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Expert answers: What are the fundraising alternatives to losing business equity?

Reader’s question: I’m wanting to open a bar and would be seeking investment from two parties, after the initial investment they won’t have any further involvement, from this I gathered the best way to structure the business would be as a Private Limited Company. My problem is that I am not in a position to contribute financially so would be seeking 100% of the required capital to establish it, which would, therefore, mean they own 100% of the business. Is it possible for me to retain any sort of ownership or portion of shares through a prior agreement?

What are the fundraising alternatives to losing business equity? Experts answer: The expert for this piece is Elizabeth Hughes from Pandle.

From time to time we get questions from prospective entrepreneurs about starting their business with investor capital. One of the most common concerns from business start-ups is getting that initial investment, without losing ownership.

Can I raise funds without losing business equity?

The good news is that yes, it’s possible to raise funds for your limited company without having to give away shares. Even if you’re looking for investors, you may be able to negotiate an investment of capital without having to lose equity.

Offer your investors a share buyback agreement

Some entrepreneurs get started by temporarily selling equity under a future buyback agreement. This means that your investors will give you the cash in exchange for shares. But, they do so under contract for you to buy back all or some of the shares at an agreed point in the future.

It’s not without its risks; if you reach the buyback date and can’t afford to buy the shares back, you risk losing them permanently. This could be the point at which your investor decides to sell to someone else, or if things are looking promising, keeping the shares for themselves.

If you are in a position to meet the terms of the buyback, you regain some or entire control over your company. Meanwhile, your investor will hopefully have seen the value of their shares go up, so will be selling them back to you at a nice profit on their initial investment!

Ask your investors for the cash as a loan

Some investors may well consider giving you the startup money you need as a private loan. You’ll usually need to guarantee private money lending against assets such as property, so there could be a lot to lose if it all goes wrong.

It’s an alternative to more traditional lending such as from the bank, but the way it works is broadly similar. You get the cash and agree on a repayment schedule with your lender investor. The benefit to them is the interest that they earn on the loan.

For the business owner who wants to raise funds without losing any control or ownership of shares, it’s potentially a good option. Just think carefully about the risks involved!

Other alternatives to equity finance

For some business owners, the desire to find a non-equity investment deal isn’t just about not wanting to share the spoils. If you have a very clear vision for your business, you may not want anyone else muscling in! Fortunately, there are other sources of start-up capital, too.

  • Crowdfunding campaigns are where you ask multiple investors for a much smaller amount of cash, sometimes in exchange for rewards. Sites such as Indiegogo and Kickstarter offer you a platform on which to launch your campaign. These can be an excellent way to get a new product from prototype to market launch, but perhaps not ideal for every business model.
  • Going into debt, such as using loans or credit (either at the bank or with suppliers), can work. A brand new limited company might well struggle to get credit, however. This could then leave you with the possibility of taking out the money in your own name, which poses a risk of you becoming personally liable if the business fails.

More on small business funding and equity vs debt.

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