Financing and fundraising is often the doom of a first time entrepreneur. You know the look, your eyes glaze over and neck begins to spin into a rotating cycle that leaves everyone in the room terrified.
Let’s make this understandable: If you take money, the goal is to pay back the investor and get them out of your company.
Quite simply, if you don't plan to sell. Then don't do equity. (read that again)
You can do profit share, which is selling short term cash flow for startup costs in exchange for long term cashflow.
An example to nail it home?
Investor gives you $100,000 in exchange of 25% equity in your company. The investor will more than likely expect a 10X return and will want to make $1 million off of this investment. You would need to sell your company for $4 million to do this.
If you don’t plan to sell, don’t take the investor’s money.
Investor gives you $100,000 in exchange for 10% of gross profit each quarter until his/her money is paid back in full. Then the rate drops to 3% in perpetuity (forever). The faster you pay this $100k back, the faster you save 7% of your profits each quarter.
You're trading short term cash flow to pay for your upfront costs in exchange for the long term cash flow.
The overarching thing to remember in all of this, if you don’t like your potential investor, then don’t work with him/her. In other words, if you don’t enjoy talking to them on the phone for extended periods of time, if you can’t see yourself having them over for family dinners for years to come, and if your personalities don’t mesh well, then don’t do it!
Life’s too short to sell your great company to a life sucking investor.
And if you're a life sucking entrepreneur, you won't attract the best investors...ever. Be the kind of business owner that you'd want to invest in one day.
(photo via markheybo)
Posted on November 24, 2014
by Tim & Tommy filed under