Raising Money vs Funding Personally
Discussion
Hi all,
Bit of a strange one. I'm working on launching a new business with two partners and we each own 33.3% of the company. The business is an education and comparison site in the finance space.
To launch effectively in our niche, we estimate needing £30-£40k for marketing for the first 3-6months.
I can fund my £10-£13k share of this by myself.
Partner A can potentially scrape the money together, but would be stretched and is therefore keen to raise money in return for equity.
Partner B cannot fund this as he is completing on a house and is already borrowing money from his parents. Given this situation he is also keen to raise in return for equity.
I think the business has legs and would rather not raise money and give away a very large chunk of equity to an outside investor at this early stage. An obvious solution is for me to put in my £10k, an outside investor puts in the remaining £20k, and I increase my proportional shareholding vs Partner A and Partner B accordingly. However, we feel this might upset the dynamic within the business as we will no longer be equal partners (and all have complimentary skill sets that have helped to build the business). We also don't feel at this stage that we would benefit much from the experience of an outside investor, whereas further down the line as the business grows this will become much more important.
Has anyone been in a similar situation before?
Is the best way around this to get a loan instead? Of course, here's there the issue of firstly getting the loan and secondly being able to service it if our (high risk) business does not take off as we anticipate.
Any direction appreciated,
22s
Bit of a strange one. I'm working on launching a new business with two partners and we each own 33.3% of the company. The business is an education and comparison site in the finance space.
To launch effectively in our niche, we estimate needing £30-£40k for marketing for the first 3-6months.
I can fund my £10-£13k share of this by myself.
Partner A can potentially scrape the money together, but would be stretched and is therefore keen to raise money in return for equity.
Partner B cannot fund this as he is completing on a house and is already borrowing money from his parents. Given this situation he is also keen to raise in return for equity.
I think the business has legs and would rather not raise money and give away a very large chunk of equity to an outside investor at this early stage. An obvious solution is for me to put in my £10k, an outside investor puts in the remaining £20k, and I increase my proportional shareholding vs Partner A and Partner B accordingly. However, we feel this might upset the dynamic within the business as we will no longer be equal partners (and all have complimentary skill sets that have helped to build the business). We also don't feel at this stage that we would benefit much from the experience of an outside investor, whereas further down the line as the business grows this will become much more important.
Has anyone been in a similar situation before?
Is the best way around this to get a loan instead? Of course, here's there the issue of firstly getting the loan and secondly being able to service it if our (high risk) business does not take off as we anticipate.
Any direction appreciated,
22s
- Bootstrap if you can. If it's really got legs then find the cash by selling stuff, extending the mortgage, family etc
- Double-check how much you really need, people mostly underestimate.
- Consider credit cards, if you've got a half decent rating then 3 of you might have 50k working capital. Go for low/zero interest rates
- If required, get a loan, you may need to underwrite each other.
- Write it all into a proper shareholders agreement
- Have clear exit clauses for when your first dir/SH decides to leave (it will happen)
some random thoughts
have you put any funds in yet between you?
- investors are usually very reluctant to invest when the equity partners are not investing in their own business - there is usually an expectation that if you think it will work you will invest in it to the level that inflicts financial pain on yourself...
- esp. in a risky business where there is no collateral to their investment
- you are potentially asking them to put in e.g. £40K for 20% - have you therefore already invested £160k in the business - and not spent it back on yourselves as living costs? If so, where does that sit as value on the balance sheet?
- why would they want to invest in a high risk business where you make the decisions as to whether it works, and have no pain if it doesn't?
- the business is not yet launched - how do you feel it has any value at all? If it has no value, exactly how many shares = £40K investment? potential value on a high risk, not yet launched business = £0
- how would you get a loan with no value to the business?
if the three of you have equal input other than finance, but different abilities for finance, then the split should not be 33% each - a business is not a hobby or an opportunity for friends to pat each other on the back - it is non-emotional, commercial, and focused on growing the business...
- partner A could put the money in, yet doesn't want to - so already there is a doubt as to how he sees the value of the business - obviously he thinks that the shares are worth less than the money (or he wouldn't sell them for that when he could get the money elsewhere), so why would an investor invest at that rate when one of the founders believes the shares are not worth that amount?
- partner B needs to decide where his priorities lie - if the house is very important then the business is not as important - is he fully committed to the business? If you all believe that the business is going to do well, then don't buy the house, invest in the business, make the money and buy a bigger house or have a lower mortgage!
as mentioned above - are you really sure that you only need that amount of money - it does seem very low.
you mention that it is a high risk business, so you want to shift the financial risk to someone else for equity that currently has no value (high risk business which may not take off = high chance of folding = shares not worth anything), are not prepared (other than you) to invest yourselves, are potentially under-investing, thus reducing the chance of success, etc. etc.
ultimately this seems far too early stage for external investment - there is some good advice above, but basically you need to work out how to get value into the business, you need to do the launching yourself, you need to make it investable which it is not at the moment... you need to sit down and have a blunt discussion with your fellow directors:
- the business needs £££ to launch and get to xyz stage (proof of concept / turning over xxx / etc.) where it is then an investable business (i.e. invested money is used to grow the profitability not prove the concept / mitigate the risk)
- that money can be raised like this... and this is how it would reflect on shareholdings...
- do they want to stay in?
- what sources of money might there be? (c.f. above) and families / friends etc.
- do you need to find someone else to come on board with more liquidity - if so at what % and what control are you giving them - i.e. Angel etc. who might handle very early start-ups, but this not a arms-length investment, this would be bringing in another partner who might want a much bigger share than yours...
- if your partners are not prepared to find the money, what is the value of their involvement? A business idea with no funding has £0 value, cash without a business still has value, put the two together and cash has the higher value - there are thousands of good business ideas out there without funding - the idea does not make the business and it is a common error for those starting a business to think that because it is their idea they get to keep the equity - not so.
- If your partners can't invest, could you run the business without the investment - grow it organically, plenty of businesses that grow with no external funding...
- If your partners can't invest, could you invest the full amount / could you run the business without them / could you bring in others who could take their role and who could invest?
I think you need some quite blunt thinking and discussion - currently it doesn't sound as though you actually have a business (not yet launched / high risk / no funds), so now is the time to get this sorted...
have you put any funds in yet between you?
- investors are usually very reluctant to invest when the equity partners are not investing in their own business - there is usually an expectation that if you think it will work you will invest in it to the level that inflicts financial pain on yourself...
- esp. in a risky business where there is no collateral to their investment
- you are potentially asking them to put in e.g. £40K for 20% - have you therefore already invested £160k in the business - and not spent it back on yourselves as living costs? If so, where does that sit as value on the balance sheet?
- why would they want to invest in a high risk business where you make the decisions as to whether it works, and have no pain if it doesn't?
- the business is not yet launched - how do you feel it has any value at all? If it has no value, exactly how many shares = £40K investment? potential value on a high risk, not yet launched business = £0
- how would you get a loan with no value to the business?
if the three of you have equal input other than finance, but different abilities for finance, then the split should not be 33% each - a business is not a hobby or an opportunity for friends to pat each other on the back - it is non-emotional, commercial, and focused on growing the business...
- partner A could put the money in, yet doesn't want to - so already there is a doubt as to how he sees the value of the business - obviously he thinks that the shares are worth less than the money (or he wouldn't sell them for that when he could get the money elsewhere), so why would an investor invest at that rate when one of the founders believes the shares are not worth that amount?
- partner B needs to decide where his priorities lie - if the house is very important then the business is not as important - is he fully committed to the business? If you all believe that the business is going to do well, then don't buy the house, invest in the business, make the money and buy a bigger house or have a lower mortgage!
as mentioned above - are you really sure that you only need that amount of money - it does seem very low.
you mention that it is a high risk business, so you want to shift the financial risk to someone else for equity that currently has no value (high risk business which may not take off = high chance of folding = shares not worth anything), are not prepared (other than you) to invest yourselves, are potentially under-investing, thus reducing the chance of success, etc. etc.
ultimately this seems far too early stage for external investment - there is some good advice above, but basically you need to work out how to get value into the business, you need to do the launching yourself, you need to make it investable which it is not at the moment... you need to sit down and have a blunt discussion with your fellow directors:
- the business needs £££ to launch and get to xyz stage (proof of concept / turning over xxx / etc.) where it is then an investable business (i.e. invested money is used to grow the profitability not prove the concept / mitigate the risk)
- that money can be raised like this... and this is how it would reflect on shareholdings...
- do they want to stay in?
- what sources of money might there be? (c.f. above) and families / friends etc.
- do you need to find someone else to come on board with more liquidity - if so at what % and what control are you giving them - i.e. Angel etc. who might handle very early start-ups, but this not a arms-length investment, this would be bringing in another partner who might want a much bigger share than yours...
- if your partners are not prepared to find the money, what is the value of their involvement? A business idea with no funding has £0 value, cash without a business still has value, put the two together and cash has the higher value - there are thousands of good business ideas out there without funding - the idea does not make the business and it is a common error for those starting a business to think that because it is their idea they get to keep the equity - not so.
- If your partners can't invest, could you run the business without the investment - grow it organically, plenty of businesses that grow with no external funding...
- If your partners can't invest, could you invest the full amount / could you run the business without them / could you bring in others who could take their role and who could invest?
I think you need some quite blunt thinking and discussion - currently it doesn't sound as though you actually have a business (not yet launched / high risk / no funds), so now is the time to get this sorted...
Thanks all for the feedback.
Proper SHA is in progress and should be ready in the coming weeks - before we put more $ in. This includes exit clauses.
I worked at Google and many of my clients were comparison sites, or in finance, or both - and that told me enough to tell you search does not work unless you have very, very deep pockets!
Will respond to the other response shortly.
MrOrange said:
* Bootstrap if you can. If it's really got legs then find the cash by selling stuff, extending the mortgage, family etc
All good points. Bit scared about being on the hook for credit cards, but worth consideration and discussion.- Double-check how much you really need, people mostly underestimate.
- Consider credit cards, if you've got a half decent rating then 3 of you might have 50k working capital. Go for low/zero interest rates
- If required, get a loan, you may need to underwrite each other.
- Write it all into a proper shareholders agreement
- Have clear exit clauses for when your first dir/SH decides to leave (it will happen)
Proper SHA is in progress and should be ready in the coming weeks - before we put more $ in. This includes exit clauses.
uber said:
If you are in the comparison game 30-40k will last you a couple of weeks especially in finance. If the idea is unique and not easily replicated it may be worth talking with someone who is already in the game who will simply finance it for a small equity stake.
Thanks. We are not doing any search marketing which should keep the costs down. I worked at Google and many of my clients were comparison sites, or in finance, or both - and that told me enough to tell you search does not work unless you have very, very deep pockets!
Will respond to the other response shortly.
It's ok for you to be the boss. If they have to sacrifice a bit to keep some equity so be it. Does sound early for an investor unless you know someone on your field very well.
I'd be tempted to give them director status but you be the main shareholder if you are funding and organising investors the other chaps can't have it both ways. If you are putting capital in you should get the benefit of a bigger shareholding. With no capital coming in they should be glad of 10% each.
I'd be tempted to give them director status but you be the main shareholder if you are funding and organising investors the other chaps can't have it both ways. If you are putting capital in you should get the benefit of a bigger shareholding. With no capital coming in they should be glad of 10% each.
akirk said:
have you put any funds in yet between you?
- investors are usually very reluctant to invest when the equity partners are not investing in their own business - there is usually an expectation that if you think it will work you will invest in it to the level that inflicts financial pain on yourself...
You beat me to it!- investors are usually very reluctant to invest when the equity partners are not investing in their own business - there is usually an expectation that if you think it will work you will invest in it to the level that inflicts financial pain on yourself...
This doesn't read well OP I'm afraid. Good luck though.
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