| You awake in the middle of the night with a business | | | | summary, I now have $175,000, but have given away |
| idea that will change the world. The only problem, of | | | | half the equity in the business. While I am not happy |
| course, is you need money to get the business moving. | | | | about this, I am still so enthused about the business |
| What do you do? | | | | idea that I shrug it off. |
| Investors and Equity | | | | The business gets rolling and I start selling gadgets like |
| Practically every economy is built upon the backs of | | | | a madman after one year. This gives rise to a serious |
| small businesses and entrepreneurs. Every day | | | | cash problem. I am getting orders, but can't fill them |
| someone comes up with an idea that will make a | | | | because of cash flow problems. To make a proper go |
| great business. Every day, these same people wonder | | | | of the business, I need another $100,000. |
| how they will come up with the cash to get the | | | | Where am I going to get $100,000? My business is only |
| business off the ground. The classic answer is to look | | | | one year old, so a bank won't touch it. My investors |
| for investors, and this is where things can go bad. | | | | haven't seen penny one back, and are unwilling to put |
| If you're seeking investors for your business, you are | | | | more money in. My only option is to sell another 400 |
| going to need to form a business entity. Corporations | | | | shares for $100,000. Fortunately, I sell the shares, raise |
| and limited liability companies are the most popular, and | | | | the money and stay in business. However, there is a |
| give you the ability to trade ownership interest in | | | | major problem. |
| exchange for cash contributions. With a corporation, | | | | In raising all of this money, I have now sold off ninety |
| investors will buy shares in the corporation. With limited | | | | percent of the equity in the business. I am left owning |
| liability companies, the investors will buy membership | | | | 100 shares and only 10 percent of the business. This is |
| interests. Regardless, this traditional exchange gives | | | | going to severely impact my physical, emotionally and |
| rise to a problem common among small business | | | | overall motivational well being. Slowly but surely, I am |
| owners, to wit, giving away too much equity. | | | | going to become very bitter. It was my idea and I am |
| From Joy to Misery | | | | doing all the work! It isn't fair that I only own 10 percent |
| A common mistake made by new business owners is | | | | of the business! |
| to give away too much equity when getting initial cash | | | | On second thought, this impression may come on very |
| contributions. This occurs because you let insecurities | | | | quickly. Regardless, the business is destined to |
| impact you evaluation of the business. Instead of giving | | | | experience major problems because the primary |
| away two percent of equity in exchange for $50,000, | | | | motivating force is no longer motivated. Unfortunately, |
| you give away ten percent. Let's look at an example. | | | | many people with business ideas run into this problem. |
| I start a business selling digital gadgets. I prepare my | | | | If you are starting a business, guard your equity at all |
| business plan and realize I need $250,000 to get | | | | costs. Selling equity should be a last resort. Try to get |
| everything up and running. I have $50,000, but need to | | | | loans or trade profit sharing in lieu of selling equity. If |
| find the rest somewhere. I form a corporation with | | | | you must sell equity, do so only in small percentages. |
| 1,000 shares and start approaching potential investors. I | | | | You do not want to the small business person in the |
| offer 100 shares for $25,000. I find five investors that | | | | example above. |
| give me $125,000 in exchange for 500 total shares. In | | | | |