Whether you are just starting a new business or need a cash infusion, the idea of selling an ownership interest will come to mind at some point. The question is whether this is a good idea or not.
A business is in many ways the realization of a dream. Instead of working to put money in the pocket of someone else, you are doing it for yourself. Hopefully, you are also starting a business in a field that you find incredibly interesting. As the old saying goes, work in a field you love and you will not feel like you are working. If you can meet this goal, the money will follow sooner or later.
As with many things, running a business comes with a unique set of issues that have to be addressed. Sooner or later, one of those problems will be your cash flow. You may be going through a rough patch and need funds to get you through a slow couple of months. On a more positive development, business may be great yet you still need more cash because you simply can’t keep up with the pace of manufacturing or what have you.
When a small business needs cash, the first step is to hit the local bank. Unfortunately, most banks have a much stricter attitude towards business loans than they do personal loans for things such as real estate. If you business is less than two years old, they will not loan you a penny. If you are older than that, they might give you loan. Then again, they may not.
For many small business owners, the idea of selling ownership interest in the business is often the apparent solution. The question, of course, is whether this is a smart move or not. There is no “right” answer, but there are some things you should take into consideration before you make the decision.
You should consider a business to be a life for the purposes of this discussion. As the business matures and grows, it can pretty much do what it likes, make mistakes and so on with only its own reputation on the line. As the sole business owner, you are pretty much free to aspire to great success or make foolish errors with no damage done other than to your bottom line. Selling equity to raise cash changes all of this.
If you sell equity in your business, it is important to understand that in many ways you are getting married. “Your business” is no longer your business. Instead, it is “our business.” This means you are no longer solely in control of the decision making process. The new owner will have something to say about decisions being made and you might not like what is said. The fact that one is a majority owner also does not necessarily insulate you from problems. In many states, minority owners have rights and they can sue to enforce them.
There are very few absolutes in business. I am of the strong opinion, however, that selling equity is a bad idea unless it is a last resort. Before you get married, make sure you have exhausted every other possible financial resource. More than a few business owners have become disillusioned after giving away equity to others.
By: SD Lawyer