| A good financial plan demonstrates to investors that | | | | go public. |
| you are a competent manager, and that you may | | | | Types of Equity Investors |
| have that special managerial edge over other small | | | | There are several paths to locating equity capital. |
| business owners looking for equity money. You may | | | | Individual private investors. Private placements of |
| gain a decided advantage through well-prepared plans | | | | equity can be made through your contacts, those of |
| and projections that include: cash budgets, pro forma | | | | your financial advisors, or by presentations before |
| statements, and capital investment analysis and | | | | investment groups. |
| capital source studies. | | | | Finder firms. Such firms may be able to help the small |
| Cash budgets should be projected for one year and | | | | company seeking capital, though they are generally |
| prepared monthly. They should combine expected | | | | not sources of capital themselves. Deal with |
| sales revenues, cash receipts, material, labor and | | | | reputable, professional finders whose fees are in line |
| overhead expenses, and cash disbursements on a | | | | with industry practice. Further, note that investors |
| monthly basis. This permits anticipation of fluctuations | | | | generally prefer working directly with principals in |
| in the level of cash and planning for short term | | | | making investments, though finders may provide |
| borrowing and investment. Pro forma statements | | | | useful introductions. |
| should be prepared for planning up to 3 years ahead. | | | | Traditional partnerships--which are often established |
| Now, making these financial plans will not guarantee | | | | by wealthy families to aggressively manage a portion |
| that you'll be able to get venture capital. Not making | | | | of their funds by investing in small companies; |
| them will virtually assure that you will not receive | | | | Professionally managed pools--which are made up of |
| favorable consideration from venture capitalists. | | | | institutional money and which operate like the |
| An investment in the company may be in the final | | | | traditional partnerships; |
| form of direct stock ownership which does not | | | | Investment banking firms--which usually trade in more |
| impose fixed charges. More likely, it will be in an | | | | established securities, but occasionally form investor |
| interim form, such as a type of loan that can be | | | | syndicates for venture proposals; |
| converted to stock. | | | | Once an interested investor is located, the rest of |
| Angel investors and venture capital firms generally | | | | the process would seem simple; if you're selling |
| intend to realize capital gains on their investments by | | | | stock, you take the investors' check and give them a |
| providing for a stock buy-back by the firm, by | | | | stock certificate. Or if it were to be a loan, you |
| arranging a public offering, or by providing for a | | | | would take the check and sign a note. Unfortunately, |
| merger with a larger firm that has publicly traded | | | | it's not quite that simple. |
| stock. They usually hope to do this within five to | | | | Regardless of the source of financing--family and |
| seven years of their initial investment. | | | | friends, angels, or venture capital, expect some "due |
| Most equity financing agreements guarantee that a | | | | diligence" to be performed. Claims would be verified, |
| major investor participates in any stock sale and | | | | and generally some forms of guarantees of collateral |
| approves any merger, regardless of their percentage | | | | on the part of the entrepreneur would be |
| of stock ownership. Sometimes the agreement | | | | documented, and possibly situations where the |
| requires that management work toward an eventual | | | | investor could take charge of the business. |
| stock sale or merger. Clearly, the owner-manager of | | | | Entrepreneurs, in their enthusiasm, often oversell. The |
| a small company seeking equity financing must | | | | execution of documents that clearly express |
| consider that taking in a venture capitalist as a | | | | responsibilities and safeguards is essential to a |
| partner may be virtually a commitment to sell out or | | | | system based so heavily on trust. |