Updated: Dec 16, 2016
When it comes to raising money in the small business world, there are lenders and then there are investors.
Lenders offer you debt capital, such as a loan or credit card, which you pledge to pay back with interest over a period of time. Investors, on the other hand, offer equity financing. Equity financing means you raise funds for your business by trading complete or partial ownership of your company’s equity — similar to the nail-biting negotiations in the popular TV show, Shark Tank. One of the biggest advantages of equity funding is that your investors takes all of the risk, and if your business fails you generally do not have to pay back the money.
However, there are several important factors to take into consideration when evaluating equity financing. Here, you’ll learn important questions to ask potential investors and potential factors to think about when weighing your decision.
1. Who are equity investors?: An overview of the differences between angel investors, venture capitalists, and strategic investors, and how to evaluate who is best for your situation.
2. Evaluating your deal terms: What to take into consideration to make sure you don’t get the short end of the stick when negotiating a deal with an investor.
3. Friends and family: While a generous loan from your best friend or eclectic Uncle Bob may seem like a great idea at the time, combining friends, family, and finances can get sticky. As the saying goes, when money comes between friends, the biggest risk is that you stand to lose both. Here are some important pros and cons to consider when taking an equity investment from the people close to you.
4. Angel investors: Angel investors are individuals keen to invest their own personal money (and time!) in promising, start-up companies. But their investment does come with strings attached — including a chunk of your future net earnings and a hands-on role in helping to steer your company towards profitability. Here’s how to weigh the benefits of a quality angel investor and how to find one for your business.
5. Venture capitalists: A venture capitalist is an investor who either provides capital to startup businesses or supports small companies that wish to expand but do not have access to equities markets. In this video, you’ll learn what venture capitalists look for in their investments, and what to expect if you decide to venture down the Sand Hill Road to pitch a VC.
6. Selecting strategic investors: A strategic investor is an individual or company, such as a supplier or even a potential customers, that adds value to the money it invests with contacts, experience, or knowledge of market. Strategic investors at the right moment in time can add a huge amount of value to your business. Here’s how to identify potential strategic investors for your business.
7. Where to find equity investors: You’re unlikely to find an investor in line at the grocery store (although in Silicon Valley, stranger things have certainly happened). Here’s a short list of strategic websites and connections you should use to find investors.
8. Evaluating a deal: Congratulations — you’ve found a potential investor! Now begins the nitty-gritty of deciding on a deal that’s fair to the both of you. Strike price, vestment schedules, stock types — in this video, Sam explains these aspects in plain English.
Whether or not you decide equity funding is the route you want to take, you may also want to investigate other options. Check out the next part of our series on debt funding to learn more about loan rates, loan terms, and more.