When a small business needs to take things to the next level, it’s often just a matter of a small amount of financing. For small business owners who are bootstrapping their business and need some additional capital, friends, family and professional acquaintances are usually the best place to start. Though you may be approaching friends or family, you must treat them professionally and present them with the same information you would show venture capitalists or angel investors. Regardless of how close a person is to you, if you are asking them for money to fund your business, you need to have three things decided and ready.
Choose the Investment Strategy
Right from the start, it is important to have your general strategy chosen and in the back of your mind at all times. The general strategy falls into one of two categories:
Accepting a desired sum of money from one investor, or
Accepting smaller sums of money from multiple investors until you reach your target sum.
Knowing your strategy will help with preparation and negotiation.
Prepare Your Pitch Deck
Have your pitch deck prepared and polished. A pitch deck is brief presentation, approximately 10 slides, which gives an overview of various aspects of your current business and future plans. The pitch deck explains everything prospective investors need to know to make an investment. Though formats vary, the pitch deck should include a dedicated slide for each of the following items: the company purpose, the market problem, your unique solution, why now is the right time, the market size, details about your competition, product details, the business model, the team involved, and current financial information and projections. Keep this presentation and your delivery of it strictly professional.
Choose the Type of Investment
You are asking for money to grow a business. Decide if you want that money to be a loan or an equity stake. Loans need to be paid back (plus interest) at a predetermined time on a predetermined schedule. This will negatively affect your company’s cash flow, but you won’t be giving up a piece of the business. If you decide to take an equity investment, you are giving up a portion of the business, but that investment does not have to be paid back like a loan.
Understanding the Equity Stake
Equity is ownership. Once you take an equity investment, you are forever giving up a piece of the company pie unless you work out a deal down the road to purchase that equity back. Whatever percentage equity you decide to sell, the investor owns that portion of the company and is entitled to that portion of the company’s net profits forever.
Equity does help value a company, however. For example, if you sell a 10% stake in your small business for $40,000, the you have just valued your entire company at $400,000 (that is, $40,000 divided by 10%).