Raising money for your business brings a host of problems, not the least of which is finding people to invest.
Corporations can sell stock, LLCs can sell memberships and LLPs can sell partnership interests. Friends and family can invest. Promissory notes, unsecured business lines of credit and home equity lines of credit can all bring money to the business. Each is a well-trod way to raise capital and each brings its own inherent problems.
Some businesses looking to raise less than $1 million will create a private placement agreement.
The move, as suggested by Brian Hamilton of Sageworks, starts with the formation of a subscription agreement. This is a document prepared by a law firm that details the type and number of shares available and their price.
The next task is to place a realistic valuation on your company. This is a difficult needle to thread because you need the figure to be high enough to show a tangible value for your business yet low enough to show a realistic plan for growth. If the value is too low, someone will buy a huge chunk of your company but if it’s too high, no one will be interested in buying a share of your company in the first place.
Armed with this information, you can sell shares in your company to investors. Those with a net worth of more than $1 million who share your vision for the company are best, Hamilton says. He suggests attending entrepreneur meetings and network among venture capital firms – not for the firms themselves but the 20 or smaller investors who you can meet through them and who are willing to partner with you at this stage of the business.
Attracting investment dollars
As you prepare to attract investment money, it’s important to keep your aims realistic.
Make sure your valuation is connected to the results of a typical discounted cash flow analysis, or at least an evaluation of comparable transactions. Keep your expectations in line with what the market will bear.
Raise the money you need to succeed. Don’t look to raise $5 million if you only need $2 million for the next few years. Similarly, don’t look to raise $1 million when your business clearly needs $2 million to stay afloat.
Lastly, understand your competitors, even if you are offering a rare product. One of the most insidious competitors to your business is the choice for customers to do nothing at all.