Do you really need the capital that you are seeking? Entrepreneurs are often approaching investors at the wrong time. They are either trying to get capital before they are ready to accept it or on the other side, seeking capital when it is too late and the investor is no longer interested, or doesn’t have enough time to do the due diligence. Either way can be catastrophic, but if you time it right, you can get capital that won’t require you to give up control of your company.
If you have the ability to tighten your strings, it’s always better to self-fund your business and keep investors out, but that is not practical for many businesses, especially highly scalable businesses that investors are seeking out. Still, slowing down the growth will allow you to stand a greater chance of growing the business without additional capital. A great example would be Bob Parson’s from GoDaddy. He controlled the growth of his company and it is now a billion dollar company.
Many entrepreneurs will start seeking capital without having done a business plan, having projections or even having a subscription agreement drawn up which is required to take on investors in a company. Before you get to far, make sure you have a qualified business attorney that will help you draw up the necessary subscription agreements, and also have you in the right type of entity for the type of investor you are seeking.
In most cases, you will need to either be an LLC or a C Corporation. In some cases, small businesses can use an S election to pass through the profits and losses, avoiding double taxation, but this option won’t work if you are taking in investment capital from institutional funds. There is one exception to maintaining S Corporation status and being able to take in funds from an institutional or venture capital fund. If you’re interested in learning more about this type of strategy, just drop me a message and I will give you more information on that option.
Always have your documents and leads ready to go when you need to seek capital. If you are constantly communicating with potential investors, it is much easier to pull the trigger and get the capital when you need it. You will most likely even get a better rate than you would otherwise have gotten if you have to scramble to get the funds you need.