Monthly Archives: August 2009

Raising Money for Your Business

A couple weeks ago a friend asked me to answer the question, “Where is the best place to raise $30k, aside from FFFs (Friends, Family, and Fools)? The person asking the question included this with his question:

I have found it difficult to find lending on such a small amount for my business. VC’s and Angels usually aren’t too keen and financial institutions aren’t lending. I haven’t tried the SBA. If anyone is interested I will give you double your investment as a return.

This was my response:

One thing to keep in mind when you are raising money is that it can be just as difficult to raise $30k as $300k. And even $300k is too small for many investors. There are a lot of good reasons for this, but it stinks if all you need is $30k. Your options will vary depending on the stage of your business, the availability of collateral, and your willingness to put your own neck on the line in the form of personal guarantees.

If you only need $30k, here are the options I would consider (in order of preference):
  1. SBA
  2. Personal Savings
  3. Home Equity
  4. Credit Cards
  5. 401k Loan
A word of caution: You need to be very careful about the promise to double someone’s investment. Never guarantee a return. Also, be careful about who you raise money from and how you do it. You are raising money for something that is highly speculative and you could end up in legal trouble if you take money from people who are not qualified / accredited investors. Be very careful.

Regarding terms, if I were to invest $30,000 with you, I would not be satisfied with a “double my money” promise. First, the promise would make me nervous and second, I want to participate in as much of the upside as possible. I would prefer to structure my investment as preferred shares with a 1x liquidation preference. Let’s assume that my $30k buys me 10% of the company and you end up selling the company for $300,000. I would get my $30,000 back (the 1x liquidation preference) and then I would participate at 10% of the remainder ($27,000). So I would get $57,000 for my $30,000 investment. This is probably the most common form of equity investment.

Finally, remember that debt is always cheaper than equity and you should bootstrap the company until you can’t bootstrap it anymore. Take on equity investors when you are ready for explosive growth and when having more people on board will increase your chances of success.
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