Navigating Equity and Partnerships for Capital

But before we dive in , a quick word of caution While we strive to provide accurate and up-to-date financial and tax information , nothing you hear on this podcast should be considered as financial advice specifically for you or your business .

We're here to share general knowledge and experiences , not to replace the tailored advice you get from a professional financial advisor or tax consultant .

You know , cash is kind of like the fuel that burns our business fire , and when you've got a company that is running on all cylinders , you know you've solved the problems in your company , You've got a great sales process down , You've got a great production process down .

Dumping cash into the company for things like advertising , equipment , hiring new people that's like dumping gasoline on a fire , and so when you get to that point , you might be looking for ways to raise capital in your business , and I thought today we could talk about three different ways in which you can raise capital for your business and also some of the pros

and cons and pitfalls , and there's going to be a couple of words that we never want to say when we're doing this , unless we have the right circumstances . So lots of cool things to talk about today .

having to figure out . Most folks go to debt first .

They try to borrow with the bank , go to debt first , like they try to borrow with the bank , but sometimes especially , um , back in the day when these folks were trying to do it , it was really hard getting financing for businesses and the terms were terrible and the bankers didn't really understand their business and so they kept .

They were just really struggling with cash , even though that they had a successful business . They were just really struggling with cash . So they eventually had to do part of what you're talking about here , which is get other business owners in on the on the business or partners , uh to provide capital to grow the business further .

If it's done right . You're probably not going to go on Shark Tank . If you do steer clear of Mr Wonderful , no , if you go on Shark Tank and you make a deal , that's awesome . You got to let us know about that .

But if , if you have , like a painting business that's doing two or $3 million in revenue in your , your local area and you want to take those same processes and systems and go like to different areas , but you feel like you need capital to do that , like , maybe you want to open up different locations in the surrounding region or whatever , this seems like a uh ,

like it's a certain situation , like a situation that would apply here , where you might want to um some additional capital from from partners . Would you agree ?

Maybe it's that situation where adding that cash , that fuel to the fire , would make sense . Yeah , so you're probably not going to go on Shark Tank . Probably for most folks , potential sources of capital would be family or friends who want to be a part of your business , or maybe other business owners who have seen what you've built and want to be in on it .

You might also have employees who you really know and trust who want to just be more than an employee . Maybe they want to be a part owner and they're willing to invest some of their money in your business . Part owner and they're willing to invest some of their money in your business .

When you're taking on partners , we kind of want to understand that there's kind of like two different trains of thought here . Right , you've got partners who want to be kind of like silent partners and then those who want to be active in the business . Active in the business Typically a so-called silent partner does not want to work in your company .

They want to set it and forget it . They want to hand you a big pile of cash and say , take this and make me money . That's kind of what you see on Shark Tank usually . Kind of what you see on Shark Tank usually . So they want to see a significant return on their investment , but they don't want to be involved in the day-to-day operations .

On the other hand , you might have someone who is an active partner . This is someone who wants to be in the room where it happens . They want to have meaningful input in deciding the direction of the company . They want to have voting rights . They want to contribute as an active owner of the business .

Whether the person coming on is more passive or more active , both of them are going to want significant returns on their investment . So , like , let's just talk quick about like , what kind of expectations they're going to have . You know there's a lot of ways of investing money . Typically we see , you know , buy stocks , buy bonds , buy mutual funds .

These are easy and somewhat safe investments by mutual funds . These are easy and somewhat safe investments . You can pretty much guarantee an 8% to 10% return over time with an index fund or a mutual fund .

So if someone's going to come to you and give you their money , instead of buying into an index fund , they're going to want more than 8% to 10% return on investment . They're taking a risk . They're less liquid . Right , I can sell index funds at the snap of my fingers .

I can't sell my shares of a business , a privately owned business , as quickly , so they're going to expect a lot more returns . So just kind of setting that expectation , understanding what they're going to want to see from your business will be good to know . Now we also want to consider the Security and Exchange Commission , better known as the SEC .

This is the branch of the government that monitors and controls investments , stocks , things like that , and they have a definition and a different perspective on things like silent partners and investors . The SEC is going to consider any type of money partner to be an investor .

We're going to define that term investor if that person has been given a promise or an expectation of return on their money , if they've invested money with you and this is important if they've relied solely on someone else's efforts in the business . So we've just described that so-called silent partner right Somebody who expects a return .

They've given you money and they're relying on you to provide that return . The SEC would consider that to be a security investor . Sec would consider that to be a security investor .

And this distinction is very , very important because if you sell securities without the proper filings and the proper licenses , then you have securities fraud and you do not want to run afoul of the SEC . I'm more afraid of them than I am the IRS .

So we just want to make sure that we're using the correct terminology and handling this properly so that we don't irritate any government agencies .

All right , now that I've scared everybody , let's talk about three different options for bringing on a money partner into your business . So option one is probably the most common and that is bringing on a money partner as a true active business partner . This is the most straightforward approach .

I will sell you 20% of my business for X amount of dollars and you will be an active partner who works in the business . You will have a say on the direction of the business . You will be in the room where it happens . You will get your 20% of the business profits . The pros on this is that you don't have to worry about registering with the SEC .

There's no extra legal work and probably the most important benefit is that you're going to get the help and advice of a true partner , someone who's got skin in the game , who wants you to succeed , and you're going to be able to work together . Now , the cons of that are kind of the same thing .

You have a true business partner and they're going to be able to work together . Now , the cons of that are kind of the same thing . You have a true business partner and they're going to want to have a say in how things are run , and they have the right to have that say . So you guys might not agree on everything .

There's going to be potential for more conflict . You're going to have to give up some control and address their concerns and listen to their input . Now , we would never want to use the term silent partner to describe this situation because , again , silent partners rely solely on someone else's efforts . This person is actively involved in the business , suffers .

This person is actively involved in the business .

We would never want to give our active partner a reason to claim that they weren't involved in the operations or that they didn't know what was going on if the business was to suffer a downturn or fail and they were being referred to as a silent partner or maybe we have documents saying that they're a silent partner . It could open us up to a lawsuit .

It could open us up to SEC scrutiny . We don't want that . So silent partner that is a taboo word . We don't ever use that word unless we've done the SEC filings . All right , so that's number one , right ? Active , true business partner .

Well , what if you're in a situation where somebody wants to give you money but they don't want to be active in the company and you don't want to have to do an SEC filing ? Well , you might consider bringing in that money partner as a bona fide lender . This is just like when you go to the bank for a loan .

Your money partner is going to give you cash and you are going to repay that loan with a payment schedule and an interest rate over time . The benefits of that is that the lender has a fixed rate of return , so it doesn't matter if the business is good , great or poorly .

He gets his 8% a year or whatever the interest rate is on the money that you borrowed . This person is not involved in the business . They don't make decisions , they don't have any control over you , they're just a lender .

This is a great option if you want to have that silent partner that word we're not supposed to use but you don't want to have to deal with the SEC filings . Now , if we're doing this , we want to be careful that we are actually treating them as a lender . So no backdoor profit sharing . If they agree to 8% , that's all they get .

They don't get a percentage of the profits . They don't get a bonus . They're a lender . They're not involved in the company .

If you were to start to involve them in the business , either through allowing them to make decisions or giving them a share of the profits , well , now you're treating them as a partner and you're opening yourself up to all sorts of problems for you , with the SEC , also for the person loaning you the money , because if the business defaults , creditors could actually

go after this lender claiming that he's not a lender , he's actually a partner and he has responsibility in paying the company's debts .

So the takeaway here is clearly understand what type of relationship you're having with this lender , how they're going to provide you the money and put everything in writing , have the right documentation and don't cross the lines , don't muddle the water , so to speak . Keep it well defined , all right .

So the third option is the most difficult option , and that is you know what . We're just going to go straight up and offer a security . We're going to do it the hard way . This is a true equity position . This is a shark tank type deal where you give a percentage of your company's shares away in exchange for money .

Now you will absolutely have to file with the SEC for this one , so you're going to need to consult with an experienced securities attorney . They are going to make a Regulation D offering and file the appropriate paperwork on time with the SEC and the different states in which you are offering these securities . Now this sounds difficult .

It's because it is , and it's going to be expensive . So expect to spend at least $15,000 in attorney fees to set this up . So this is probably not going to be your first choice , but if you really do want to bring on silent partners or investors , this is what you need to do . So just to kind of you know recap what we talked about .

You know , bringing money into your company is a great way to throw fuel on the fire . You have different options for doing that . You can bring a person in as an active partner , which they will pay you for shares of your company , and then they will help you run that company .

If you don't want someone else making decisions with you , you can borrow money from them as a lender , but keep it as a loan arrangement . They get an interest rate , not a percentage of the company's profits .

And then the third option is if you truly want to sell shares of your company to potential investors , then you need to do your paperwork and file with the SEC . Potential investors then you need to do your paperwork and file with the SEC . So unless you've done that , please don't use the term investor or silent partner .

Those are words that will get you in trouble if you're not offering a true security .

There's a lot of different options for raising money , so consider each one carefully before you sign any deals and also consider whether the money is actually something that's going to benefit your company . I just got to throw this out here . Money is awesome , but throwing money at a problem does not always solve the problem .

So make sure that whatever bottleneck you're facing is something that money can actually improve . Bottleneck you're facing is something that money can actually improve .

If you have issues with your process or your operations , you might take on a partner for their experience and for their help not their cash or you might need to get those things fixed before you start throwing money at the problem .

But if you're firing on all cylinders and you're ready to go , you know bringing in capital is a great way to scale your business . So we'd love to hear your experiences . If you've had to bring on partners or raise capital , you can go to our Facebook group Grow your Painting Business . We would love to hear what you have to say about that .

Or if you have questions about anything we talked about or suggestions for future episodes , definitely let us know in the comments . We love to interact with folks on Facebook . No-transcript .