Are you in business to create the opportunity to win big? To hit the home run and make millions? Or are you in business to have a steady income stream, prestige of running your own business, calling the shots?
Ask the Questions
The answers to these questions make a difference in how you run your business and the decisions you face. It is one thing to be a lifestyle business which the founders wish to continue to own, control, and grow for the benefits of its founders and stakeholders. It is another to be a business which has at its core the desire to grow through operations, investors, and on-going expansion of activities and operations. The difference between these two is substantial and significant. Here are some key points of difference:
- How much money is needed
- What is the source of the dollars which will to fund growth
- How is the business managed
- Will it be necessary for “professional” management to be retained
- What role, if any, will founders have as the business grows
- What is the primary purpose of making money – for immediate and near-term benefit of the owners or for investment in growing the value of the business
- What will be the key decision points for how fast and if to grow
- How much “control” are you willing to give up to get investors
Making the decision or setting the objective to be a “growth” company means understanding that there are many “strings” which get attached to financing the business with funds from “outsiders,” whether those are grants, debt, or equity dollars. Each type of funding creates obligations to rules, regulations, or terms and conditions imposed by agreement or contract.
Have you heard this old saying: “He who pays the piper calls the tune.”? This adage is also true in funding your business. The size and number of strings which get attached are a function of many elements. Here are only a few:
- Regulations – State and Federal
- Amount and Timing
- Legal agreement
If we are honest about things, few of us enjoy dealing with regulations (okay, there may be a few auditors, lawyers, and CPAs who do), however, they are a fact of life and are truly not optional. Further, just because “no one else complies” doesn’t mean that the compliance is optional. When you play the lottery you try to be “the one” who beats the odds. You don’t want to be “the one” when regulators or auditors examine your records for compliance.
Private Funding and Securities Regulations
Be aware that any dollar of debt or equity raised beyond those funds invested by the founders is a securities transaction. While you may not be making a pitch or offer to the public, asking for an investment from anyone (including family, friends, or acquaintances) is a state and federally regulated activity. The level of regulations again depends upon the nature of what you are doing and who is involved, but you need to make sure you know the rules before you start. Do not accept “that no one really pays attention to that”. If you are seeking funds, make sure you know what you can and cannot do; what you can and cannot say; and what process to follow.
Federal Financial Assistance Programs or Procurement Contracts
Grants, co-operative agreements, and contracts are all mechanisms for receiving federal funds. Contracts are purchase relationships between the government and vendors that are acquisitions of products or services that are essentially the same as those offered in the marketplace. Grants and co-operative agreements differ from acquisition contracts in that they are funding tools for the development of technology and other innovations for which the government seeks to provide support in advancing the proof of concept and product development. The key difference between grants and co-operative agreements is the amount of government involvement in the project – co-operative agreements have the particular funding source directly involved.
Whether you are a federal contractor or a grant recipient, the government (no big surprise) has rules to govern how you do business with them – from how funds can be spent to how you report on how the funds are spent to who can work on the project. The myriad of rules are unique to each relationship between the business and the government; there are commonalities and core principles, but the application depends on your particular agreement.
How Much and When
Each business is unique and will have a different timeline for needing funds. The amount and timing of financing efforts has significant impact on the ownership interests and financial outcomes for founders and early stage investors. As the business moves from initial formation to growth stage and the degree of capital intensity (the amount of funds required to go from concept to making commercial sales), businesses in growth mode demand more and more cash. Cash must come either from operations or from sources outside the business – equity, debt, or grants.
Where do you seek funds? What are the implications? What do you want from your business? What strings are attached? How will the investment change the way you do business and your timeline? Will it be a one time thing or will you need subsequent rounds? All of these questions need to be understood and answered before you accept the first dollar of funding. Once you have accepted the first dollar, the strings are attached and a new way of doing business begins.
Copyright ©2007 F.O.C.U.S. Resource, Inc.