Dilution
Always a sticking point for an entrepreneur. If you believe that the business will only get to where it needs to be through an injection of capital and external assistance and have considered and failed with the less risky finance options then dilution is an inevitable consequence.
Work through the financing options:
1.Can you get debt? Tough ask in today’s environment for businesses with EBITDA of less than £1m
2.If not, is mezzanine appropriate? Tends to require strong cash flows to support the on-going yield but (should) lead to less dilution.
3.Equity? Requires dilution.
4.Can the investor blend mezzanine and equity? Does it work for the company and allow you flexibility going forward
Control
Different investors require different levels of control
1.Angel Investors – Typically a minority stake with limited control
2.Venture Capital Trust or Development Capital investor (e.g. PGE) – Minority stakes but with controls around key decisions to protect their investment
3.Mid-Market and Buyout – Often majority stakes and with it control is surrendered
Level of Capital Raised
1.Raise enough to get you to a landmark with some headroom
- Landmarks can be anything from product launch, feasibility studies or profitability. Make sure you achieve it or your negotiating position will be significantly weaker!
- Allow some headroom for the unexpected
2.Don’t raise too much
- Likely to involve heavy dilution
3.Don’t raise too little
- How much time do you want to spend fundraising? You have better things to do – like running a business!
Valuation
1.Please be realistic!
- If you want to justify a valuation on anything other than operating profits please have a very good rationale…..
- Comparable company valuations and similar transactions are positive