![\"Tom](\"http:\/\/www.financenewmexico.org\/userfiles\/tjs_bw.jpg\")
Tom Stephenson, Mangaging General Partner, Verge Fund<\/p><\/div>\n
Over the course of this series, various columnists have provided insights into equity \u2013 how to determine if it\u2019s appropriate for your business, how to prepare your company, how to navigate the evaluation process, and how to identify the right capital partner.\u00a0Before you embark on the long and sometimes frustrating process of raising equity capital, however, you should heed an old adage: be careful what you wish for.\u00a0Make sure that you actually want equity investment in your business.<\/p>\n
Raising equity capital brings substantial benefits.\u00a0If you have selected your equity source carefully, you gain far more than just cash \u2013 you gain a partner.\u00a0Good equity partners bring experience, networks of contacts and energy to your enterprise.\u00a0They should be able to help you think through strategic decisions and introduce you to important business contacts like vendors, customers or even, eventually, acquirers. \u00a0They may participate in recruiting candidates and reviewing financial statements.\u00a0And, lest we forget, they invest cash into the business to help cover operating losses during growth phases, as well as build working capital and make infrastructure investments in the business.
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All of these benefits, however, come with costs.\u00a0For most entrepreneurs, the most difficult is the loss of control that comes with having a partner.\u00a0As I and others have described in past articles, when you accept equity capital from an outside source, the business is no longer your company, it is now our company.\u00a0\u00a0While the degree to which this is true depends upon how the deal is structured, even if you are still the CEO and the majority shareholder, you will have obligations to your minority shareholders.\u00a0You cannot run the company in your own personal interests; you have to run it in the best interest of the shareholders as a group.\u00a0While this may not be a problem if you are focused on building the value of the company, it can nonetheless be a large adjustment for any entrepreneur.<\/p>\n
The situation is magnified if you take equity capital from a professional venture capital firm.\u00a0New Mexico Community Capital and similar groups typically require representation on the company\u2019s board of directors.\u00a0Even if we are minority shareholders (which we generally are), we put significant restrictions on the entrepreneur\u2019s ability to raise additional capital or sell the company without our approval. We do this to protect our investment, but also to make sure we have some level of say in how the company is run.\u00a0For many entrepreneurs, particularly those who started the company to be their own boss, this means making significant changes in how they operate.<\/p>\n
The other cost, of course, is direct cost \u2013 when you sell a piece of your company for a price today, you are giving up the potential future-value of that piece of the company.\u00a0This cost can be a benefit if you understand how taking outside equity capital will ultimately impact the value of the business.\u00a0Equity capital, if well used, will result in a substantially higher end-price than that obtained by growing a company organically.\u00a0How much?\u00a0That is the magic question.\u00a0I often ask entrepreneurs if they want a bigger piece of a small pie or a smaller piece of a much larger pie.\u00a0As an entrepreneur, you need to truly believe in the ultimate value your equity partner will bring, and recognize that you will now be entitled to a smaller percentage \u2013 likely a much smaller percentage \u2013 of the final proceeds of a sale of your company.<\/p>\n
Taking equity capital is a significant step in the development of any company, and the entrepreneur and management team should not take that step without first assessing both the benefits and the costs of doing so.\u00a0After determining that the benefits do outweigh the costs, both real and perceived, the entrepreneur can focus on using that capital to maximize the benefits for all stakeholders of the enterprise.<\/p>\n
Read more about Verge Fund<\/span><\/strong><\/a>.<\/p>\n <\/a>Download 22_The Costs and Benefits of Equity Financing PDF<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Information on how to decide if equity capital investment in your business or idea is right for you. Continue reading