When we are creating a business one of the first things we must do is look for financial resources. There are just few cases where the entrepreneur has sufficient resources to support the company until it becomes profitable, and even if this is the case, he shouldn’t put away the idea of acquiring investments in order to make the project grow. Taking this into account we must assess correctly our business before we search for investment.
A frequent mistake in entrepreneurs is that they don’t assess correctly their company. If the businessman is not aware of the huge value his project has, he is going to give away a great part of his company in exchange for resources. The problem is that his shareholding structure will be dreadful for his interests.
For example in a structure where the entrepreneur keeps just 20% of his business an the investors 80% of it, his point of view about the business course won’t be taken into account in the same way as if he were the major partner. Other important point is that if the business requires another round of investment he will have to negotiate with just a shareholding of 20% that may imply two situations: that the new investors don’t care about an investment in a maximum 20% of shareholdings of a company or that the entrepreneur dilutes his shareholding to around 10%. Finally we must remember that holdings may be used in order to link together employees to the company and to retain their talent. This is why it is important to keep some shares to distribute them among important employees that must be retained in order to compromise them with our business project.
According to the last paragraph, the recommendation is to give up only 20% shareholding in the first round of investment. This is feasible taking into account that the company must have an excellent assessment. On a second round of investment the recommendation is also to just give away 20% or 25% of the company. According to this the entrepreneur keeps being the major partner with 55% or 60% of the company. With this structure he can also include important employees as partners giving away 10% of his shares. In this way he will keep 45% or 50% of the business. Even is his holding is less than 50% he will still be the major partner.
To conclude, the important aspect of this post is that as entrepreneurs we must learn to assess correctly our project. Even if we obtain a huge investment remember that our company will be able to create many more resources in a future. Therefor we must negotiate taking this into account.
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