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Angel investors and venture capital firms
generally intend to realize capital gains on their investments by
providing for a stock buy-back by the firm, by arranging a public
offering, or by providing for a merger with a larger firm that has
publicly traded stock. They usually hope to do this within five to
seven years of their initial investment.
Most equity financing agreements guarantee that a
major investor participates in any stock sale and approves any
merger, regardless of their percentage of stock ownership. Sometimes
the agreement requires that management work toward an eventual stock
sale or merger. Clearly, the owner-manager of a small company
seeking equity financing must consider that taking in a venture
capitalist as a partner may be virtually a commitment to sell out or
go public.
Types of Equity Investors There are several paths
to locating equity capital.
Individual private investors. Private placements
of equity can be made through your contacts, those of your financial
advisors, or by presentations before investment groups.
Finder firms. Such firms may be able to help the
small company seeking capital, though they are generally not sources
of capital themselves. Deal with reputable, professional finders
whose fees are in line with industry practice. Further, note that
investors generally prefer working directly with principals in
making investments, though finders may provide useful introductions.
Traditional partnerships--which are often
established by wealthy families to aggressively manage a portion of
their funds by investing in small companies;
Professionally managed pools--which are made up
of institutional money and which operate like the traditional
partnerships;
Investment banking firms--which usually trade in
more established securities, but occasionally form investor
syndicates for venture proposals;
Once an interested investor is located, the rest
of the process would seem simple; if you're selling stock, you take
the investors' check and give them a stock certificate. Or if it
were to be a loan, you would take the check and sign a note.
Unfortunately, it's not quite that simple.
Regardless of the source of financing--family and
friends, angels, or venture capital, expect some "due diligence" to
be performed. Claims would be verified, and generally some forms of
guarantees of collateral on the part of the entrepreneur would be
documented, and possibly situations where the investor could take
charge of the business. Entrepreneurs, in their enthusiasm, often
oversell. The execution of documents that clearly express
responsibilities and safeguards is essential to a system based so
heavily on trust.
John B. Vinturella, Ph.D. has
almost 40 years experience as a management and strategic consultant,
entrepreneur, author, and college professor. For 20 of those years,
Dr. Vinturella was owner/president of a distribution company that he
founded. He is a principal in business opportunity sites
jbv.com and
muddledconcept.com, and maintains
business and political blogs.
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Financial
Planning and Equity Investment