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3 Steps to Get All the Equity Financing You Want

Getting equity financing can mean the difference between growth or slow death for a startup, use this three-step process to get the money you need

I’ve started a few companies and have consulted on dozens more over the last ten years. In that time, few topics have been as important as how to secure equity financing to keep the startup alive.

I know, the idea of bootstrapping a company is all the rage right now. The idea of growing a company on a shoe-string budget is romantic but…not that realistic.

Facebook might have started in a college dorm, but it wasn’t long before it needed legit money for legit growth.

Whether you’re starting a small retail business or even an online site, getting the money you need for growth is going to be critical. I’ll talk about the basics of equity financing first before revealing a three-step process I’ve used to raise millions for several companies.

What is Equity Financing

Equity financing is just a technical term for selling a piece of your company for funding. Most people are familiar with equity financing in the form of stocks sold on the stock market.

Equity financing for a company can bring on owners/investors that are nearly silent in how the company is run or can bring on investors that are practically partners in everything you do.

  • Most equity financing means sharing voting rights for when the company puts a vote to shareholders. For stock investors, these voting rights are usually negligible for less than 1% control of the company.
  • If equity funding from one investor is large enough, for example giving them the right to more than 15% of the company, they may want more control and even a say in day-to-day operations.

Equity financing can also be public or private. In a public market, investors can buy or sell their stake in your company. Private financing usually means ownership is less easily transferred to another investor.

The idea behind equity financing is that, even though you’re giving up a piece of the profits and control, the money you raise can help your company grow much larger. That means a bigger profit pie and that each slice will be bigger for everyone.

Sources of Equity Financing

There are several sources to look for equity financing for your company, some public and others private. We’ll get into how to raise money in a bit but first let’s look at some of the ways you can fundraise.

Most people immediately think of the public market for shares when they think of equity funding but the stock market is actually one of the more rarely-used sources. Only companies worth billions usually get to sell shares on the open market.

A much more common source for equity financing comes from angel investors and venture capital. These are groups of wealthy investors with experience investing in startups for a chunk of the company. Besides millions in potential funding, these groups bring decades of management experience and can help your strategy.

The downside is that they usually want significant control and will constantly be pushing you to grow the company or get out of the way.

An alternative to venture capital has been created in equity crowdfunding where financing is raised from a larger group of smaller investors. There are a few tradeoffs here,

  • It might be harder to raise the millions you could get from Angel or VC groups because individual investors are likely investing less than $10,000 each
  • You might not get the managerial experience or strategic help you’d get from a professional group
  • You retain greater control even if you sell the same amount to investors because the investor control is spread out among more people

Equity Financing Pros and Cons

Besides the pros and cons of each type of equity financing, there are also benefits and disadvantages of equity financing in general.

Pros of equity financing:

  • You don’t have to pay back equity financing like you do a small business loan
  • Funding amounts are usually many times over what you can get from other sources, in the millions versus tens of thousands on a loan
  • Equity investors have buy-in to the company’s success and will help to spread the word or promote the company

Cons of equity financing:

  • Future earnings will be shared among investors. That means to make the same money you are making now, you need to grow the business for more earnings.
  • The company is no longer only yours and investors might consolidate control to push you out
  • Investors usually only care about profits and will constantly push you to create higher earnings

An Easy Process for Getting Equity Financing

Equity financing doesn’t happen overnight, not the real money anyway.

Looking for the kind of funding that is going to take your company international means building up to it. When it comes to raising millions, or even hundreds of thousands in equity financing, you’ll need to show investors that they’ll get a return on a solid company.

That means using other types of financing first to build your story.

Using Debt Financing to Put You on the Path to More Money

The first step in this process, after putting your own money in the company, is going to be debt financing. I know, it sucks that you’ll have to pay the money back and rates can be high if you don’t have good personal credit.

But debt is a part of business. Show me one publicly-traded company that has not used debt to leverage its sales into higher earnings.

Despite having a massive $74.1 billion pile of cash, Apple Inc owes $97.2 billion in long-term debt.

By borrowing to fund your company’s growth, you can leverage up the returns without having to share a piece of future earnings. In fact, the majority of small businesses use debt exclusively and never sell an equity share of the company.

If the debt financing allows you to grow the business and earn a return over the interest rate, then it’s just a smart business tool.

There are two ways to get debt financing for your company, through a business loan or a personal loan.

If you’ve got a few years of sales and solid financial statements, you might be able to get a business loan from sites like Lending Club. The peer lender offers business loans up to $350,000 for up to five years and at rates that are well below those on personal loans.

Getting a business loan generally requires at least 12 months in business, $50K or more in annual sales and a few other criteria. If you qualify, check your rate on Lending Club to get started.

equity financing requirements lending club

Debt Financing Requirements on Lending Club

Many new businesses won’t qualify for a business loan so the owners choose to get a personal loan on their own credit instead. This is a lot easier because anyone with a credit score of 580 or higher can get a personal loan and you can use the money for anything.

Personal loans require no collateral so you won’t have to worry about losing your assets if you run into trouble but it will go on your credit report. Loans are usually available for up to $40,000 and on terms from three- to five-years.

I’ve used personal loans to consolidate debt, for home repairs and for business funding in the past. Only borrow as much as you need and make sure current revenue is enough to cover the monthly payments.

Check your rate on a personal loan up to jumpstart your business

Using Rewards Crowdfunding to Build a Community that Venture Capital Loves

Rewards crowdfunding is the most underestimated and misunderstood small business resource I’ve found.

This is where you raise money on sites like Kickstarter and ‘reward’ supporters with your product or other tokens. If this sounds a lot like just making sells, that’s because rewards crowdfunding is nothing more than advertising your products on a website that gets millions of visitors every month.

But crowdfunding is about more than just the money, so much more.

You get instant feedback on planned products from a warm audience and funding even before you’ve committed any money to production or marketing. With a crowdfunding page, you basically get a survey group in the thousands to tell you exactly how to grow your business.

steps to getting equity financingEach crowdfunding campaign will also get you life-long cheerleaders for your business. Supporters to your campaign will feel like they are part of your success, they’ll have instant buy-in and will be the most loyal customers you’ve ever seen.

Every small business should be crowdfunding, for new products or just to relaunch old products. You can easily raise tens of thousands to grow into new markets and develop new products plus you’ll build an army of loyal customers.

Getting Millions in Equity Financing Even for a Small Company

Putting your own money into the company through loans and building that loyal base through crowdfunding is going to set you up for success when you go for millions in equity financing from Angels and Venture Capital.

You’ll want to approach angel investor groups first. These are usually specific to a region and an industry so look for angel groups in your part of the country and ones that typically invest in your industry.

You’ll need financial projections and solid plans for the money to pitch an angel group. Reach out to supporters from your crowdfunding campaigns to find financial experts that can help putting these documents together.

Mining your crowdfunding supporters, you might even be able to find a few angel investors within the group. I know a lot of angels that browse crowd projects looking for startups that might be a good investment in the future.

If you need more than the million or so provided by an angel group, you might need to approach venture capital investors. The documents and projections needed are the same here but on a scale 10-times bigger. VC firms are only interested in companies that will pay out tens of millions within the next decade so be ready to show several million in sales annually.

This equity financing process is meant to be cumulative and flexible. Each step will help you raise more money and grow your business to new markets. You can stop at any stage or go through the entire process to raise millions. I would recommend, even if you don’t feel like you need more than debt financing, to give rewards crowdfunding a try since it doesn’t involve giving out ownership.

About Joseph Hogue

An investment analyst by profession, I run two blogs (Crowd101 and PeerFinance101) in personal finance, peer lending and crowdfunding. I've been on both sides of the table as a lender and a borrower and am excited to be a part of the peer movement. With the power of the internet, people are helping other people manage debt and raise money in ways never before possible.

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