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How to Prepare for an Equity Investment

If you’re like most startup entrepreneurs, you’re eager to get the equity investments you need to scale your business as quickly as possible. There’s no guarantee you’re going to get the money you need, and with each passing day, you get deeper into your company’s development.

 

Still, before you get to the point of signing an equity agreement and getting money from a VC firm or angel investor—or even going public with an IPO—there are some important steps you’ll have to take to prepare your business for the investment.

Determine and Understand Your Source of Financing

First, figure out how you’re going to get your funding, as well as the full strengths and weaknesses of that source. There are different advantages and disadvantages with each type of funding you could procure. For example, if you choose to work with a VC firm, you might have access to more experts and resources, but there may be more stipulations about how you can spend the money. You may face more competition.

If you choose to take the company public with an IPO, you may have unlimited growth potential. But you’ll also need to comply with far more rules and regulations. Do your research before you move forward.

Audit and Document Your Operations

Even if you’re still in the early stages of development, take the time to audit, understand, and document how your company operates. Which departments do you have established, and which ones require further development? How do you make your product or perform your service? How much money are you spending on upkeep, and how will this change over time?

This is important—it will help surface weak points within your organization. It may also be an important piece for prospective investors to review; many invest in people and processes rather than products or services.

Know the Numbers Inside and Out

Before you even think about getting funding, you should know your company’s numbers (and future forecasts) like the back of your hand. How much revenue are you currently generating? What expenses do you face? How will these numbers change over time?

If you understand these numbers well, you’ll be able to present them to a prospective investor confidently. You’ll be prepared to answer any questions concerning anticipated industry and market impacts. You’ll also have a much better chance of spending the money in a way that ultimately helps your business grow.

Figure Out How to Use the Money

This leads to my next point: Figure out how you’re going to use the money. Too many entrepreneurs who get a big injection of equity funding start spending liberally, without any thought toward budgeting or long-term financial plans. You might already have documented items you need to get (like pieces of factory equipment) or people you need to hire.

But before you take on this kind of funding, you should be able to account for every dollar—or nearly so. It will help you make a better pitch to prospective investors and ensure you spend that money responsibly.

Review and Upgrade Your Financial Team

You might already have a CFO in place or, at the very least, an accountant to help you track the company’s finances. But if you’re anticipating a major injection of capital, you’ll need a more robust and capable financial team to help you manage things.

There’s no firm rule for how many people you should have on staff, but make sure you have access to plenty of collective experience and manpower.

Establish a Governance, Risk, and Compliance Framework

Governance, risk management, and compliance (GRC) looks a little different for every organization, but no matter what, you’ll need to have some kind of GRC framework in place. There are countless variables to consider, so your best bet is to work with a team of mentors or advisors to determine the best structures and policies to institute for your company.

Create a Foundation for Investor Communications

Finally, work to create a strong foundation for your communications with investors. If you’re working with an angel investor or a small group of people, this means setting firm expectations for how to communicate in advance.

If you’re going public, you’ll need to establish how you’re going to report on company financials and other important information.

Once you’ve taken these steps, your startup will be ready to receive equity funding. Depending on the nature and size of your startup, equity agreements can get complicated. Make sure you have an experienced financial team backing you to understand the nuances of your agreement, whether you hire in-house or work with a third-party consultant.

Equity investments can be exciting developments for a growing company. But they can also be disappointing and draining if they aren’t handled correctly. Make sure to prepare your company—and yourself—for what’s to come. It will result in the best outcome for everyone involved.

Author : Holly Hutton

Born in the Big Easy and raised in the Sunshine State, Holly has spent the last five years brunching in the Big Apple and bantering with Big Ben. As a wandering writer, techy-in-training, and avid alliterator, Holly has written everything from educational policy and political news briefs to web content and travel blogs. She is thrilled to be a part of the KS team and working with a community of smart, savvy, entrepreneurs on all things startup!

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