Here at Chainium, we’re passionate about private businesses. Their growth plans. Their need for funding to support their growth plans. Their challenge to not give away too much equity or pay high fees in order to receive funding to support their growth plans. Their challenge to fairly value their business so they don’t give away too much equity or pay high fees in order to receive funding to support their growth plans. That’s the private business conundum. And we’re passionate about helping private businesses to make this less of a conundrum…an anti-conundrum…an un-conundrum…a non-conundrum…you get the drift.
“Do I need funds to grow?”
Some businesses don’t. Some businesses can function on a shoestring, don’t need capital investment, use revenue to invest in their business as they grow and gradually expand. Think consultancies and professional services. Some businesses have rich owners who can afford to self-fund the business to get it to where it needs to be. Think Dyson. But not all businesses work like this.
Other businesses will not grow, or even succeed, without funding. There could be large set-up costs — technology, resources, property, licences, etc. There could be phases of growth where funding is needed to go to the next level of growth — global expansion, acquisitions, mass marketing. This requires large investment. Without investment, the business could fail, or certainly be restricted in their growth prospects.
“Where do I get funding from?”
This is a conundrum in itself.
· Fund it yourself or ask friends and family — perfect…if you/they have the money to part with for a while and business & family mixes well for you
· Get a bank loan — you could pay 5–10% in fees, you’ll have the pay it back regularly or within a set time period…and that’s assuming they like the look of your business and they’ll agree to a loan of course
· Find a private investor — if you can find one and you’ll probably need to give away equity in your business…and potentially more equity than you’d like
· Use a crowdfunding platform — you’ll pay 5–10% in fees and you’ll need to cut-through the crowd of charity fund-raising opportunities
“How much do I pay for funding?”
There are really only two ways. Firstly, pay a fee. To a bank or to an investor or to a friend or family member — this could be a flat fee or a percentage of the amount you’re borrowing. Secondly, give away equity in your business in the form of a share/s — this could be a percentage of equity in your business for the agreed amount of funding.
If you take the second option, and give away equity in your business, you need to think carefully about how much. There are thresholds in equity stakes that mean the shareholder has specific rights — in the UK, there are thresholds at 5/10/15/25/50/75% levels which give the shareholder increasing rights when it comes to business decisions. So don’t just pluck a figure out of the air.
“How do I value my business?”
If only I had a token for every time I see a business valuation article saying that it’s an art and not a science…and yet there are loads of business valuation tools out there. So which one to use?
1. Asset-based approaches subtract liabilities (debts, loans) from assets (cash, property, equipment)
2. Earning-value approaches calculate the expected value of earnings in future based on past revenue/costs
3. Market-value approaches compare your business to the price of other businesses like yours
Without too much thought, you can probably see the flaws in all of these models. What if your business is a start-up? What if your business has a disruptive idea that is unproven? What if your business is pivoting into a new space?
“What do I need to do for my shareholders?”
For all businesses, there are rules for shareholder communication and engagement. The rules include annual accounts, annual general meetings (AGMs), voting and shareholder reporting. You need to think about regular communication to share the financials, business strategy, sales numbers and customer feedback. You need to think about voting rights and voting processes. You need to think about shareholder engagement when you need more funding or want to make significant business changes in future. You now have obligations to your shareholders.
“Who do I need to tell?”
In all countries, there are rules on how to run a business. In the UK, the rules come from Companies House. In the US, it’s the Securities and Exchange Commission. In Hong Kong, it’s the Companies Registry. Loads of rules. Businesses need to register when they’re setup, they need to share their annual accounts, they need to pay tax and they need to report changes in ownership, such as through selling shares to raise capital. Every country has different rules, regulation and taxes. There are all sorts of templates and forms to fill in. Private businesses, of all shapes and sizes, need to navigate these rules in order to be compliant and legal. Particularly when it comes to raising capital and selling equity.
“If only there was a better way…”
There is. Chainium. Launching in 2018.
Chainium has rebranded to Own. For more information about our brand change please read this medium post.
