Page 15 - MIND YOUR ASSET

MIND YOUR ASSET

The proposed investment is usually in the form of debt, equity, or a combination of each:

Debt
Debt is the most common form of capital used by start-ups. Capital is secured by the assets of the
company including the possible personal guarantee of the owners. With time, the company repays
the principal with interest from cash flow. If the business fails, the lenders foreclose and liquidate
the assets for repayment, possibly seeking any shortage from the owners. Asset lenders are
concerned with the market value of the assets, not the business enterprise, lending only a
proportion of the assets’ value to the company to ensure repayment. Lenders are not normally in
the business of taking risks. While the interest rate on borrowed money may be high, using debt
allows you to maintain 100% ownership.

Equity
When utilizing equity, investors become owners of the business with the entrepreneur. The
amount of ownership held by each is dependent upon a negotiation, which in turn is based upon
the funds invested and the agreed-upon value of the business (as it is at present, and as it may be
in the future). As a random example, a business owner might sell 1% ownership for R2,000, and an
investor might buy in at 10% for R20,000.

Example: Let’s say a person has a software business worth R1,000,000 and wants to raise some
capital to take the business to the next level. If you sell a 25% share of the business, it would mean
that you can raise R250,000.

Entrepreneurs typically want as much money as possible for as little equity as possible; investors
are the opposite, wanting as much equity as possible for as little money as possible. The final
equity proportions and amount of money raised is generally a compromise based upon the
eagerness of the investor to invest and the desperation of the entrepreneur looking for money.

I believe the best approach is delaying capital infusions from non-affiliated third parties for as long
as possible until you can prove the business concept and show revenue. Starting your business on
a smaller scale gives you the chance to show growth and your commitment. Investors typically
require that entrepreneurs have “skin in the game” before being willing to invest their own
money, and prefer you to have made progress towards implementing your business plan as well.

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