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Turning a great idea into a profitable business or taking your existing business to the next level may require a substantial amount of money that you don&’t have. As an alternative to borrowing the funds, you may want to consider equity financing such as investments from venture capital firms or angel investors. Financing your business with equity means you don&’t have to pay any money back. Instead, investors take an ownership interest in your business.
Advantages to Using Equity
The principal advantage of equity financing over a bank loan is that you don&’t have to use business profits to make regular loan payments. Equity investors seek returns in the long-term. They hope to enjoy a share in the business&’ profits instead of just a fixed amount of interest. Moreover, equity investors share the business risk with you. If for some reason the business is unsuccessful, you have no obligation to give investors their money back.
Presentations to Venture Capital Firms
Before approaching a venture capital firm, you&’ll need to prepare a proposal that outlines all aspects of your business and, more important, why the firm should invest. Typically, venture capital proposals state the amount of money you&’re seeking, how the infusion of capital will benefit your business, current marketing strategies you employ, and financial statements for the most recent years. If the venture capital firm has some interest, it may conduct its own investigation into your company before making the investment.
Angel Investors Use Their Personal Funds to Invest
Angel investors are similar to venture capital firms. Rather than pooling financial resources from larger investment vehicles, such as a pension or insurance company, angel investors are individuals who use their personal funds. Angel investors commonly work together in groups and make investments together. However, these investors will evaluate your business in the same way that venture capitalists do. They, too, will expect a convincing proposal and presentation.
Preparation of Legal Documents
When you turn to equity financing, you give up some control and ownership of your business. As a result, the investment will be contingent on your acceptance of all terms in a legal document called the “equity finance agreement.” Among other issues, this agreement will outline the percentage of ownership that investors will take and how involved they will be in your business.
A Business Lawyer Can Help
The law surrounding the use of venture capital or angel investors to finance your business is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.