Raising Capital for the Ordinary Lifestyle Business
Tech is HOT.... and chances are, if you have a technology-based or tech-related business, you've already at least heard about the enchanting world of venture and angel capitaltists as a source of funds for your business. Or perhaps you've even explored the possbility of various "grants" from government or private associations. But what if you're a successful, but perhaps more ordinary, outfit needing additional capital to operate or to expand and prosper? Where do you go in a time when credit is tight even for the most profitable of businesses and banks just aren't that eager to take many risks?
Lately I have been having writer's block with this blog - something which hasn't happened much since I started writing it a couple of years ago. So it was especially welcome when a business owner at the Chamber of Commerce forum I recently attended asked precisely this question and helped me break through and focus again on issues of concern to businesses and their owners that I can help answer.
Venture capitalists and so-called angel investors are enthralled with new technology embedded in what is sometimes called a "growth" business or, in the parlance of one speaker at the forum, a "sudden wealth vehicle". So what if you have what is often known as a "lifestyle" service or manufacturing business focused on the proverbial tortoiselike more steady, but perhaps less astonishing, growth? It doesn't exactly take rocket science to figure out that the iconic "friends and family" route may be the most viable alternative available to you.
Every one of us probably has a number of relatives or close friends who love us and only want us to be happy. These are the people - the "friends and family" ("F&F") - we go to when our business really needs $$. I've posted before about some of the risks of gving even a sliver of ownership to someone else. However, If the company needs a cash infusion either to continue operating or to grow and traditional financing is not available, this may be the only practical alternative,
Friends and family may often be willing to provide funds without any formal documentation or "due diligence". But suppose both you and your benefactor would like to make the relationship a bit more businesslike. What then? There are several alternatives - here are a few ideas:
1. Promissory Note. The easiest way to make a more formal record of money received from F&F is to use a promissory note. It can have a specific payment schedule, be due after a period of time (say a year or two) or be a DEMAND note which allows the person lending the money to decide when they want to be paid back. For tax purposes, it is important to have at least a minimum rate of interest if the money is from a relative.
2. Stock with Call Option. It is also possible to give F&F some "temporary" .ownership of the business until you pay back the money given to you. If stock (or other ownership interest like an LLC Membership Interest) is given with a "call" option, it essentially sets a repurchase price that will need to be paid to regain complete ownership. With a "call" option, the company gets to decide whether and when it has the ability to "buy out" these ownership interests.
3. Stock with Put Option. Stock with a "put" option is similar to a "call" option except that it is the person holding the stock who gets to decide within certain specified parameters whether and when they want to be "bought out".
4. Nonvoting Stock. If your business is a C-corporation or a LLC, you could also give F&F nonvoting stock or membership interests. With this alternative, F&F can get the economic benefits of ownership, but do not have the ability to control the business and financial affairs of the company. Because S-corporations can only have one class of stock, this option is not available to businesses that have selected this choice of entity. A similar result can be obtained, regardless of the choice of business entity, with respect to larger groups such as employees through use of a "phantom" or "mirror" stock plan. Thia basically gives recipients a sort of "virtual" ownership interest which can be tied to performance in their work for the company. Use of a "voting trust" in which the voting rights connected with shares of stock are assigned to another party is yet another variation leading to a similar result.
5. Convertible Debenture. These instruments are a sort of hybrid between a promissory note and ownership interests. Those providing funds are given a promissory note for the amount of the money given. Unlike an ordinary promissory note, under certain conditions, holders of the note can elect to "convert" their loan to an ownership interest in the company.
These are just a few of the options available to any business seeking private financing. A good business attorney can help determine which alternative best fits any particular company based on the founder's goals, the company's immediate objectives, and the situation faced by the business.
