written by: Navic Deka
"If you buy things you don't need, soon you will have to sell things you do need."
- Warren Buffet
Let's start right back where we left off.
Angel Investors
As their name suggests, angel investors are fantastic people who put money into new businesses. Typically, angel investors are people who have generated a lot of money on their own and want to reinvest some of it. They typically want to invest their money in the industry where they have made their money.
Where are angels to be found? They are typically discovered through networking. Consult your accountant and attorney. Consult stockbrokers, real estate agents, bankers, clients, sales representatives, and colleagues in the sector. You will need to keep trying since you never know when or where that angel will appear. Additionally, a Google search can be used to find angels on the internet. Of course, it won't be simple to discover an angel, but once more, it is possible. . If and when you do find one, here are three steps that can help you get a deal:
1. Get ready for your elevator pitch. A proposition that can be explained in roughly 30 seconds—the amount of time you may spend in an elevator with an investor—is referred to as an "elevator pitch" in business parlance. Your elevator pitch needs to be captivating, perceptive, succinct, and compelling in order to pique someone's interest in learning more. You need to have a snappy idea ready because the first thing you will do when approaching any potential angel is to pitch your idea.
2. Do your research. If your pitch is successful and you are granted a meeting, you must be ready. It goes without saying that your company plan must be impeccable. However, having some background information about the possible investors is just as crucial. What was their source of income? What is their history? What other things have they funded? Before attending the meeting, find out as much as you can about the investors. Show promise, pique their curiosity, and establish a rapport. Be enthusiastic and thoroughly familiar with your business idea.
3. Following up. If the meeting goes well, be sure to ask the angel for references on past transactions he has handled. Make sure the angel is reputable and simple to work with by contacting the references. Congratulations are in order if everything is in order.
Venture Capital
If a venture capital (VC) business is a group of like-minded individuals with even more money, an angel investor is an individual with a lot of money.
Family members, investment banking firms, professional investors, or any other group wanting to invest in companies with high potential can make up VCs. But keep in mind that the majority of VCs only invest in companies that require at least $250,000, and even then, the likelihood of success is at best remote. Over 1,000 concepts may be submitted to a VC company each year, with the great majority being turned down. A solid management team, potential for growth, and distinctiveness are the criteria that VC firms seek. Unless yours is a small business with huge potential, you would be best advised to look for funding elsewhere.
Dealing with Investors
There are various ways to execute a deal when a company wants to bring in an investor, whether they are a family member, an angel investor, or someone else. This depends on the legal structure of the company.
Sole Proprietorship & Partnerships
If the company is a sole proprietorship or a partnership, the funds may be regarded as a loan that must be repaid at a predetermined interest rate and by a specified date. Alternately, you could explain that the investor is purchasing a piece of the company and will be paid a portion of the monthly profits. Negotiations need to be made on this.
Corporations
The sale of debt and the sale of stock are the two primary ways for a corporation (either a S or a C corporation) to raise money. When debt is sold, the capital invested is treated as a loan. Debt securities are what they are called. Due to its priority over equity assets, debt securities appeal to some investors. That is, in a hazardous business, the investor's loan is legally safeguarded and given higher legal priority than your ownership interest in the event that something goes wrong.
Taxes are one factor that may lead you to structure the investment as debt security. When this investor gets paid back if you merely sell his stock, it will probably be viewed as a dividend. Dividend payments made by your company are not tax-deductible for tax purposes. However, if you structure the transaction as the sale of debt (a loan), then your repayments are deducted from your business's taxes because they are seen as interest payments. Therefore, by arranging the transaction as a loan, your company would pay fewer taxes.
Selling your investor's stock in the company is the second way to structure the transaction; this is known as a sale of equity or a sale of securities. This option appeals to many investors since it grants them a real ownership stake in the companies. The right to share in profits and the ability to vote on the board of directors are included with the selling of common stock to an investor. The most typical style of company finance arrangement is this one. How many shares of stock should the investor get? Saying is impossible. The size of your company, the sum of money he is investing, the level of power you want him to have, and other factors all come into play. You must speak with someone about this.
LLCs
Things are a little different if you are an LLC owner. LLCs lack "shares" of stock, unlike corporations. Instead, it has members as owners, and you may purchase membership shares. You are entirely free to sell your LLC's investor shares if you so choose. If you do, though, your LLC's structure might alter. Keep in mind there are two categories of LLCs. Most are managed by members: The firm is managed and operated by the owners—the members. The second type of management structure is manager-managed, in which the owners are assisted in running the company by managers. The LLC's income would be distributed to the nonmanaging owners, who would likely be your new investor.
It's crucial to realize that in an LLC managed by managers, only the named managers are permitted to vote on management decisions and represent the LLC. Your investor would be similar to a shareholder in the company, with the exception that he would not be permitted to vote on the board of directors or serve on it. Why? due to the lack of a board of directors for LLCs.
Thank you so much for reading!
If you haven't read part one click here!
