How you choose to finance your new business venture can have a dramatic impact on the type of entity you use for the venture, the structure of that entity and the direction your company takes in the first few weeks and months of its existence. Companies that are funded entirely by you and/or your close friends and family members will operate in a dramatically different way than one that is funded by outside investors. Similarly, a company funded by the entrepreneur or owner (or his or her family and friends) will likely afford the individual greater control over the direction of his or her business as opposed to a company that receives its initial capital and funding from other types of investors.
Sources of Capital and Financing Impact Who Has Control of Your Business
Selecting an appropriate funding source or sources for your new business is critical, then, to maintaining the level of control you desire over your new enterprise. Some possible sources for funding include:
- Yourself, your family, and/or your friends: You may choose to fund your California business start-up using your own savings or assets or those of your family and friends. You and/or your family and friends may also attempt to obtain loans from banks or other lenders to provide your business with the requisite capital. While the amount of capital you may gain from any of these sources may be small, these sources afford you the opportunity to retain the greatest amount of control over your business.
- Angel investors: An “angel investor” is one who provides capital to help support a new business in exchange for an ownership interest in the business. The hope of the angel investor is to be able to share his or her ownership interest for a profit at some point in the future. As a result, an angel investor might take significant interest in the direction of the business and may attempt to exert control over the direction of the business.
- Crowdfunding/”Kickstarter” loans: In recent years, crowdfunding has become an increasingly popular method to fund startup businesses, especially businesses related to the arts. Here, hundreds (or even thousands) of individuals contribute money toward the entrepreneur’s project. Non-equity Crowdfunding offerings do not permit investors to obtain equity in the new business venture they are investing in and these investors do not share in the success of the business they are funding. Nevertheless, because these investors usually give capital to projects they truly believe in, such investors may try to exercise influence over the direction of your business.
Seek Experienced Counsel During Your Business’s Start-Up
Giving the wrong person or entity too much control over your business by accepting too much financing from that person or entity can doom your business before it begins. When you are in need of capital for your new business venture, speak first with the experienced and dedicated business formation and startup legal team at JGPC Law. We can explore potential sources of funding with you and advise you of the implications that accepting such funding may have for your business plans. Contact JGPC Law today to discuss any questions you may have regarding the financing of your start-up business by calling (925) 463-9600 or by contacting us through our website.