3c hapter - Index of

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