Know When to Take the Money Have an offer for funding but think you can get more? When it comes to raising money, being overly confident can hurt you.

Sales are going through the roof. Distributors are calling daily begging to carry your product. Your suppliers are straining to meet delivery deadlines so you don't fall behind on production. A representative of a major Hollywood star wants several cases of your product delivered to the star's home for a huge celebrity event. Everything is happening far beyond your wildest dreams, and that, in a nutshell, is your problem.

Two months ago, you were emerging as the hottest deal on the market. Everyone was clamoring to invest in your company. You were looking to raise $2 million and you had more than $8 million on the table. And things got even hotter: Investors were buying the sizzle, before you even had the steak. Then it happened. You got hit with a blast of greed, blended with a good dose of optimism. You decided you didn't need the money, even the $2 million. Taking it all would dilute your ownership in the company, so why bother? For now, $500,000 would do, and besides, you could always raise more money later at a higher valuation. What unbridled optimism!

Now, four months later, you have a problem. The $500,000 that seemed like a fortune just a few months ago won't even begin to pay for the costs of producing enough product to keep up with demand. And you know if you lose this momentum, it could severely damage the future of your company. You need cash, and you need it fast. So what do you do? Go back to the investors you turned away just four, short months ago to see if they're still interested? Or try and find new sources of funding?

Let's weigh the advantages and disadvantages.

Going back to a previous investor
The advantages:

  • They know the company.
  • They know the value.

The disadvantages:

  • They've been rejected.
  • They see the blood in the water.

Finding a new investor
The advantages:

  • They're fresh.
  • They see the potential.

The disadvantages:

  • They move more slowly.
  • They, too, will see how desperate you are.

The example above illustrates a fundamental rule about raising money: When the money's on the table, take it. And here's why:

Rule #1: You'll always need more money than you think. You're right to worry about protecting your dilution, but don't go about it in the wrong way. If you're fortunate enough to have people wanting to invest more in your company than you think you need, remember this rule and take more than you think you need. Here's the trick: Don't take everything that's being offered--you want them fighting over who'll be able to get into this deal--and then negotiate the best valuation you can. This might mean doing one of two things:

Either negotiate a higher valuation for the entire investment, or have part of the investment come in now at the negotiated value and the next part come in nine to 12 months later at a higher valuation (this funding may be tagged to milestones). Either of these two strategies will minimize dilution for the founders and still work well for investors.

Rule #2: Never let your investors see you sweat. Even (and perhaps especially) when you're hot, you never want to come across as desperate. The ability to negotiate is built on the concept of leverage, and desperation erodes all leverage. Win-win situations rapidly become win-lose when the pendulum is out of balance.

Rule #3: Never get caught with your pants down. Plan for all contingencies. Adjust constantly. Have a Plan A, B and C for every possible scenario. Nothing ever works out exactly as anticipated, and your ability to react and adjust will determine your success. If you're not prepared for success, you'll have to pay the price to adjust. Will this mistake be fatal? In most cases, probably not. However, long-term rewards will be reduced substantially due to your short-term failure to plan. Don't make that mistake.

Jim Casparie is the "Raising Money" coach at Entrepreneur.comand the founder and CEO of The Venture Alliance,a national firm based in Irvine, California, that's dedicated to getting companies funded.

Editor's Pick

A Leader's Most Powerful Tool Is Executive Capital. Here's What It Is — and How to Earn It.
Lock
One Man's Casual Side Hustle Became an International Phenomenon — And It's on Track to See $15 Million in Revenue This Year
Lock
3 Reasons to Keep Posting on LinkedIn, Even If Nobody Is Engaging With You
Why a Strong Chief Financial Officer Is Crucial for Your Franchise — and What to Look for When Hiring One
Business News

More Americans Are Retiring Abroad, Without a Massive Nest Egg — Here's How They Made the Leap

About 450,000 people received their social security benefits outside the U.S. at the end of 2021, up from 307,000 in 2008, according to the Social Security Administration.

Business News

7 of the 10 Most Expensive Cities to Live in the U.S. Are in One State

A new report by U.S. News found that San Diego is the most expensive city to live in for 2023-2024, followed by Los Angeles. New York City didn't even rank in the top 10.

Business News

How to Set Boundaries With Your Team While You're on Vacation

Are you one of those leaders who just can't seem to detach from "work mode" even when you're sitting on a beach in Hawaii? Here's how to ensure both you and your team can thrive when you're on vacation.

Growing a Business

More Brands Are Losing Touch With Their Customers. Do These 4 Things to Make Sure Yours Isn't One of Them.

Despite the growth of online marketing and digital sales tactics, more brands are struggling to connect with their customers and target audiences. To reunite with them, they need to do these things.

Business News

Lululemon Employees Say They Were Fired for Trying to Stop Shoplifters

Two Georgia women say Lululemon fired them without severance for trying to get thieves out of the store.