Selling Equity in your Corporation

Regardless, how are you going to raise money so you can carry out your business plans?

The first step most people take to raise money is to give away equity. In the case of a corporation, this means selling shares to potential investors in exchange for cash. While this is a logical step, it is not the best solution. In fact, it should be the last resort.

When you start a business, you consider it to be “my” company. What many new business people don’t understand is that selling shares in a corporation is diluting ownership. He who owns the shares controls the company. If you sell shares, it is no longer your company. It is the stockholder’s company and there are now more than one.

One of the biggest mistakes made with new corporations is the dilution of ownership due to a lack of planning. Let’s assume you talk to your buddy about investing in the corporation. He looks at the business plan and thinks it is a great idea and you really have your act together. In fact, he thinks it is great, he offers to invest $100,000 for 45 percent of the shares. You agree since he is your friend and the money can really take the business a long way.

So, what is wrong with this scenario? Well, what happens in a year when the business needs another $100,000? Are you going to sell more equity? You barely have any! At this point, things start to get ugly. You start making statements about it being your idea and doing all the work. Soon, you evolve into the full blown bitter originator. By giving away equity, you’ve lost control of “your” idea and “your” business. Unless something can be worked out, your dream is dead and the business will probably be as well.

A better option for financing is, well, anything else. Instead of selling equity to friends and family, try to get them to loan you money. You will be surprised how many will agree to this. If the business goes well, you pay them back, retain total control and everyone is happy. If you can’t get loans, you can go ahead and sell equity. When you do so, however, sell a very small amount for as much as you can get. If your buddy thinks it is such a great idea, he should be willing to kick in $100,000 for a small percentage.

When starting a business, regardless of the type, it is vital that you hold on to your equity. Make them pry it from your dead hands before you sell it. If you don’t, you stand the very real chance of becoming disillusioned later on.