Small Business Equity Investors
Many business owners who are either just starting their new
venture or already have an existing company they plan on expanding, need an additional investor so that the business will have the cash on hand to be able to meet their needs. These types of
investors are commonly called Equity Investors. They are also often referred to as Venture Capital Investors, or Angel Investors.
Although the names are often used interchangeably, while pursuing capital a small business owner should be aware of the slight differences. The term equity investor is more commonly used in a situation where there is an existing business, which has less risk than a start-up, and is pursuing a growth strategy. Venture capital is a term more often used during the start-up stages of the business, which comes with more risk. The term Angel Investor is used to describe an investor assisting at the initial stages of the business development, which is considerably more risky.
For today’s article we will focus on the Equity Investor. Additional information regarding venture capital and angel investors can found at www.BusinessFundingSecrets.com
Small business equity investors purchase shares of stock in exchange for voting rights, dividend income, participation in the company’s profits, and sometimes control of the company. They become stockholders, co-owners, and partners with the current owners.
Some small business owners make the mistake of thinking they can reap millions from an equity investor while only giving up a minimal portion of the stock. However, if the investor provides enough cash to purchase most of the company’s stock - guess who owns the company?
Small business owners looking for equity funding should understand that:
1. An equity investment is not a loan. It is not debt that is repaid with monthly installments. Small business owners often confuse debt funding with equity funding in their funding requests.
2. Equity investors, even in the small business arena, are
looking for investments of a $1 million or more. When a funding request is less than $1 million, the amount of due diligence is still the same, and takes just as long to complete as a larger
investment. Therefore, smaller funding requests don’t capture the interest of an Investor.
3. When an equity investor is buying into the company, they are purchasing a portion of the company’s stock. On a Balance Sheet, assets minus liabilities = equity. Is the company in a position where there is realistic value in the equity?
4. Equity Investors typically invest in industries where they have some expertise. The funding request needs to be targeted toward an investor that has skills and industry insights that match with the company’s needs. Throwing the funding request out to anybody and everybody will not be an efficient use of time or money used in marketing for equity capital.
5. Many equity funding requests come with the anticipation there is a rich person, who has some additional cash they are willing to lackadaisically risk, who will only perform minimal due diligence, and is willing to accept a minimal amount of stock although they are providing a larger cash investment than the current owners. Unless the current owner has a friend or relative that matches that description, this is a big mistake to make when searching for an equity investor.
6. Most equity investments are made by investment groups where a number of people have combined their funds and skills and seek out investments that offer a potential for high returns. They are not looking for the average mom and pop type of business that offers minimal upside potential.
7. Some equity investment companies receive funding themselves from investment banks. When the investment banks can’t raise funds by selling bonds, they don’t have the funds to provide the equity investment groups, who then don’t have enough capital to make the small business investments. This is an existing problem due to the current economy and political policies. This results with equity investors, who do have the capital available, to be very cautious in the investments they do make.
1. Funding Requests for equity investments need to be very specific with clear and concise information providing enough data to capture the initial interest of an investor or the broker/consultant which will facilitate the funding process.
2. Vague funding requests won’t get the job done. When business owners are resistant to providing adequate data so that it can be determined whether or not to take the next step (of hundreds of steps) - expect the funding request to end up in the round file.
3. There are both federal and state laws that regulate selling
stock. Even the process of marketing the prospectus to various potential investors may be regulated. It is crucial to be aware of the laws that may affect your business and ability to bring in an
4. Businesses seeking an equity investor need to have their financial and business records up-to-date and in order. An equity investment is a lengthy and involved process. However the process can’t start if a business owner can’t provide accurate and up-to-date data.
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