Let’s pretend that you are a brilliant entrepreneur. You get a moment of insight with an idea that can help people. You do everything in your power to create a product or service. Or at least a prototype. You test it with potential buyers and you have a business plan in place. Awesome! But there’s one problem: you don’t have the money to get this idea to the shelves all over America. Depending on your ideas and endeavors, this can cost a lot of money. Equity is one of the best forms of capital if you are looking to start a business as an alternative form of payment. Use these ten tips to avoid giving away too many shares.
1. Seed capital
What you need to do is look for something known as seed money. Startup capital is money that helps protect your business, but in return, the investor receives capital. While this sounds intimidating, it is actually a common problem for most aspiring entrepreneurs. Fortunately, investors are easy to find if you know where to look for them.
Now that you’ve found your investor, the real big problem is negotiating. This means that how much equity can be exchanged for money, also known as capital, is at risk. If your business hasn’t even started yet, then an investor will probably want to get most of the capital if they are investing that much capital in your company. It makes sense. After all, this is a business.
Now, technically, you can with all intents and purposes give 100% of the shares for 100% of the capital. This is not unreasonable, and this is what happens in startups. The downside is that you will no longer be the owner, you will just be an employee there. So, since the business was your idea, you’ll probably want to have your say in the company, as its reputation may come back to you. Besides, you wouldn’t say which direction the business is going. All in all, it looks like you have little reason to be there if you don’t have a contribution. It is better not to give away all this equity at once.
4. Various offers
The good news is that many venture capitalists and investors prefer that “you” keep most of the equity in the company. Instead, they will probably want to get another offer, such as a key position in the company, such as a member of the board of directors.
5. Convertible credit
Or you can offer them a piece of convertible credit instead of just shares. The convertible portion of a loan is when the loan will be repaid as equity on a predetermined date in the future.
A good equity offer for seed capital would be somewhere between 30%-40%. You could even make 49% since you would still have a majority stake in the company.
7. Asset financing
Another option, rather than equity, is to provide investors with asset financing. Asset financing is when you use a company’s balance sheet assets, such as inventory, and use them to borrow money to get a loan. The company must then provide the creditor with a security interest.
8. Debt and equity financing
Meanwhile, debt financing is when your business raises money for capital and you sell debt instruments to people. In exchange for the money, the buyers become creditors and are promised that their principal and interest will be repaid. Another way to raise capital from debt is to place shares in the public domain. This is known as equity financing.
9. Leave a part for employees
What you want to do is leave some of your equity back. Why? This should leave some equity for your employees, whether you plan to hire them in the near future or if they already on board. Shares can be given as an alternative for pay, so look out for employees who go up and down for the company. It is also quite normal that the founder of the company becomes a minority shareholder. Although, this is different for more family businesses.
10. Business Growth
Regardless, if you are a founding entrepreneur and want to have a growth driven business, it is a good idea to have at least 25% business growth at the time of exit. Cause? It can make the long hours and hard work even more rewarding, and it can also help you have a promising retirement fund, as well as more freedom in your finances.
While all of these terms seem overwhelming, they really aren’t. Lots of time, most get along, and few problems. However, some people just think differently and may try to take some control over the company. For example, Apple fired Steve Jobs when the business was not going in the direction it wanted. It happens, so remember to be quick and open-minded about all possible possibilities.
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