May 19

Reasons To NOT Raise Equity

By Nathan Rose, Assemble Advisory

Many businesses should not take on external shareholders.

Before you think seriously about efforts to raise equity, you should first consider whether having investors will be a fit for you and your business – and this means making sure your interests are aligned with those of your would-be financial backers.

Let’s take a step back and ask what the purpose of a business actually is. Many would say it is to generate profits for shareholders – and that’s often true – but not the whole story.

The purpose of a business is, rather, to serve the interests of the shareholders. Here, the distinction is critical between founders who start and spend their time in the venture and investors who mostly contribute money. Angel investors may contribute some time along with their money, but it won’t be fulltime.

The aim of financial investors is usually to make a profit – a return on their capital. But because founders have the added experience of spending their time in the company too, they are also seeking a return on their time – and return on time can be measured in enjoyment as well as financial profit. For some founders, having investors could ruin the pleasure of being business.

Here are four reasons to NOT raise equity capital, through crowdfunding or otherwise:

If you don't like the idea of being answerable to others

Having outside shareholders is not for all personalities. It’s common for people to be attracted to starting a company so they can “be their own boss” – the idea of having no-one telling them what to do is attractive for many.

If self-reliance, independence and total control are the main things that draw you to being an entrepreneur, then efforts to raise equity will result in removing the very elements you like most about being in business. Suddenly you’ll need to consider other opinions in your decision-making, and this trade-off in autonomy will be unlikely to be worth the shareholder’s money.

If growth is not your main concern

Investors are contributing equity capital with the expectation of gain, growth and profit. Yes, some are investing for reasons other than profit – to put their money to work for ethical purposes, for instance – but the growth motive is rarely completely absent. Even investors with ethical motives want to see operations expand, so that more good work can be done. If the profit motive isn’t there at all, the “investment” is really more of a donation. Nothing wrong with that, so long as the people giving you the money are clear about it.

Some founders simply don’t have growth at the core of why they’re operating. It could be more important to them that they’re doing interesting work, or perhaps they don’t care to grow the company beyond the level that supports their lifestyles.

When authority becomes shared with your investors they won’t be happy if you want to take time off, or refuse to expand just because you prefer to work less. You give up a degree of independence when you take their money, and need to become more growth-oriented.

If you never want to sell your business

Financial investors are often looking for liquidity through a trade sale, realising an increase in the value of their shares in the process. Maybe you can’t imagine ever selling your business. Maybe you enjoy the work, you enjoy the learning and personal growth that comes with running it, and no amount of money realised through a sale would give you the satisfaction your business already provides you with every day.

Again, it’s the misalignment between what the founders want and what the investors want that will cause problems down the road. For the start-up crowd, this doesn’t pose a problem as they expect to gain satisfaction from growing a business, whereas others gain more satisfaction from having a business. Which are you?

If you couldn't sell your business, even if you wanted to

If your business relies on your unique skills, it is less suitable to raise equity. I once had a chess coach who would give me lessons once a week. He had many students learning from him, and he did quite well. But it wasn’t the sort of business he could ever sell. He was a top player – one of the best in the country, and due to his skill borne of years of practice, his client base could only be served by him and a handful of others.

All good, investible, high-growth companies have some sort of asset that sets them apart from their competition, and the governance procedures in place to allow continuity in the event the founder was to leave. Is your business an asset that others can invest in? Or have you built a job?

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Many founders have been sold on the idea of raising capital, without really thinking about the implications. They get hung-up on presenting their business in a way that will be attractive to investors, without considering the reverse; whether having investors is attractive to the founders!

So before you spend time and energy in efforts to raise equity, understand what you are getting yourself into. It’s your business and you get to run it however you want… until you have shareholders which force you to take into account what they want too.


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About the Author

Nathan Rose is the founder of Assemble Advisory, a consultancy for equity crowdfunding. We help busy company founders get their information memorandums and financial models in order, and provide advice on structuring a successful equity crowdfunding campaign.