How do you balance the trade-off between giving up equity and retaining control of your startup?
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Before you seek any external funding, you need to have a clear idea of what your goals and needs are for your startup. What is your value proposition, target market, and competitive advantage? How much money do you need to achieve your milestones and validate your assumptions? How much control are you willing to give up over your vision, strategy, and operations? These questions will help you determine what kind of funding and financing options are best suited for your startup.
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Other questions founders seeking funding should consider: What stage is your startup in? What is your financial projection? What is your team's expertise and track record? What is your funding timeline? What is your growth strategy? What is your risk mitigation strategy? What type of investor is the right fit for your startup? Are there any non-financial resources or strategic advantages that investors can bring to your startup? By addressing the aforementioned, founders can gain a comprehensive understanding of their startup's funding requirements and align their strategies with potential investors who are the right fit for their business.
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Absolutely agree with this. Some businesses actually do not need funding at all - or may need investors for reasons other than capital. This needs to be understood early on and even before the journey has begun. The key is to find a problem to solve. Can you find a set of people whose problem you solve and get paid for? And is that a big enough number of people? And would they pay for it? And can you build a sustainable operation from this? Those determine if the journey is worth taking on. Next comes scale - if you don't scale you might as well be a one-person team. To scale, you may need capital - and then to become really big and so on. For this you will need capital, the right people, advisors, team, resources, branding and so on.
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The fundraising strategy needs to be developed before starting a fundraising round, and based on the above you need to define your Dream Investor and the strategy itself to achieve the fundraising goals. Having defined your Dream Investor profile and the fundraising strategy, you need to list Investors that match the profile in a strategic way to avoid you having more than 100 meetings with investors that do not match your strategy.
There are many different ways to raise money for your startup, such as bootstrapping, crowdfunding, grants, loans, angel investors, venture capitalists, and corporate partners. Each option has its own advantages and disadvantages, as well as terms and conditions that affect your equity and control. For example, bootstrapping and crowdfunding allow you to retain full ownership and autonomy, but may limit your growth potential and access to networks. On the other hand, angel investors and venture capitalists can provide more capital and expertise, but may also demand more equity and influence over your decisions. You need to research and compare your options and terms carefully, and negotiate the best deal for your startup.
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I would always: 1) bootstrap as long as I could first; 2) Next, borrow as much as possible. Never use equity to buy something you can buy with borrowed money. Debt is cheaper than equity! Hock whatever is necessary and sign personally for the debt if needed; And 3) Sell equity to key employees. All this comes before selling any equity outside of the company. The more you can demonstrate that you can grow the business without outside capital, the less ownership you will have to give away to new equity investors. It really is fundamental!
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Trade-off is part of the learning game of a startup. You can never have it all - you win some and lose some. You give some and gain some. And many times it appears as if you are just giving in the hope of gaining something eventually. And that may be frustrating too. This can become subjective and sometimes other stake holders may not agree with you or your view. This is how conflicts are created. And even in conflict there is room for you to give some and take some. There is a secret to solve this or at least get some direction in this matter: that is to know your 'Why'. It is the single most important question startup entrepreneurs should ask themselves. The answer to the question 'why' usually lets you know which way to go.
One of the key factors to balance the trade-off between giving up equity and retaining control of your startup is to align your interests and expectations with your potential investors or partners. You want to find people who share your vision, values, and goals, and who can add value to your startup beyond money. You also want to communicate clearly and honestly about your expectations and responsibilities, and establish trust and rapport. By aligning your interests and expectations, you can reduce the risk of conflicts and misunderstandings, and increase the chances of a successful and long-term relationship.
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That makes sense in writing, but the reality is, that finding someone with the same values, interests and expectations that also has spare money to invest, is probably quite rare.
Another important factor to balance the trade-off between giving up equity and retaining control of your startup is to protect your rights and assets. You want to make sure that you have a solid legal and financial foundation for your startup, and that you have the necessary documents and agreements in place. For example, you may want to have a co-founder agreement, a vesting schedule, a shareholder agreement, a term sheet, a non-disclosure agreement, and a patent or trademark registration. These documents and agreements will help you define and secure your ownership, control, and intellectual property, and prevent any disputes or lawsuits.
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One suggestion I've made to clients is to consider moving ownership and revenue streams for certain products and services into separate entities under common ownership. You can invite investors into some but not all of those entities under common ownership.
Finally, you need to be flexible and adaptable to balance the trade-off between giving up equity and retaining control of your startup. You need to understand that raising money for your startup is not a one-time event, but an ongoing process that may require multiple rounds of funding and financing. You also need to recognize that your startup may change and evolve over time, and that you may have to adjust your plans and strategies accordingly. You need to be open to feedback, learning, and experimentation, and be willing to make compromises and trade-offs when necessary. By being flexible and adaptable, you can maximize your opportunities and outcomes, and minimize your risks and costs.
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Be careful about choosing the right investors. Good investors know that diluting your ownership too much will harm the business and your cap-table and make it very hard for you to win investors in your next round. Good investors don't rip you off and know how much dilution is fair, according to market standards, and what it needs from an ownership perspective to incentivize you commercially as a founder to stay until the exit.
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My experience is too many business founders try to get outside capital too soon. Their business has not produced significant results yet and appears very risky. Therefore if anyone does invest they are going to insist on taking a large chunk of equity and/or having controlling interest. The longer a founder can wait to go outside for money, the better. They will get more money for a smaller share of their business the better proven their concept is. Plus the fact is bootstrapped companies have more financial discipline and generally do better later when they do get off the ground.
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Looking for potential investors vs. debt is an ongoing issue. One of the most important ideas is seriously considering a professionally administered succession plan. The plan will address the hard side as well as the soft side issues. The plan will likely handle the debt vs. equity and potential investor concerns. Please see the following link that will address the succession issue at greater length. https://www.dhirubhai.net/pulse/traditional-fomb-succession-planning-components-10-factors-chindamo/
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