When I talk to entrepreneurs about raising money for their businesses, a common fear they have is losing control of their company. This is understandable because most entrepreneurs go into business because they want to build the company of their dreams and run it on their own terms. In addition, many founders get fired by the very company they founded. Even Steve Jobs got fired by Apple.
When businesses sell equity in their company, there is a chance that the founder will get fired. In the startup world, getting fired from your own company is the rule, not the exception. This is because startups normally get investment from professional investors that dictate the investment terms, ensuring that the investor has control over the company and can dictate its direction.
You Can Raise Money For Your Company Without Giving Up Any Control
The good news is, you can raise money for your company without giving up any control. This is especially true for small businesses and other entrepreneurs that have difficulty getting investments from venture capitalists or angels and need to raise money in other ways.
There are laws in place that allow companies to raise money from all types of investors, even your friends, family, neighbors, and other people that you may not necessarily think of as investors. Using these laws, you can raise money without losing control of your company.
First, if you don’t sell equity in your company, you don’t lose any control. Rather than selling ownership in your company, you can raise money by selling promissory notes--or debt--to your investors. When you raise money by selling debt, you don’t give investors an ownership stake in your company. Instead, you promise investors that you will pay them back their principal and an additional amount on top. This can be appealing to investors because there is liquidity built into their investment. In other words, your investors have a way of getting their money back and even make some money from their investment.
You can structure your debt offering in multiple ways, including by structuring it as a typical loan and as a revenue-sharing agreement.
3 Ways to Raise Money without Losing Any Control
When you can structure your note as a typical loan, you promise your investors that you will pay them back their principal plus interest. In structuring your loan, you can determine the amount of interest you will pay and the amount of time you have to pay back the note. This gives you more control than you would otherwise have if you were borrowing money from a bank, for example.
You can also structure your note as a revenue-sharing instrument, where you promise to repay your investors a certain percentage of their principal from your revenues until you pay back the principal in addition to the agreed upon percentage. For example, if you tell your investors you will pay them back 2x their original investment, you are agreeing to pay them back 200% of their investment.
In a revenue sharing agreement, you decide on the percentage of revenues that you will use to re-pay back investors. This means, the length of your loan and interest rate will vary depending on how quickly you pay it back. If you think you will pay back your loan quickly, then the resulting interest rate may end up being very high. However, a revenue-sharing note gives you the peace of mind that you will only have to pay your loan when your company is making money.
Finally, you can sell equity in your company even if you do not want to give up any control. One way of doing this is by creating a class of shares that doesn’t have any voting rights. If your investors can’t vote, they can’t control your company.
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This article is provided for informational purposes only and should not be construed as legal advice. Read our disclaimer here.