One of the things that you're going to need to do as a business owner is raise funds for your business. A quick way to do that is raising funds from private investors such as your friends and family. In this lesson, we're going to talk about some of those quick ways to get seed capital for your business. We'll introduce a few of the sources of capital for your business, and then will talk about three primary sources. One, friends and family, two self-financing your business, then finally, we'll say a few words about federal financing, getting some monies from the federal government to financial business. In terms of sources of capital, there are many ways that you can find funding for your business. They may include venture capital funding, engaging with other businesses in joint ventures or strategic alliances, angel investors who are essentially wealthy individuals who are oftentimes contributing seed money to businesses in hopes of getting a return on their investment. But also a federal financing, grants, and loans from the federal government to help you get started with your business. Self-financing, either through your own money or seeking money from a bank to get your business off the ground. Then family and friends. Let's start with talking about family and friends. Now there are few pros and cons of using family and friends as seed money for your business. In terms of the pros, it's quick access to capital. These are people who you have direct access to you, you know them, and they may be able to get you money right away to get your business operations started. Another pro of this is oftentimes a family and friend investor is not hugely interested in controlling your company. You can get the seed money and still maintain control and management of your company. Because your family and friends are equally interested in you, and you doing well as they are on a return on their investment, oftentimes, the emotional support that comes with that is like a boosting effect on your ability to start pushing your business forward. There's less of an emphasis on return on investment because your family and friends are also rooting for you to do well. There are some negatives and some drawbacks to seeking seed money from family and friends. The first is, oftentimes this won't be enough money for your business operations, so you'll have insufficient capital. Secondly, by engaging investing opportunities from your friends and families, oftentimes it's just limited to whatever amount of money that they have. There's usually no extra expertise or strategic value that your company gains from engaging with your friends or family. Then finally, and this should not be understated, is the fact that you're gaining money through personal relationships. You have to be very, very careful about not hurting those personal relationships when you're engaging in a business transaction. Best practices around this, if you are going to seek seed money from a friend or family, you should make sure that you draft up a written agreement with all the terms that you would do if it's an angel investor or a VC or a professional investor. Just so it's clear that what the terms are for the investment that your friend or your family member is making. Self-financing. To a lesser extent, some startups are engaging in the ability to just finance the business their self at least in the early stages of the company. Now again, this allows you to get quick access to capital. It's either your own money or you're getting money from a bank. Now if that's the case, there's no equity dilution. You're not giving someone else and ownership interests in your company. You continue to maintain control and management of the company. That's a huge benefit, particularly early on in your business. Then the drawbacks for that, like friends and family, it's typically the amount of money you'll get from yourself or from a bank, won't be sufficient to fully fund your business. You have some insufficient capital issues. Again, you won't get any additional expertise or strategic value because the money is just coming from you or coming from a financial institution in the form of a loan. It's hard to negotiate bootstrapping. Bootstrapping is where your business is in the business of selling things. You're essentially going to sell things. The money you make from selling your product is what you'll use to fund your business. Now it's hard to negotiate that because you have to negotiate the terms such that you're either getting paid prior to delivering the products so that you have the money for your operations, or you have to negotiate very tight payment deadlines. So you get the product and the payment must be received very shortly thereafter. Those terms require some very hard negotiations, and as a result, it's very hard to pull bootstrapping off. Another drawback for self-financing is in the context of alone. Oftentimes, your business, because it's a new company, a bank will not offer a loan to your business outright. The bank will require you as an individual, to offer a personal guarantee on the business loan. This gets very complicated because oftentimes when you're thinking about forming a business in the form of business that you will use, the considerations that you oftentimes looking for is what form of business will allow me to have a beneficial tax treatment. Allow me to share my personal assets from liability, from the corporation's assets. Oftentimes you will choose a limited liability company, for example, or a corporation two forms of business that allows you to have the shield of your personal assets. But even if you have an LLC or a corporation and you're trying to get financing through a bank, for example, because your company doesn't have a credit history, it doesn't have a financing history. The bank will require you to have a personal guarantee. What that does is really undermines the protections that you've tried to put in place by incorporating your business or by forming your business as an LLC. Because now, if the company is not in a position that we pay that loan, you as an individual is fully on the hook for repayment of the loan. That's a drawback for self-financing or getting a loan from a bank to finance your business. Best practices here, if you're going to sell finance, try to use your own money. Try as best you can to negotiate terms and a bootstrapping type scenario. To the extent you can avoid using credit cards, most of which have very high-interest rates, there could be very harmful to your ability to turn a profit for your business. To extend you can avoid using credit cards, avoid using credit cards to finance your business. Let's talk about federal financing, and you can get federal financing through either grants or loans. The benefit of federal financing is very similar to self-financing or financing through friends and family. You get to maintaining control and management of your company. You like granting equity ownership in your company, so there's no equity dilution for you as a founder. But also when you have a federal grant or federal loan, it raises the profile of your company up there, which is very helpful in attracting private funding. It's not a bad deal to go after a federal grant, just so you can say that in your representations to private funders that you have a federal grant, it's a badge that there's some merit in the idea that you're pursuing with your business. Now, of course, there are drawbacks to the federal long process. First, the application process can be pretty intense. It's a very competitive process. There's a limited number of federal grants and loans out there, and multiple companies are competing for those grants and loans. Also, if you are able to get a federal grant, if you develop technology and you have IP rights in that technology, under most scenarios, you must share those IP rights with the federal government. That may be something that's unattractive to your business, but something to keep in mind if you pursuing federal grants. Also, in almost every case, federal grants have huge restrictions on how you can use the funds. Whereas if you get money from your friends or family or yourself finance, or you get money from venture capitalists or angel investors, typically that money goes into a general pool and you can use that money for whatever operational needs your business has. With federal funds, they're usually pretty clear about how the funds can be used, what aspects of the project the funds can be used for, and also, oftentimes, these federal grants require that you bring some money to the table. It's what they call cost share. How much money are you getting from other parties towards this business venture? Those are some of the few drawbacks, for federal grant. Tell the best practices. The best thing to do here, is to go to www.grants.gov. That's a huge database of grants of the US federal government grants, and figure out what grants are available in the space that you're businesses operating in. If you're looking at countries outside of the US, you may also want to assert similar databases for federal government or government-sponsored grants for certain types of technology spaces to see whether there's a grant in the space you're pursuing. As a matter of summary, raising money for your business is very important and it requires particular attention to some legal requirements. There's various ways, there's capital and there's pros and cons to doing it either way. Family, friends, self-financing, and even federal financing, they may minimize the equity dilution concerns that come with raising capital through professional investors. They also allow you to maintain control of your company. Before you engage in any arrangement that involves the transfer of securities, whether you're granting your family or friends a stake in the company, anything that's involved in the transfer of security, you want to make sure that you seek the advice of counsel before engaging in that type of activity.
