Equity Financing

Balancing that fine line between accepting capital and losing control

Because equity financing involves trading partial ownershipinterest for capital, the more capital a company takes in fromequity investors, the more diluted the founder's control."The question is how much management you're willing togive up," says attorney Jerry Friedland.

Friedland emphasizes the importance of voting control in thecompany. Investors may be willing to accept a majority of thepreferred (nonvoting) stock rather than common (voting) stock.Another possibility is to give the investor a majority of theprofits by granting dividends to the preferred stockholders first.Or, holders of nonvoting stock can get liquidation preference,meaning they're first in line to recover their investment ifthe company goes under.

Even if they're willing to accept a minority position,financiers generally insist on contract provisions that permit themto make management changes under certain conditions. These mightinclude covenants that permit the investor to take control of thecompany if the corporation fails to meet a certain income level ormakes changes without the investor's permission.

Excerpted from Start Your Own Business: The Only Start-Up GuideYou'll Ever Need

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