Equity Financing from Business Investors

In equity financing, you give up partial control of your company to business investors in exchange for their capital. As opposed to debt financing, where you're forced to repay the loan. Don't get too excited, yet. You can lose control of your company if your investors -- ranging from private angel investors to venture capital firms -- feel your company needs a change of direction. On the other hand, they'll leave total control to you if they think you're running an efficient business operation. What Business Investors Want Why did Silicon Valley's Sequoia Capital grant Google $12 million at its infancy? It saw great potential, wished for partial ownership in the company, and wanted to help control the company's direction. The decision was right when Google hit its IPO in 2004, turning the venture firm's eight-figure deal into a $200 million gain. Business investors, or equity partners, want great returns on their investments. For them, they love a great small business with enormous potential. To access this capital, your equity investors will want ownership in your company (e.g. shares if you're incorporated). They can also be involved in the management of your company, so be aware of this. No More Control? Remember, business partners want the best bang for their buck. They'll be on you to provide great results. If you don't have a clear sense of direction, your investors will assume control of your company. You'll lose the independence you may have wanted when you became an entrepreneur. The best defense mechanism from this is to use your available resources to the best of your abilities, before you seek outside equity financing. Your investors will more likely let you run the business, because you've already built some traction. Importance of Voting Control Another way to keep more control in your company is to understand voting control. Stocks in a company come in two different varieties: common (voting) and preferred (nonvoting). Equity investors can be more willing to accept preferred stock if you give them some incentives. For example, you can grant them the majority of the profits by disbursing dividends first to preferred stock owners. Giving Up Control: Can it Be Good? If you're a great business leader who's indispensable to the company, giving up equity control to business investors can be a good decision. It's better to own 10% of a $1 million company than 100% of a $100,000 company because the potential for greater success is so much higher. Sure, you'll be losing equity control, but because your investors feel you can't be replaced, they'll give you great management power in the company's direction. If you believe you can provide a great return on an outside investment, equity financing may be a great choice for you. Equity Investment Options There are two sources of investment: those who invest their own money into your business (angel investors) and those who use other people's money to invest in yours (venture capitalists). Learn more in-depth information through the following links. Angel Investors: They're all around you. Know what to do. Venture Capital: It's hard, but you'll learn the best way to get it.

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Posted on February 18

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