Funding your business can be challenging, but luckily, loans and venture capital aren't the only options. If you want to stay out of debt and protect your assets, you may want to consider equity-based financing. In simple terms, that is when you sell shares of your company to investors.
You benefit from the capital infusion, and they benefit from owning a small stake in your company. Setting up these mutually beneficial relationships, however, can be a bit tricky, and in most cases, you want a commercial lawyer by your side. Here's how these professionals can help.
1. Mediate Needs of Both Parties
As explained above, there are two main parties involved in equity-based financing — the business and the investors. The investors, ideally, want to get as much return for as little investment as possible. The business, on the other side of the coin, wants to get as much upfront capital as possible in exchange for giving out a relatively small stake in the company.
A commercial lawyer can help bring these two interests together. They can mediate your conversations and ensure everybody is on the same page.
2. Evaluate the Business
In order for everyone to come to an agreement, it can help to know how much the business is worth. Evaluating businesses in general is difficult, but it is even more difficult with new businesses. Luckily, commercial lawyers also have experience in this realm.
Using your assets, your accounting records, your debts and other less tangible factors, a commercial lawyer can help you come up with a value that makes sense.
3. Draft Contracts
All of these elements must be tied together in a contract. The contract should include what you are offering (in terms of what percentage of the company is included in each share). It should list share prices. It should also elaborate on distributions, pay outs and similar issues.
Most importantly, you need to talk with the commercial lawyer about protecting your core interest in the company. To that end, you may want to include language in the contract that prevents a take over from equity partners. In particular, you don't want multiple investors to sell all of their shares to a single investor who then has majority ownership.
4. Help With Disclosures
When you take on equity partners, you need to keep them informed about what's happening. A commercial lawyer can also help you understand what disclosures you need to make, and in some cases, these professionals can even help you put together disclosures or statements.