Do you think of yourself as an investor? You should. You are investing not only your personal time and effort in building your business; you are probably the first financial investor as well. So far your monetary outlay may not be much but in order to expand your company and produce more revenue, you will need to raise more cash and learn how to judge whether the products and services you need to promote and run your business will be worth the money.
Investment Options:
Personal Savings
There are a few ways you can invest personal savings in your company:
- As a loan
- As equity
- A combination of both
Equity is the most common method but has the disadvantage of lacking liquidity. Converting your investment to cash is difficult.
A loan provides the liquidity that equity lacks as long as your business has a good cash flow and is generating adequate revenue in order to pay back the loan.
To make the best choice, find an accountant who specializes in tax laws and founder’s capital.
Tranches
What the heck are tranches? Tranches are partial investments, a method that venture capitalists often employ. Rather than invest everything all at once, a venture capitalist will invest portions of money as needed based on a company’s requirements and demonstrated progress.
Investing in tranches like a VC is a good way to fund your company while maintaining a personal emergency fund.
DIY – Do It Yourself
This is advice mainly for the married entrepreneur. You must decide whether it would be best to maintain ownership of the business in your name only. If so, you need to make certain to use only your personal savings or checking account, not a joint account you hold with your spouse or partner.
Caveats:
Pricing Shares
When you first incorporate you set the “par value” of your company shares, usually a very low number (a penny or less). You then invest in your company by buying shares at par value or other market value.
You should treat this as any other stock investment decision, even though it means guessing how successful the business will become. And be careful of another pitfall.
If you approach outside investors in the future, understand that they can and will learn any difference between your stock’s par value and the amount you are asking them to pay per share. Extreme differences can set you up for strong questions during negotiations. Be sure your company can show the amount of progress that justifies a much larger investment than you made yourself.
Return on Investment
It should come as no surprise that you could lose money investing in your business. This is a good argument for investing in tranches and keeping an emergency fund. Again, treat this as you would any other investment and keep a diversified portfolio. You shouldn’t invest everything in a single stock or business and that includes your own. This is called being a shrewd business person and does not reflect a lack of confidence in your company.
Paying for Products and Services
Unless you really are going to do it all yourself, it is likely you will need to approach third parties for things like marketing assistance. Dileep Rao, writing for Forbes Magazine, provides an excellent example of how to determine whether that investment will pay off.
According to Dr. Rao what you are looking for is a “reasonable, risk-adjusted return on each dollar invested.” In order to effectively use your capital you must have a way to estimate the financial benefits of any investment you make in products (office equipment, software, raw materials) and services (marketing, web design).
It takes some math but Dileep Rao takes you through every step in a simple example.
You are an entrepreneur and you have confidence in your vision and your company. But to be a good financial steward of that company you must learn to invest wisely in it without endangering your entire bank account or home.
Take the time to determine the best route for you to invest in your business for the long run.
