Debt, Equity, Friends, & Family

There was an interesting comment made by Charlie Penner in his interview about financing innovation for small business. He said; "Equity investment, the hardest thing is evaluating the company and potential." It is a given that aspiring entrepreneurs like myself invest significant financial resources to start up a business, but if money from family and friends aren't enough, there are a variety of credit options entrepreneurs can choose from for other sources of debt capital. If you want to avoid the banks, there are different types of state and local economic development programs. Many states offer financing programs, usually in the form of loans, loan guarantees, and venture capital pools to help developing business, creating jobs and promoting economic growth.

Charlie Penner makes excellent and important points for clarifying the terms of a business agreement with your friends and family. While many people may assume that their relatives and close friends will maintain an agreement, sometimes things get ugly and relationships change, resulting in an unfortunate legal dispute. It is best to outline a contract whether it's with a family member or someone you merely have a business relationship with. This protects all parties from costly and time-consuming litigation and provides the business owners with peace of mind. Debt financing with your family seems like a preferable method of handling it so that your investor knows that they will get their money back as specified in the loan agreement and you don't have to consider their opinion in your business decisions. Equity financing can be nice if your venture is a bit more risky, but having to treat your investor as a partner if they have little knowledge of your business can be tricky to say the least. Either way it's somewhat of a risk but it helps the investor and the borrower to know exactly what the deal is and to have it on paper so that no one can change it later without warning. Some investors that trust the borrower might not even want to get a lawyer involved even if it's in their best interest, but the borrower should insist if that's the case because it simplifies the process for everyone when it comes down to being repaid. If the business is successful it may not end up being a very big deal, but failure will result in a loss for someone, and the investor has to know if he is one of those someones ahead of time. If they expect to get their money back no matter what and they turn out to have an equity investment, they will be in for a very nasty surprise.

In-fashion and out-of-fashion is a very interesting way to state at what stage venture capitalists are interested in investing in a new company. Before I had watched this interview I was under the impression that a venture capitalists invested earlier on in the stages of developing the business idea and making it start instead of investing in the business once it is already off the ground. Figuring out where the financing is going to come from for a start-up business is another part of the equation where there are many different options available; however there is only a few that are specific to the needs of a particular small business. From what I have heard and read it is very difficult to get seed money to start a business unless the person starting the business is using a lot of there own money and showing so. I am really glad to have watched this video because it is very important, in my opinion, to really understand the difference between debt versus equity and what that means when and if there is a time to start paying people back. Money always seems to be one of those areas that can ruin relationships if it is not handled in the correct way. Making sure that everyone is on the same page with money situations is always the best option. Recently I was put on the deed to a house that is in my family and we went through other legal avenues to make sure that we were all on the same page as far as what the commitments were to maintaining the home and living in it so that, should a situation arise where something needs to be fixed, there is clarity as to whom is flipping the bill. As far as business start-ups, I don’t think that I would be too interested in borrowing money from family unless there was little expectation on there part to get there investment back within a few years so that it is understood that the money is going into starting a new business and there is no set time on how quickly the business could get off the ground.

Charlie Penner’s interview brings up several important key factors relating to risk, family ventures and financing. All entrepreneurs must face risk in almost all areas of their company formation. Unfortunately, if the risk is not handled well the company may suffer or perhaps have to file for bankruptcy. When this risk involves family or friends, Mr. Penner’s advice should be well taken and all parties should consult a lawyer or at least some reliable legal advice. Not only would this help protect the company from over-looked dangers but also sound legal advice would help protect the company with properly prepared legal and tax documentation. Documentation should be prepared by an able legal advisor for other factors. Almost every company needs some sort of financing whether from family and friends as a loan or partnership, equity financing where the investor is treated similar to a company partner or debt financing. Mr. Penner describes an interesting point in that in both cases of equity financing and debt financing, the investor may have varying degrees of knowledge about your business, from nothing at all to very knowledgeable. This could be a potential threat to the company existence in that if the funds are used to expand the company or finance certain debts, when the investor needs their money returned, it could put the company in another financial crisis. Mr. Penner’s company can be a good resource for the entrepreneurs networking needs. He has noticed a niche opportunity to create a company to aid entrepreneurs evaluate various hurdles during different stages of company growth especially during their start-up phases. I feel this type of business is somewhat similar to the SPARK Company in Ypsilanti that also helps entrepreneurs but do not know if SPARK offers as much legal or financial assistance as Mr. Penner’s Small business & Technology Development Center.