Determining when and how much money your business needs to grow is an important milestone in your journey as an entrepreneur.
Maybe you’re a manufacturing company looking for a line of credit to fund purchase orders. Maybe you’re a pre-revenue startup limited liability company raising convertible debt. Or maybe you’re a fast-growing tech company raising in a Series B Preferred Stock round as a C corporation.
Regardless of your size or industry, there are some mission-critical rules of engagement to consider as you pursue your funding objectives.
But just as important as knowing what you should do when raising capital is knowing what you shouldn’t do. Here we share five things to avoid when funding your business.
What Not To Do: 5 Things
1. Don’t Solicit Randomly
Not all funding is created equal so while you may be eager to secure any funding to get to the next stage of growth, be selective and discerning. Every business has options when it comes to funding. Knowing which option is best for your business is critical so you aren’t casting too wide a net and are in the best position possible to raise the funds that your business needs.
In order to know which best suits your needs and those of your business, ask yourself the following questions:
These questions will help you determine which funding option is best for your business, so you know which options – and solicitations – are like Goldilocks: Just right.
Equally critical before you solicit anyone is to consult with a securities lawyer about whom you are permitted to solicit. There is a significant difference between a 506(b) offering to accredited investors with whom you have a preexisting relationship, and “general solicitation” offerings under a 506(c) offering where accredited investor status must be verified – and there are several other options under securities laws. These are complex laws with serious financial and even criminal repercussions if you inadvertently violate them.
2. Don’t Sign Without Knowing What You’re Signing
This should be obvious; however, too often the excitement of securing funding is enough to disarm common sense. Agreements provide a written record of the understanding the business owner and investors reach regarding their specific arrangement and its terms. But beyond the importance of having all terms and conditions in writing is the equally important understanding of the terms and conditions agreed upon therein, especially when it comes to matters concerning money.
While it may be tempting to blindly accept the real (or seemingly real) expertise of an investor with a big bank account, those decidedly less exciting fine-print details spell the difference between unreasonable risk and favorable reward.
3. Don’t Wait Until You’re Desperate For Money
It’s been said that an ounce of prevention is worth a pound of cure and when it comes to securing funding for your business, it’s best to not wait until you’ve run yourself aground financially. Desperate times often elicit desperate measures. You don’t want to find yourself in dire straits, willing to accept any capital thrown your way.
If you want to scale strategically, you have to be prepared to stay focused – which can prove challenging as you’re tempted to move fast or pivot when something seems to be developing slowly.
Resist the urge.
It’s critical to have patience as you’re scaling. Securing the right funding may take time. Allow yourself that time and budget accordingly. Unexpected issues will occur. Embrace them. Learn from them. Trust the process and all of the work that you did leading up to this point.
Your energy and resolve will make scaling successful and ultimately make your business grow.
4. Don’t Announce That You’re Raising
Before you grab your pitchforks and torches in protest – ‘Not all raising announcements are bad!’ you chant – let us explain. Go back to tip #1 and the securities laws; you must comply!If you improperly announce to the general public (such as a post on Facebook or LinkedIn) that you’re selling equity in your company (or offering convertible notes, or SAFEs), your investors could force a rescission and buyback of their shares in the future if you have not fully complied with securities laws.
5. Don’t Be Discouraged By “No”
Honestly, this is just sound life advice.
The cold, hard truth is that you’ll likely hear “no” far more than you’ll hear yes, but what will distinguish you from your competitors is your ability to take them in stride.
The bottom line is that fundraising can be painfully dispiriting and disruptive. You may just hear “no” enough times that you begin to question yourself and your business.
Words of advice: Listen, evaluate, and iterate in response to what you believe to be sound advice; disregard the rest.
The reality is that very early in your process you’ll hear no – and often – but there could be countless reasons for an investor to pass on you. Your business may not be in their wheelhouse, or isn’t at the right stage, or maybe they’re just too busy with other projects to properly vet your particular deal.
So, what to do with each “no?” Learn what the common denominator of each “no” is and adjust your pitch and approach accordingly.
Hunter Business Law: The Right Team At The Right Time
At Hunter Business Law, our experienced attorneys understand the rules of raising capital and will guide you on the journey of funding your dreams.
So, whether you started with your own money or small amounts of capital from friends and family, inevitably, the time comes when securing more sizable investments proves critical to your growth.
Contact us to continue innovating, delivering game-changing products, services or technology, and moving the Florida entrepreneurial ecosystem forward.
DISCLAIMER: This blog is for educational purposes only and does not offer nor substitute legal advice. Additionally, this blog does not establish an attorney-client relationship and is not for advertising or solicitation purposes. Any of the content contained herein shall not be used to make any decision without first consulting an attorney. The hiring of an attorney is an important decision not to be based on advertisements or blogs. Hunter Business Law expressly disclaims any and all liability in regard to any actions, or lack thereof, based on any contents of this blog.