EQUITY FINANCING OPTIONS AVAILABLE TO YOU

You generally know you've hit the big time when the guys in Brooks Brothers suits and Hermes ties start prowling through your financial statements with magnifying lenses. What they're looking for is a piece of you. Welcome to the world of equity financing.

Playing the equity financing game means giving up a measure of control in exchange for the prospect of rapid growth. Outside investors will generally want a potential breakthrough—that's why they're willing to pay attention to small companies in the first place.

In general, equity investments come from three sources: individual investors, often called "angels," with money to invest, professional venture capital firms, and the sale of stock to the public on the open market. The first category is very broad—it includes everyone from your parents, to one-time colleagues, to partners who want to join in your business. Most small business owners have at least considered selling an interest to an acquaintance. Keep in mind, however, since an angel goes in with you on the risk of running a small business, he or she will expect a fair share of the profit. If you think that your company might soon be worth a hundred million bucks, and gnash your teeth at the thought of giving away a fifth or a tenth, you might be better off thinking about borrowing to grow.

If you're considering going to professional venture investors, be prepared to offer sky-high rates of return. Venture capital firms will generally only look at companies with the potential to grow 50% a year or more. That means that if you've been in business for a few years and haven't seen that kind of growth, you'll need to tell a convincing story about why you're expecting to in the future.

Even if you're not yet at the stage where equity financing through stock offerings or venture capital is a realistic option, it's worthwhile to start analyzing the options early. It can easily take a year or two to lay the groundwork for a public offering or venture capital deal. If you might be ready for infusion of new capital in the next three years, it might already be time to start talking to the investment bankers.

Bruce Blechman and Jay Conrad Levinson, in Guerrilla Financing, argue that the single best way of finding new capital quickly is to place an advertisement in the newspaper. You'll find ads asking for capital under headings like "Capital Wanted" or "Partnership Opportunity." Often you will get responses from private investors who are looking for more modest returns (and lower risks) than professional venture capital firms. This system works, however, only if you are willing to give your partner an active say in your business. As far as the securities laws are concerned, advertising for inactive partners is the same as offering stock, and to do that you need to clear some significant hurdles, like registering your offering and putting out a complete prospectus. This makes advertising for capital in the newspaper a little like putting an ad in the personals - you might have to kiss a lot of toads before you find a match you're comfortable with as a partner.

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