3c hapter - Index of
3c hapter - Index of
3c hapter - Index of
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120 Locavesting<br />
Seeds, a purveyor <strong>of</strong> organic and heirloom seeds. (A “high mowing,”<br />
in case you are wondering, is an old agricultural term that refers<br />
to the mowed hilltop hayfi elds that were common in the area<br />
a century ago.) Stearns started growing seeds as a hobby and<br />
turned it into a thriving business. From 2000 to 2005, his sales<br />
grew by an average 80 percent a year, and he began to contract<br />
with other farmers to grow additional seeds. He was soon at what<br />
he calls a critical juncture, faced with a decision <strong>of</strong> either slowing<br />
down the breakneck pace <strong>of</strong> growth, or embracing it. Like<br />
any entrepreneur worth his salt, Stearns chose the latter. But that<br />
required investments in new facilities, equipment, technology, and<br />
staff to support the additional business.<br />
Stearns knew he couldn’t service more debt during this<br />
period <strong>of</strong> capital investment. Yet equity posed a challenge, too,<br />
since he wanted to retain control <strong>of</strong> his company and couldn’t<br />
exactly <strong>of</strong>fer the kinds <strong>of</strong> huge returns that angel or venture<br />
capital investors typically expect for their money. Ultimately, he<br />
decided on a convertible debt <strong>of</strong>fering that would provide reasonable<br />
returns and liquidity to investors, but on favorable terms<br />
to the company. Stearns proposed a 6 percent interest rate. The<br />
interest would start accruing immediately, but no interest would<br />
be paid out for the fi rst fi ve years. At the fi ve- year mark, investors<br />
could either convert some or all <strong>of</strong> their principal into equity and<br />
receive a lump sum payment <strong>of</strong> accrued interest, or elect to be<br />
paid back principal and accrued interest in quarterly payments<br />
over another fi ve year period.<br />
In less than fi ve months, Stearns had raised roughly $1.1<br />
million from 17 investors—all within 50 miles.<br />
The investors were all accredited, meaning they met the SEC’s<br />
defi nition <strong>of</strong> a wealthy, and by implication sophisticated, investor.<br />
Stearns needed to raise large sums, and he didn’t want to have to<br />
communicate with an unwieldy number <strong>of</strong> investors, so limiting it<br />
to accredited investors made sense. And, as noted in C<strong>hapter</strong> 2,<br />
it’s easier from a legal standpoint to deal with such investors. Still,<br />
says Stearns, “We need vehicles to allow smaller investors and<br />
smaller amounts <strong>of</strong> money to go into these things so on an aggregated<br />
basis it could total hundreds <strong>of</strong> thousands.”