Getting investors for the first time - how does financing work?
So how typically does financing work. Are investors basically giving me a loan that I have to pay back? Are they buying equity (so that upon business failure, nobody owes anybody anything)? Are they doing something in between?
If they are taking equity, how much should I offer them? What are the things I should be considering? I've heard horror stories concerning the dilution of ownership.
3 Answers
I highly recommend reading everything on venture hacks they cover pretty much everything around raising capital.
How much capital do you need to raise? What stage of the business are you at?
I recommend taking a lot of time getting to know your investors and getting to know each other expectations. The first time I raised a seed round of capital the biggest mistake I made was not getting everyone's expectations down on paper, play devils advocate and assume its going to fail and talk through what happens in the different scenarios, discuss what they think they are buying into and what your getting out of them aside from money, what time commitment do you expect from them?
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Yes, VentureHacks is the fastest way to get you from beginner to expert. At first, nothing will make sense, but keep reading. It's better than listening to half-incorrect advice anywhere else. – Alain Raynaud 14 years ago
It depends on the investor.
A bank will give you a loan, and expect it to be repaid. In most cases, the bank will ask you to personally guarantee the loan. This means that even if your business fails, you will still have to repay the bank.
A VC, Angel, and most other investors will ask for equity. How much equity you have to give up depends on a lot of factors, including how much money they invest, the current stage of your business, and the type of ownership/stock the investor gets.
If the investor is one of the 3 Fs (friends, family, and fools), it will depend. This gives you the most options, and the most flexible terms, but isn't always an option.
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In generally, though, a bank would not be considered being an investor. Giving a loan is not investing in a busienss, it is giving out a loan. – Net Tecture 14 years ago
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@NetTecture: Yes, I agree. Personally, I wouldn't consider a bank an investor, but the OP mentioned loans, so I threw it in there. I wasn't sure if he prefers that option over giving up equity to an investor. – Zuly Gonzalez 14 years ago
- Banks supply loans that you must pay back
- Friends and family give loans and usually request they be paid back
- Investors, VC's, Angels are usually sold on your idea and are looking to invest in something that already has some momentum. They are going to give you a significant amount of money for significant equity.
Investors - will expect to be able to mentor you, advise you and put people in the company that can help you move it forward. It's not uncommon for most significant investors to want 51% so they can make controlling decisions and watch out for their investment.
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Great answer... Your best bet is to approach investors in this way. Friends and family first, next banks, last VC and Angels. The reason for this the requirements get more strict, and equity percentages higher as you go down the line. If you can afford to build your app, business etc, without investors you are golden. You can use investors for growth, and marketing, but should not think that an investor is going to create a job for you. Those days are over. – Frank 14 years ago
