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Selling Equity: A High-Stakes Game

Sidestepping the traps of equity fund-raising

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This story appears in the December 2010 issue of Entrepreneur. Subscribe »

The Facebook post reads: "Startup medical device company looking for investors." An eBay ad offers "double-digit growth potential for early investors." And with loans in short supply, you might be tempted to hang an "investors wanted" sign of your own. But be warned: Selling equity is very different from borrowing from Aunt Sally. And it's easy to run afoul of state and federal securities laws, no matter how small the .

When Aunt Sally loans you money, she expects to get it back. But when you sell equity, your investors have no recourse if you don't succeed. Their money is just plain gone. That's why the and equivalent state agencies want to weigh in. Their prime concern is that investors understand the risks and can afford the hit if the venture doesn't perform as hoped.

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