Legal structure is an important factor for outside investors. The average entrepreneur is most likely starting off their business as an LLC due to the simplicity and speed in setup, and the flexibility in managing if there are multiple partners. However, most investors in early-stage companies require a C-Corp structure for the business to provide for the best legal and tax structure to protect and control their dollars. This means there is a step in-between now and the capital raise to reorganize the entity and follow the proper IRS rules. Keeping close contact with you CPA or other financial business advisors is critical so the pieces can fall into place at the right time.
Raising capital is a grueling process that requires a mixture of talent and expertise in many areas. Trying to do it on your own as an entrepreneur is near impossible given the wide variety of topics that are involved – Technical Expertise, Sales, Legal, Finance, Tax, Operations, and more. As an entrepreneur, once you decide that raising capital is the next best step, it’s important to assemble a team of advisors and resources who can help you through the process and ensure that those dollars are in your best interest and not a poison apple down the road.
It is no secret that there is a lot of work involved in the process of raising capital. One of the first steps is creating a forecast for the business to actually understand how much capital is needed to get to the next enterprise value inflexion point. As an entrepreneur, the challenge is to avoid undershooting the initial capital raise amount and getting stuck in a position where you are out of money, but haven’t yet gained enough traction to demonstrate a step-up in value, or generate operating cash flow. Double and triple check your financial forecast with trusted advisors before setting the floor for your capital raise.
You may be surprised to find out that there is a significant amount of liquidity and capital circulating in the investor market. If you truly have a unique, game-changing idea, finding capital sources will not be the most challenging part of the process. The best approach is finding the right investors – those individuals or groups with experience in your field, potential connections to help you succeed, and a history of providing good counsel to other ventures. The magic is getting dollars AND valuable partners through a raise.