Trading Equity for Cash in a New Business

You have a company concept that will revolutionize the world when you wake up in the middle of the night.

The only issue is that you need money to start the business, of course.

How do you behave?

Equity and Speculators

Practically every economy is supported by startups and small companies.

Every day, someone comes up with a brilliant business concept.

These same individuals ponder daily how they will raise the capital necessary to launch the business.

Finding investors is the traditional response, but this is when things can go wrong.

You must create a company corporation if you want to attract investors for your venture.

The most common types of businesses are corporations and limited liability companies, which allow you to exchange ownership interests for monetary contributions.

In a corporation, investors purchase stock in the business.

Investments are purchased by investors in limited liability firms as membership interests.

However, this conventional transaction leads to an issue that affects many small business owners, namely handing up excessive equity.

From Happiness to Pain

New business owners frequently make the error of handing out too much ownership in exchange for the first round of financial support.

This happens because you let your insecurities to affect how you assessed the company.

You give up 10% of your equity in instead of giving away 2% in exchange for $50,000.

Let’s examine a case in point.

I launch a company selling electronic devices.

I figure out I need $250,000 to start everything up while I write my business plan.

I have $50,000, but I need to locate the remaining money.

I set up a corporation with a share count of 1,000 and begin seeking out investors.

For $25,000, I’ll sell you 100 shares.

I locate five investors who offer me $125,000 for a total of 500 shares.

In conclusion, I now have $175,000, but I’ve thrown up half of the company’s equity.

Even though I’m not thrilled about it, I brush it aside since I’m so excited about the company idea.

After a year, the company takes off and I start selling devices like crazy.

This creates a significant cash flow issue.

Orders are coming in, but because of cash flow issues, I can’t fulfill them.

I need an additional $100,000 in order to properly operate the firm.

Where will I find $100,000?

Because my company is just one year old, no bank will work with it.

Since they haven’t received even the first penny back, my investors are reluctant to contribute more.

The only thing I can do is sell 400 more shares for $100,000.

Thankfully, I sell the shares, raise the funds, and continue to operate.

However, there is a significant issue.

I have now sold off 90% of the business’ equity in order to raise all of this cash.

I still only hold 100 shares, or 10%, of the company.

My total mental, emotional, and physical health will all be negatively impacted by this.

I will undoubtedly grow quite resentful over time.

I came up with the idea, and I’m executing everything.

It’s unfair that I only own 10% of the company!

This impression could, in retrospect, manifest itself very rapidly.

However, as the main driving force is no longer driven, the company is doomed to encounter significant issues.

Unfortunately, this issue affects a lot of people who have company ideas.

Keep your equity safe at all costs if you are establishing a business.

Equity sales ought to be a last resort.

Try to avoid selling equity by obtaining financing or trading profit sharing.

If you must sell equity, just sell modest portions of it.

You do not want to approach the aforementioned example’s small business owner.

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