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Finding the Right
Source of Funding
Finding just
the right financing to start or expand your company is a complex
process that involves uncovering sources of money, using the proper
means and evaluating whether the timing is good. If the economy is
slow, it's more difficult to raise cash — no matter how
clever your business plan is. You should consult Ronald
J. Cappuccio, J.D., LL.M.(Tax) business attorney at (856) 665-2121 to
help you legally plan your business financing.
There are several ways to initially finance your business:
- personal funds,
- cash injections from family
- Round Robin
Financing is often done through “rounds”
over time
and may involve one or more sources. Expect to wait about six months
from initial contact to actually receiving the cash. Because the value
of the business may rise between rounds of funding due to
increased numbers of customers or new products and services, later
investors may get less percentage ownership for their investment.
Initial financing is frequently due through friends, loans, venture
capital firms that specialize in financing
new businesses and wealthy angel investors who have no institutional
affiliation. Nevertheless, this process is complex. Your lawyer can
help make sure that the
deals you make are in your best interest. The key issue frequently is
negotiating the amount of control you retain in the company.
After all, it was your idea and you don’t want to lose
ownership.
Here
is a summary of the major sources of start-up
financing:
1.
Personal Funds - This is the most common source and is
often preferred because it lets
you and your co-founders maintain control. Most importantly, it shows
your commitment to the enterprise, which can help you develop a strong
position for later venture capital financing. Another advantage is
getting you into business faster, without the
delays that can accompany efforts to attract outside capital. One
source of personal financing is the cash value of whole life insurance
policies you may have. You may have accumulated a considerable cash
surrender value that you can borrow against.
2.
Venture Capital - This is usually a good source of money,
if you are able to negotiate
reasonable and acceptable terms that relate to your control over the
company and the return that venture capitalists expect from their
investment. Some investors may insist on taking an active role in
strategic planning and company operations. Professional advice can
really help in these negotiations, particularly when bargaining power
may not be equal on both sides of the table.
3.
Friends and Angels - Here you may be able to get
good terms, but be wary of unrealistic
expectations. Friends and angel investors may be unsophisticated and
have unbalanced portfolios and that can lead to friction and
intrusiveness during the volatile ups and downs that most start-ups
experience. This financing also tends to be a one-time deal, so there's
little chance of getting them to boost their investments
later.
4.
Other Sources - Banks and federal and
provincial agencies offer loans for new
businesses and you should investigate any that seem suitable for your
venture. In addition, you can sometimes find other companies that may
finance the development of a product in exchange for either taking an
interest in it or acquiring it at some point. Former employers or
industry peers can be tapped in this way.
The
rest of the story: Finding the initial capital is just
part of the
process. You will also want to determine the best means of acquiring
the money by choosing between stock offerings, loans, mezzanine
financing, and the like. Further, timing counts. The current economic
climate always has a
significant effect on how you raise money, how much you get, and how
fast you grow.
Ronald
J. Cappuccio, J.D., LL.M.(Tax) business attorney at (856)
665-2121
can provide professional legal advice from the outset and help you by
continuing during the process to help ensure you get the best
deal with the best
terms. For example, proper guidance can help minimize your tax bill
and
bring you through a successful initial public offering when the time is
right.
Finding
and signing the right deal takes good planning. The success of
your venture and continued control over the business is at stake.
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©
Copyright 1996-2007
Ronald J. Cappuccio, J.D., LL.M.(Tax) All
Rights Reserved
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