financing to be aware of include:

• convertible debt: when a company sells bonds that can be repaid to investors with cash or shares based on a certain conversion price and ratio. Investors still earn interest on the loans and usually have to decide to convert the principal into shares within a specific time frame.
• crowdfunding: relies on a very large number of people making small investments to raise a large amount of capital. In this case, investors would receive a share or a portion of a share in return for their investment.
• flow-through: is a uniquely Canadian vehicle for mineral exploration companies exploring in Canada. In flow-through financing, an investor can claim a tax deduction equal to the cost of the total initial cost of the flow-through shares purchase.
• forward-selling: is when a company sells an asset or commodity before it has been produced, often at a discount.
• streaming: when a resource company sells the right to purchase a fixed percentage of future production at a certain price for an upfront payment.

Aim for a low cost of capital and minimal dilution, when possible

Two important considerations in financings are the cost of capital and dilution. Cost of capital measures how much a company will need to make on an investment before that investment adds value. Dilution is how much the ownership percentage of current shareholders decreases when new shares are issued. In general, you want to aim for a financing with a low cost of capital and the least amount of dilution.

While debt has a lower cost of capital because the interest is tax deductible and is antidilutive because no new shares are issued, it is very risky for low- or no-revenue companies. Interest and repayments must be made whether or not the company has the cash flow to do so. In an equity financing, any money raised does not have to be repaid. If your company has a small number of shares outstanding and no revenue, you will probably go for an equity financing. However, if your company has consistent cash flow and a lot of shares outstanding, it may make more sense to explore a debt vehicle.

Size is a key component here. How much money should you raise? There’s what you need in the short- and long-term, balanced against the financing options available now and in the future.

If your company needs $5 million to get through next year, it might make sense to raise only $5 million. However, if you’re able to put together a financing with a low cost of capital that minimizes dilution, you might consider raising more so that the company doesn’t have to finance again, at potentially less optimal conditions, for some time.

Conversely, you may need $15 million for the next three years but are finding that the options are extremely dilutive. You may consider doing a smaller financing that covers the work you need to do in the short term, work that would enable your company to attract a better financing option in a year or so. Or you could consider a mix of financing options, and do a small equity raise combined with a manageable debt vehicle to minimize dilution.

Sometimes a financing is about more than money

While access to capital is often the main reason for a financing, it’s not always the only reason.

For example, you might think about placing the bulk of your financing with investors who do not currently own your shares, particularly if your shares are tightly held. Broadening your shareholder base can help increase liquidity over time, and help you cycle from shareholders who invested at one price to others who are prepared to invest at a higher price.

Or you may want to attract some analyst coverage. If you have a bought deal with a broker (increasingly rare these days), analyst coverage may follow, as the broker will want to support clients who invested in the stock. Working with a broker may also open the door to investor conferences that could attract more awareness and new shareholders to your stock.

Don’t forget, a key role of the IRO is to communicate the rationale

It’s always important to maintain open lines of communication with your company’s shareholders, particularly the ones who have been invested in your company for a long time. Try to ensure that current shareholders have the right to participate in any new financings, even if it’s a smaller portion as you try to expand a shareholder base.

One of your most critical jobs will be to communicate the rationale behind any financing to your pre-existing shareholders. A financing, particularly an equity financing, means dilution for them, so it’s important to help them understand why the company is raising money, how management determined how much to raise, and why now. Be clear about the goals of the financing and how those goals tie into your strategy overall. As always, the more that your shareholders buy in (forgive the pun) to your strategy, the better.

Annemarie Brissenden, CPIR, oversees investor relations for Lavras Gold Corp. (TSXV: LGC).