What you need to know about making sound investments that are ethically sound.
So you want to raise equity investment, but where do you start?
The first consideration for ventures looking to raise equity is whether your motivations are sound. Selling shares in your company involves sharing ownership and some control with others and should not be entered into lightly.
Let’s look at some of the circumstances in which raising equity is suitable:
- You want to grow quickly and have a strategy for rapid growth that requires capital to execute on.
- You can’t pay the money back immediately, but you have plans for substantial growth that means the value of your business will increase many times.
- You have wealthy advisors with connections and expertise and you want to leverage these benefits by giving them a direct interest in the success of your venture.
If you identify with any of the above points, then raising equity might be right for you. Some starting points are set out below to help you approach this in a considered way. Approach these questions with a copy of the Ākina Cap Table (below).
Download our Example Capital Strategy Summary
Here are some instructions to help you fill out the cap table
- Enter the number of shares held by each founder in cells D9-D12 (or continue as necessary). Note: ensure there are enough shares in the company that you can issue the right percentage to investors, because you cannot issue a fraction of a share. For example, if there are three founders and each have 1 share each, then to issue one share you would be giving up a 25% share in the company – being 1 out of the 4 shares in the company. In the cap table we start with 100,000.
- Enter the amount you intend to raise in cell G14 (if you have not already done so).
- Enter a premoney valuation in cell G3. Rather than valuing your company, Start with a pre-money valuation that results in you offering a percentage to investors that that is acceptable to the founders. See How do I value my company for more information on how to justify a valuation.
- Play with some numbers in the second and third round to see how founder and investor shares will be diluted over time.
This is an excellent base to start a conversation with investors. Some of your numbers and activities may change during your discussions with them, especially if they have industry knowledge and experience that they can share with you. But this provides a starting point and shows investors that you can strategically think about the short and long term needs of your venture.
How much money do you need?
If you have a plan for expanding your business, the hard part is done! Now you can put together a list of the resources you will need (human and otherwise) to execute on this plan and a budget of how much this is going to cost.
Consider how much you need to raise in the short term. To get an idea of how to figure out a meaningful amount, see How do I make sure I’m taking on Investment Wisely?
When you have determined the amount to be raised in the first round of investment, insert this amount in cell G14 of the cap table.
How will this affect the shareholding?
A company can have any number of shares, but your ownership interest in a company is calculated by the percentage of shares you own, rather than the number of shares. When taking on equity investment you are issuing new shares to investors which means the founders’ share in the company are diluted.
To ensure you aren’t giving away a controlling interest (>50% of the shares) in your company, you should be clear on what percentage you will give away in this round and in following rounds. The cap table will help you to map this out.
How do I make sure I’m taking on investment wisely?
Understand why you are taking on investment and how that will get you closer to your end goal.
Investment comes with a cost. First there is the time and effort that needs to be put into securing investors. Then of course there is the value that an investor expects in exchange for putting their money at risk. This means that both your organisation and your investors have an interest in having a plan for using investment to add value to the company by way of increasing revenue and broadening your customer base. If you use up all your investment cash and have achieved nothing other than paying some salaries for 12 months, then the resource invested by both parties has not been used optimally. See columns F – “Use of Funds” and G – “Value Milestones” of our Example Capital Strategy Summary for an examples of what a social enterprise might use investment funds for and the value that might create.
Understand what a
The earlier stage your social enterprise is, the more risk you represent to an investor of not achieving what you say you will, namely creating sustainable social outcomes and revenue. The higher the risk, the higher the return most investors will expect on their investment and therefore, the more expensive this capital is for your social enterprise. For this reason, start-up companies often raise money in a number of rounds. The idea being that with each round you take risk out of your business so that the next round is cheaper. Often, This means a period of self-funding and “bootstrapping” followed by a number of rounds that are linked to value milestones.
See our Example Capital Strategy Summary to get an idea of how a social enterprise might stage out its investment and determine a meaningful amount to raise at each stage.
If you haven’t already, make sure you check out our ‘Finding Funding‘ webinar, which should provide more helpful tips on how best to fund your social enterprise.