Top Ten Reasons to Solicit Equity Investors

Are you starting a business and in need of capital? Are you having difficulty getting a bank loan? If so, consider soliciting equity investors. Opening a business with many “partners” can be good for business and good for financing purposes. This is true for many of the following reasons:

1) It can be difficult getting a bank loan . There are a multitude of reason why banks may deny you a business loan. The other alternative, for equity financing, is getting partners to invest.

2) Having many partners who are “owners” equates to robust marketing. Imagine 50 people who love your business that own a small piece of it telling all of their friends and neighbors “Hey, go visit this new company. I am a part owner and it’s fabulous!” What better word of mouth marketing could you possible get?

3) Equity may be cheaper than debt. Depending on the deal structure, your dividend or repayment of profits to your equity investors may be less than a bank funded loan.

4) Structure properly and include a right to buy-out your equity investors. Pay your equity investors a fixed rate of return (like a preferred stock) or share the profits (like common stock), but within a certain amount of years for example, three to five, have the governing documents be clear that you can buy them out for a pre-determined price.

5) 49% partners are not that bad. So long as you continue to own voting control of the company, sharing up to 49% of the ownership will not inhibit you from running the company. Your governance documents need to be clear.

6) Not all equity shares are equal. You could distribute non-voting shares to your investors thus retaining the voting shares for yourself to be able to run the company.

7) It’s not what you know, it’s who you know. Similar to #2 above, if you have many equity investors, you can leverage your relationship with those equity investors to leverage vendors, get to know the local dignitaries, and take advantage of their network that would not otherwise be in your network.

8) Equity is better for future expansion. If you meet your obligations and are able to distribute profits of the company to equity investors, they will be there for you to make further investments in future locations. If not, their presence in the first location will make it easier for you to get bank financing for the next location.

9) Show family and friends that you are serious. Often times family and friends, because they want to support you, will be willing to “lend you” some money for the new venture. Show them you are serious, and make them a part owner so long as they are indemnified in the governance documents for legal exposure. It highlights your credibility.

10) Do nothing on a handshake. Business stories are abound with oral agreements for the money person to be an equity owner and not know what his or her equity rights really mean. Document the relationship in legal documents.

For any further discussion, please reach out to Kerry Lavelle at klavelle@lavellelaw.com or 857-705-7555 to schedule an appointment.