I see it happen a lot lately in Jakarta. Startups with 4-5 founders who are pretty much equal shareholders will look for very early Angel funding, which (if they get it) brings another shareholder on board.

Now you’ve got a situation with 5-6 shareholders in a company that still has to land its first serious funding. This is in my opinion a situation far from desirable, for some obvious and some less obvious reasons.

In general, when a startup approaches an (angel) investor for a pitch and shares that the company has 4 or 5 shareholders with pretty much similar voting rights, my first question would be “Who wants to give up his or her shares?”. It’s just too early to have so many shareholders. Startups succeed for a large part because they can make decisions instantly, and react faster than competitors, who are often more “corporate”. With having 4 or 5 voting shareholders on board, chances are your company won’t be that flexible and dynamic anymore. Also, any investor would prefer to just talk to 1 or 2 persons, which for them is just more clear and manageable.

But let’s look ahead a bit. Let’s say your startup has 4 founders with equal shares and voting rights and you land an angel investment who “after-money-in” gets 20%. So now your startup has 5 shareholders and a capital to last a year. I’m making this assumption because I’m mostly talking about digital startups that will need a longer period to become bootstrapped and even when bootstrapped will require more (growth) capital in the future.

In my experience (and I was one of them as well), startup entrepreneurs tend to ignore looking into the future. This is often because startup entrepreneurs have a very positive outlook on life in general, and specifically on their business. But in most cases it’s clear as day that at some point you will need extra capital, whether it’s for compensating losses, solving cash-flow issues or growth capital. This is where investors will strike, a (most of the time) non-profitable company in need of quick cash is an easy target. The result is the existing investor or a new investor will take a large part of the shares resulting in the founders diluting to a questionable percentage while still very much in startup phase.

Needless to say that as a founder you won’t be too happy diluting to let’s say 10-15% after just 1-2 years. But also from investor point of view this is not really the ideal situation. Many shareholders who are all less incentivized doesn’t strike me as a perfect situation. The simple solution of buying out some of the shareholders often fails because there’s simply no value yet so why would they sell?

My tips to anyone planning to start a digital business would be:

1. 1. Start with just two founders;
   2. Don’t give people shares because you can’t pay salaries (!);
   3. Hold of any (angel) investment as long as possible, create as much value first. If needed borrow money from family or friends or find alternative income sources;
   4. Plan ahead! Talk to people who have been there and be realistic in your expectations. In any case avoid a situation in which you need money urgently, this will put you in an unnecessary weak position in any negotiations;

To anyone saying “That’s easy when you have money!” True, so be creative and work hard. Many digital startup entrepreneurs have alternative income sources. In the early days of Tokobagus we were selling e-commerce development services which allowed us to pay the bills and work on building Tokobagus.

Are you involved in a really early phase (digital) startup and considering to get (angel) funding to make life a bit easier? Wanna pay some of your key staff with shares instead of salary? Though money is both a problem as well as a necessity, you might want to read this first.

Article Source: https://EzineArticles.com/expert/Deb_Gabor/1640174

Article Source: http://EzineArticles.com/7925542

Venture capital firms are different from private investors in that they have raised capital from a number of high net worth individuals with the intent to make investments on their behalf into promising start up companies and expanding businesses so that they can ultimately take the business public via an IPO or sell the business for a substantial earnings multiple. There is not a single business that does not face any type of specific business risk that should be addressed within your business plan. You should showcase, within your business plan, how you’ll deal with an economic recession as it relates to remaining profitable and cash flow positive. The primary difference between private investors and venture capital firms is that these individuals tend to live in areas where there are a number of other high net worth individuals. In some instances, you may be able to finance your business through credit card receivables if you’re already in operation as an alternative to expensive equity capital financing.

Angel investors usually have a net worth of $500,000 to $1,000,000 although this number may be higher in selected metropolitan areas. It should be noted that venture capital firms will typically take 30 days to 60 days to make a decision as it relates to the capital that you need. Most angel investors are prepared to make their investment decision within two weeks of receiving your proposal. In any document that is specific for a angel investor or venture capital firm should have appropriate disclosures as it relates to the risks associated with business which should be drafted by an attorney. When you’re developing your business plan for an angel investor or venture capital firm, it is extremely important that you dismiss your emotions in the product or services that you is that you sell.

We recommend that you have your attorney present during your first meeting in order to make sure that the individual is a legitimate investor or venture capital firm that is willing to make a significant investment into your business. It should also be noted that there are firms out there that can introduce you to angel investors or syndicated individual investment groups when you are seeking private equity capital.

The primary difference between an individual investor and a venture capital firm is the amount of capital that they are willing to provide you with as it relates to making an equity investment into your firm. As such, if you are seeking less than $5,000,000 then it may be in your better interest to work with an angel investor rather than a large scale investment firm.

Matthew Deutsch is a prominent business plan writer. His work has been included in nine books pertaining to this subject. Additionally, Mr. Deutsch has written extensively on subjects regarding entrepreneurship, small business lending, angel investing, and other related topics.

Angel investors do not usually provide loans unless there is a substantial interest rate associated with this type of financing. There are many industries that are less risky and therefore more attractive to angel investors that allow them to provide equity capital to promising ventures. There are a number of strings attached to working with private funding sources that provide capital in both the form of debt or equity capital. Private investors may include hard money lenders that want to generate a high interest rate from property based loans.

Entrepreneurship is the fastest growing new field of study in American higher education. This has been primarily due to the fact that given the job climate many people are looking to crate their own jobs rather than looking to find employment at a third party firm.

If you have a private placement memorandum drafted then you can use to a PPM broker to sell your securities third-party as it relates to raising either debt or equity capital. As it relates to real estate, owner-occupied properties are typically not funded through equity financing. Prior seeking any type of financing, you should become very well educated as to how the process works so that you can get the best deal possible. You need to thoroughly consider whether or not your business is appropriate for the current market as it relates to raising capital. You should take the viewpoint of a type of third-party funding source when you are determining whether or not you need third party investment.

Never give up too much equity in your business to a third party as it relates to working with a venture capital firm, angel investor, or private equity firm. It should be noted that your private funding source should considered to be accredited. An accredited investor has an income exceeding $200,000 per year if they are not married or $300,000 per year if they are married. An attorney should be closely to inform you of the specific laws that are related to raising capital from a private source as you will need to remain within the letter of law as it pertains to these matters. However, you should not spend an exorbitant amount of money as it relates to having the counsel that you need in order to raise capital.

In conclusion, raising capital is an expensive process and it comes with substantial risks. You can anticipate that 3% to 5% of the capital you raise will be associated with costs pertaining to obtaining this type of financing.

Matthew Deutsch is a prominent business plan writer. His work has been included in nine books pertaining to this subject. Additionally, Mr. Deutsch has written extensively on subjects regarding entrepreneurship, small business lending, angel investing, and other related topics.

There are several potential financing options available to cash-strapped businesses that need a healthy dose of working capital. A bank loan or line of credit is often the first option that owners think of – and for businesses that qualify, this may be the best option.

In today’s uncertain business, economic and regulatory environment, qualifying for a bank loan can be difficult – especially for start-up companies and those that have experienced any type of financial difficulty. Sometimes, owners of businesses that don’t qualify for a bank loan decide that seeking venture capital or bringing on equity investors are other viable options.

But are they really? While there are some potential benefits to bringing venture capital and so-called “angel” investors into your business, there are drawbacks as well. Unfortunately, owners sometimes don’t think about these drawbacks until the ink has dried on a contract with a venture capitalist or angel investor – and it’s too late to back out of the deal.

Different Types of Financing

One problem with bringing in equity investors to help provide a working capital boost is that working capital and equity are really two different types of financing.

Working capital – or the money that is used to pay business expenses incurred during the time lag until cash from sales (or accounts receivable) is collected – is short-term in nature, so it should be financed via a short-term financing tool. Equity, however, should generally be used to finance rapid growth, business expansion, acquisitions or the purchase of long-term assets, which are defined as assets that are repaid over more than one 12-month business cycle.

But the biggest drawback to bringing equity investors into your business is a potential loss of control. When you sell equity (or shares) in your business to venture capitalists or angels, you are giving up a percentage of ownership in your business, and you may be doing so at an inopportune time. With this dilution of ownership most often comes a loss of control over some or all of the most important business decisions that must be made.

Sometimes, owners are enticed to sell equity by the fact that there is little (if any) out-of-pocket expense. Unlike debt financing, you don’t usually pay interest with equity financing. The equity investor gains its return via the ownership stake gained in your business. But the long-term “cost” of selling equity is always much higher than the short-term cost of debt, in terms of both actual cash cost as well as soft costs like the loss of control and stewardship of your company and the potential future value of the ownership shares that are sold.

Alternative Financing Solutions

But what if your business needs working capital and you don’t qualify for a bank loan or line of credit? Alternative financing solutions are often appropriate for injecting working capital into businesses in this situation. Three of the most common types of alternative financing used by such businesses are:

1. Full-Service Factoring – Businesses sell outstanding accounts receivable on an ongoing basis to a commercial finance (or factoring) company at a discount. The factoring company then manages the receivable until it is paid. Factoring is a well-established and accepted method of temporary alternative finance that is especially well-suited for rapidly growing companies and those with customer concentrations.

2. Accounts Receivable (A/R) Financing – A/R financing is an ideal solution for companies that are not yet bankable but have a stable financial condition and a more diverse customer base. Here, the business provides details on all accounts receivable and pledges those assets as collateral. The proceeds of those receivables are sent to a lockbox while the finance company calculates a borrowing base to determine the amount the company can borrow. When the borrower needs money, it makes an advance request and the finance company advances money using a percentage of the accounts receivable.

3. Asset-Based Lending (ABL) – This is a credit facility secured by all of a company’s assets, which may include A/R, equipment and inventory. Unlike with factoring, the business continues to manage and collect its own receivables and submits collateral reports on an ongoing basis to the finance company, which will review and periodically audit the reports.

In addition to providing working capital and enabling owners to maintain business control, alternative financing may provide other benefits as well:

• • It’s easy to determine the exact cost of financing and obtain an increase.
  • Professional collateral management can be included depending on the facility type and the lender.
  • Real-time, online interactive reporting is often available.
  • It may provide the business with access to more capital.
  • It’s flexible – financing ebbs and flows with the business’ needs.

It’s important to note that there are some circumstances in which equity is a viable and attractive financing solution. This is especially true in cases of business expansion and acquisition and new product launches – these are capital needs that are not generally well suited to debt financing. However, equity is not usually the appropriate financing solution to solve a working capital problem or help plug a cash-flow gap.

A Precious Commodity

Remember that business equity is a precious commodity that should only be considered under the right circumstances and at the right time. When equity financing is sought, ideally this should be done at a time when the company has good growth prospects and a significant cash need for this growth. Ideally, majority ownership (and thus, absolute control) should remain with the company founder(s).

Alternative financing solutions like factoring, A/R financing and ABL can provide the working capital boost many cash-strapped businesses that don’t qualify for bank financing need – without diluting ownership and possibly giving up business control at an inopportune time for the owner. If and when these companies become bankable later, it’s often an easy transition to a traditional bank line of credit. Your banker may be able to refer you to a commercial finance company that can offer the right type of alternative financing solution for your particular situation.

Taking the time to understand all the different financing options available to your business, and the pros and cons of each, is the best way to make sure you choose the best option for your business. The use of alternative financing can help your company grow without diluting your ownership. After all, it’s your business – shouldn’t you keep as much of it as possible?

Tracy Eden is the National Marketing Director for Commercial Finance Group (CFG), which has offices throughout the U.S. and Canada. CFG provides creative financing solutions to businesses that may not qualify for traditional financing. Visit http://www.cfgroup.net or contact Tracy at tdeden@cfgroup.net.

Getting your startup funded is not a small challenge. It’s even harder when your startup is at an early stage when there is no “field” proof that could indicate the chances of its success, like a working product, happy customers, steady income etc. in the early stage of a startup, founders need to prove investors that the company doesn’t only have a great product with a clear market fit, but they need to show as well they are capable of leading the company through the next stages and ultimately to success. As a preparation for the meetings with potential investors, it is not sufficient to only master the business plan and intimately understand the business model, but to also work hard and prepare for the conversation itself with the investors. What does it mean? First, you need to know and understand the potential questions that investors could ask, and be prepared to answer them thoroughly, to the point and impressively. Those will include personal questions on your resume, as well as technology, business and financing questions. Most likely it would be around 20 questions; here are some examples:

1. How complicated is your technology? How is it protected? Is it easy to copy it?

Especially in a technology venture, protection from theft and copy is very important and provides security with investors, who can ensure that this is significant technological innovation. In case the specified product requires heavy quality assurance tests, software validations, licensing authorization or regulatory approvals, it is recommended to start those at the very early stage of the project, since it is likely they will require time due their nature. Any kind of such an approval will increase the value and prestige of the company to the investors.

2. How many months are required for each stage of the development process?

Some of the ideas and projects have a short window of opportunity for market penetration. In such cases, in it important to show the startup can complete the development stages in a rather short amount of time (months), without contradicting that though the development is fairly quick, it will still be relatively difficult to copy the product.

3. Who are the competitors?

When the need/market size for a certain product exists, chances are there are already a few companies trying to fulfill it. Therefore, it is important to show that there is actuall competition out there, and do not try to avoid or hide this subject.

Show your advantages and unique value proposition compared to your competitors. Don’t claim your product is perfect – it is highly unlikely.

It is important to show the founders know how to take advantage of their product or service unique values over the competitor’s one, and take it to the right market – the market where the value of the product is higher and the disadvantages are less noticeable.

4. What is the addressable market size (AMS)? How did you reach those numbers?

Established researchers from leading companies such as IDC, Gartner etc. costs thousands of dollars. Usually, a new startup does not have the resources to invest in such market research.

It is recommended to invest a good amount of hours on search engines to find other researches, presentation slides, and other data that will help calculate the relevant market size for your startup. Even if the information you dug up does not match precisely to your target market, you can roughly evaluate your addressable market size.

There are many more questions, such: how do you plan to penetrate the market? What is the business model? What is the basis for it? What is the business model of your competition? How much cash do you need until operation balance? What are the ownership rates you are willing to give for the investment? And more.

Knowing these questions and being prepared for them significantly improves the impact you might leave on the investors and their ability to properly evaluate the chances of the founders to lead the company towards success.

Additionally, most founders come from a technological background (engineers, developers) and lack the business and financial understanding needed to build and scale a company. Terms such as operating profit, cash flow, fixed and variable costs, equity, and many more and rarely known and will make it hard to lead and steer the discussion in front of the investors. Such a thing could harm the investors’ enthusiasm and willingness to invest – even if the product is great, with no competition and a great market. After all, even the greatest ideas could fail without the proper business, marketing and strategic leadership.

WHAT IS REVENUE-BASED FINANCING?

Revenue-based financing (RBF), also known as royalty-based financing, is a unique form of financing provided by RBF investors to small- to mid-sized businesses in exchange for an agreed-upon percentage of a business’ gross revenues.

The capital provider receives monthly payments until his invested capital is repaid, along with a multiple of that invested capital.

Investment funds that provide this unique form of financing are known as RBF funds.

TERMINOLOGY

– The monthly payments are referred to as royalty payments.

– The percentage of revenue paid by the business to the capital provider is referred to as the royalty rate.

– The multiple of invested capital that is paid by the business to the capital provider is referred to as a cap.

CASE STUDY

Most RBF capital providers seek a 20% to 25% return on their investment.

Let’s use a very simple example: If a business receives $1M from an RBF capital provider, the business is expected to repay $200,000 to $250,000 per year to the capital provider. That amounts to about $17,000 to $21,000 paid per month by the business to the investor.

As such, the capital provider expects to receive the invested capital back within 4 to 5 years.

WHAT IS THE ROYALTY RATE?

Each capital provider determines its own expected royalty rate. In our simple example above, we can work backwards to determine the rate.

Let’s assume that the business produces $5M in gross revenues per year. As indicated above, they received $1M from the capital provider. They are paying $200,000 back to the investor each year.

The royalty rate in this example is $200,000/$5M = 4%

VARIABLE ROYALTY RATE

The royalty payments are proportional to the top line of the business. Everything else being equal, the higher the revenues that the business generates, the higher the monthly royalty payments the business makes to the capital provider.

Traditional debt consists of fixed payments. Therefore, the RBF scenario seems unfair. In a way, the business owners are being punished for their hard work and success in growing the business.

In order to remedy this problem, most royalty financing agreements incorporate a variable royalty rate schedule. In this way, the higher the revenues, the lower the royalty rate applied.

The exact sliding scale schedule is negotiated between the parties involved and clearly outlined in the term sheet and contract.

HOW DOES A BUSINESS EXIT THE REVENUE-BASED FINANCING ARRANGEMENT?

Every business, especially technology businesses, that grow very quickly will eventually outgrow their need for this form of financing.

As the business balance sheet and income statement become stronger, the business will move up the financing ladder and attract the attention of more traditional financing solution providers. The business may become eligible for traditional debt at cheaper interest rates.

As such, every revenue-based financing agreement outlines how a business can buy-down or buy-out the capital provider.

Buy-Down Option:

The business owner always has an option to buy down a portion of the royalty agreement. The specific terms for a buy-down option vary for each transaction.

Generally, the capital provider expects to receive a certain specific percentage (or multiple) of its invested capital before the buy-down option can be exercised by the business owner.

The business owner can exercise the option by making a single payment or multiple lump-sum payments to the capital provider. The payment buys down a certain percentage of the royalty agreement. The invested capital and monthly royalty payments will then be reduced by a proportional percentage.

Buy-Out Option:

In some cases, the business may decide it wants to buy out and extinguish the entire royalty financing agreement.

This often occurs when the business is being sold and the acquirer chooses not to continue the financing arrangement. Or when the business has become strong enough to access cheaper sources of financing and wants to restructure itself financially.

In this scenario, the business has the option to buy out the entire royalty agreement for a predetermined multiple of the aggregate invested capital. This multiple is commonly referred to as a cap. The specific terms for a buy-out option vary for each transaction.

USE OF FUNDS

There are generally no restrictions on how RBF capital can be used by a business. Unlike in a traditional debt arrangement, there are little to no restrictive debt covenants on how the business can use the funds.

The capital provider allows the business managers to use the funds as they see fit to grow the business.

Acquisition financing:

Many technology businesses use RBF funds to acquire other businesses in order to ramp up their growth. RBF capital providers encourage this form of growth because it increases the revenues that their royalty rate can be applied to.

As the business grows by acquisition, the RBF fund receives higher royalty payments and therefore benefits from the growth. As such, RBF funding can be a great source of acquisition financing for a technology company.

BENEFITS OF REVENUE-BASED FINANCING TO TECHNOLOGY COMPANIES

No assets, No personal guarantees, No traditional debt:

Technology businesses are unique in that they rarely have traditional hard assets like real estate, machinery, or equipment. Technology companies are driven by intellectual capital and intellectual property.

These intangible IP assets are difficult to value. As such, traditional lenders give them little to no value. This makes it extremely difficult for small- to mid-sized technology companies to access traditional financing.

Revenue-based financing does not require a business to collateralize the financing with any assets. No personal guarantees are required of the business owners. In a traditional bank loan, the bank often requires personal guarantees from the owners, and pursues the owners’ personal assets in the event of a default.

RBF capital provider’s interests are aligned with the business owner:

Technology businesses can scale up faster than traditional businesses. As such, revenues can ramp up quickly, which enables the business to pay down the royalty quickly. On the other hand, a poor product brought to market can destroy the business revenues just as quickly.

A traditional creditor such as a bank receives fixed debt payments from a business debtor regardless of whether the business grows or shrinks. During lean times, the business makes the exact same debt payments to the bank.

An RBF capital provider’s interests are aligned with the business owner. If the business revenues decrease, the RBF capital provider receives less money. If the business revenues increase, the capital provider receives more money.

As such, the RBF provider wants the business revenues to grow quickly so it can share in the upside. All parties benefit from the revenue growth in the business.

High Gross Margins:

Most technology businesses generate higher gross margins than traditional businesses. These higher margins make RBF affordable for technology businesses in many different sectors.

RBF funds seek businesses with high margins that can comfortably afford the monthly royalty payments.

No equity, No board seats, No loss of control:

The capital provider shares in the success of the business but does not receive any equity in the business. As such, the cost of capital in an RBF arrangement is cheaper in financial & operational terms than a comparable equity investment.

RBF capital providers have no interest in being involved in the management of the business. The extent of their active involvement is reviewing monthly revenue reports received from the business management team in order to apply the appropriate RBF royalty rate.

A traditional equity investor expects to have a strong voice in how the business is managed. He expects a board seat and some level of control.

A traditional equity investor expects to receive a significantly higher multiple of his invested capital when the business is sold. This is because he takes higher risk as he rarely receives any financial compensation until the business is sold.

Cost of Capital:

The RBF capital provider receives payments each month. It does not need the business to be sold in order to earn a return. This means that the RBF capital provider can afford to accept lower returns. This is why it is cheaper than traditional equity.

On the other hand, RBF is riskier than traditional debt. A bank receives fixed monthly payments regardless of the financials of the business. The RBF capital provider can lose his entire investment if the company fails.

On the balance sheet, RBF sits between a bank loan and equity. As such, RBF is generally more expensive than traditional debt financing, but cheaper than traditional equity.

Funds can be received in 30 to 60 days:

Unlike traditional debt or equity investments, RBF does not require months of due diligence or complex valuations.

As such, the turnaround time between delivering a term sheet for financing to the business owner and the funds disbursed to the business can be as little as 30 to 60 days.

Businesses that need money immediately can benefit from this quick turnaround time.

The M&A and Corporate Finance Advisors at InternetInvestorsGroup.com work with revenue-based financing capital providers to secure growth funding for technology companies.

Contact Us at http://www.InternetInvestorsGroup.com to secure funding for your technology business.