Funding; one of the
driving forces to taking a business to new heights. John Dimmer opened my eyes
to the importance of gaining enough capital for your company to take it where
you want it to go. Special attention should be taken in this since it can help
in expanding your company or causing you to lose your part in it. This is because
too little can lead to running out of funds before achieving key milestones,
while too much can lead to selling yourself out of an ownership interest in the
company at too low a price. It all depends on the financing source you make use
of since they each have their own benefits and drawbacks.
Debt doesn’t dilute ownership
percentage, but it is often difficult for start-up businesses to obtain. Equity
is the largest pool of funding for start-up businesses, but by taking on equity investment, you give
up partial ownership and, in turn, some level of decision-making authority over
your business. Other financing sources include prize money from business
plan competitions (since it is non-taxable free money), governments grant known
as SBIRs, money available under veteran’s programs, crowd sourcing, and a few
other methods. Benefits of these are that there’s no repayment obligation like
debt and no ownership dilution like equity, though these methods can prove to
be time consuming and only nominal funds are available.
Gaining investors in a company through shares is a very common thing. Generally,
though, they never want anything to do with Sub-Chapter S Companies since they
eliminate many Angel investors and VC’s who use LLC’s as their investment entity.
The corporation’s investors prefer are “C” Corporations and LLC’s since they
provide liability shields for the investors. It is important to note though
that once your ownership drops below 50% you lose control of the company so it
is necessary to plan out how many times you plan to raise and where you want to
make use of your exit strategy if that’s your reason for building up the
company.
