Once you’ve figured out your financials (see “How Much Money Do I Need To Start My Business” ) then you have another set of calculations to make. The first calculation is, “How much will I personally invest in my business, and how much am I asking for from investors?” Any investor is going to want to see that you’ve made a commitment to your company. However, no one says you have to go bankrupt trying to start your enterprise.
Wicked Start founder Bryan Janeczko said “Investing is a question of risk tolerance. You have to invest some of your own money so you have skin in the game. Investors will want to see that. But, if you can self fund, that’s better since you won’t have to bring on investors or headaches.”
Assuming you will bring on investors, what percentage you fund is not a “standard decision.” Notes Morris Bocian, President, Creative Business Planning Incorporated, “There are no hard and fast rules. However, investors feel like you should suffer some “pain” if the company goes out of business. For example if you need $300,000 to start your business, if you have a net worth of $500,000, your investor would want you to contribute significantly more than if your net worth were $10,000.”
Bocian commented that it doesn’t have to be all your money, either. “Often [investors] view friends and family money as that of the entrepreneur’s. They want to see that you and the people that know you best are confident in your capabilities, are fully committed to the venture and you won’t walk because its too difficult. They want to know that if things don’t work out as projected you will do what’s right to protect everyone’s investment.”
There are no formulas. “If you are looking to leverage your equity with say an SBA guaranteed loan,” Bocian says “Your SBA lender might require you to have a minimum of 20% – 25% of equity.”
Should you offer debt or equity in your business? Janeczko says “Debt is generally better than equity since it’s not ownership. However, for high-risk ventures like internet startups equity is often better since it’s riskier. Debt will have to be repaid with interest and may involve personal guarantees.” Bocian adds, “If you have assets, purchase orders, accounts receivable you might qualify for debt, whereas if there is limited or no assets, there is a good chance you are looking for equity.”
This part of your business planning is complicated. If you need help, we’re always around on the Wicked Start Community. (Just sign into your Wicked Start account and click the community link on the menu below the logo.)