The XBanker
Business Financing eXpert
Preventing Unnecessary Dilution
July 15th, 2008
One of the biggest mistakes entrepreneurs make is that they give away too much of their business too soon. I’ve spoken with entrepreneurs that own less than 2% of their brainchild after diluting for “friends, family & fools” and for venture capital. You need to properly stage the financing of your business and to do so under the best circumstances possible to prevent unnecessary dilution.
Let’s say you are raising $250k from investors to start your business, if the business is only worth $500k, the investors will own 50% of it; if the business is worth $1m, they’ll only get 25%. The higher the valuation, the greater the percentage of your business that you’ll retain. It can be challenging to justify your valuation without revenue – which is where promising entrepreneurs routinely get taken to the cleaners. This is why I typically recommend convertible debt to raising hard equity, and why I recommend obtaining debt financing in the early stages of your business.
First of all, most business won’t raise a dime in outside capital. Investment networks are flooded with hopefuls that burn time and money trying to raise money – not recognizing the complete tooling they will receive in the event that someone actually believes their concept has merit and wants to invest. It is a lot easier to attract capital, and to do so on your terms, if you have successfully proven the concept and have some traction.
Unless you’re building airplanes, you can probably get things moving with less than $100k. This is why the XBanker is an important asset in the Shared Success family – we are here to help entrepreneurs establish a strong foundation, nailing the fundamentals and obtaining “seed credit” so they can get things moving. So if you are still slumming on the investment networks and forking over gobs of money for a business plan that no one will read (and if they read it – they sure won’t believe it!) – stop. Let us help you get your first $200k, so you can bring on investors under the right conditions.
Sphere: Related Content
July 22nd, 2008 at 5:02 pm
Dear X Banker,
I have spent 8 years working part time to get my working prototype AKA (baby $ flow cow $150/hr) ready to go main stream. I have purchased 2 utility patents (US & Taiwan) and I will be applying for 13 more individual international patents in the next 6 months to protect myself world wide. This is an aerospace manufacturing based business to as you point out in your article to manufacture large OEM components to supply the aircraft manufacturers themselves.
After I pay another $100K and I start generating a ramping up + $ flow, then I want to build my first large $ flow cow which will generate $3K hour or about $10M a year gross revenue.
How and what do I need to perform to get ready to borrow $2M in this tough post housing boom credit crunch?
Before you ask, my personal credit rating is 728 and my baby $ flow cow is almost paid for. If I had to go purchase this baby cow on the open market it would cost ~ $500K only 65K left to go.
I have just opened up discussions with Grow think in LA about writing yet another version of the business plan; I am not wild about that.
Lastly I work up in Alaska 2-3 weeks a month. Wheels up at 2:30 PM on 7-23-08. My company email on slope is bob.jensen@bp.com
If you can help/tutor me drop me a line. Thanks