Starting a business is an exciting journey, but it comes with its own set of challenges—especially when it comes to money. To grow and develop your company, you’ll need to invest in various areas. Once your business is up and running, you can sell products and services to generate funds. However, the real hurdle often lies in securing that initial funding. Finding the right financial support can be tricky, especially with the legal issues involved. As an entrepreneur, it’s important to understand these legal considerations and ensure you follow the laws that govern the securities industry.
Evaluate financial needs
Before heading towards securing funds for the business, assess the financial needs. Find out if you need money to only cover the immediate expenses or if you also need to plan for future growth. You need to analyze if you can self-fund your venture or if you really need to raise the funds. Evaluate whether the business size justifies seeking outside investment. You need to project your future growth and then make a decision. The lenders are going to evaluate your financial situation and plans so ensure you have clear answers and a well-structured financial plan ready.
Consult the expert
You should connect with a legal expert like a securities lawyer to understand securities law. They can offer you valuable advice on protecting your business while seeking funds. They can help you understand complex legal requirements related to the funds.
Legal considerations for securing Funding
Select the mode of financing
Entrepreneurs can secure funds in multiple ways.
Equity financing
Entrepreneurs can sell the stakes of the company to acquire funding. The companies with assets that can be used as collateral for loans can go for it.
Equity financing can be in many forms. Seeking investments from family members can be a great idea as they understand that establishing a business can take time. Entrepreneurs can go to open platforms like GoFundMe and ask for money from the public after sharing their stories to create a brand identity. Each such crowdfunding platform has its policies and costs. Another option is to seek investments from angel investors with high net worth. They can also offer guidance and help.
Debt financing
In this form of funding the businesses have to repay the loaned amount with interest. Seeking funds from family and relatives with a promise to pay back with interest is again a great option. You can approach the Small Business Administration to take advantage of their loan programs. Entrepreneurs can secure funding from banks as loans.
Moreover, forming an LLC can be quite favorable for small businesses seeking debt financing. By establishing an LLC, entrepreneurs benefit from limited liability protection. For example, if your business registered as an LLC in Arizona, falls into debt due to unforeseen circumstances, then your personal assets are safeguarded against business debts under this entity. This structure enhances credibility with lenders and allows for more favorable loan terms due to perceived lower risk.
Make a wise decision while choosing between equity and debt financing, as each one comes with its own set of legal aspects.
Control over governance
In the haste of securing funding for the company, the owner can end up making some mistakes. In options like crowdfunding and venture capital, you need to be careful about the negotiation terms.
There are many terms in the terms sheets such as evaluation, governing rights, protection options, and shareholder protection. Go through every mentioned term and condition to understand them. Try to find ways to maintain your autonomy and yet take care of the needs of the financers.
Evaluate the exit options
Entrepreneurs should be alert about the exit options if they are securing funds from Venture Capitalists. The investor is going to exit in a profitable state. The business owners need to explore all the possible disputes they can have with the investor and accordingly make exit alternatives. An exit can lead to an Acquisition, IPO, or merger. While raising funding from VC, make sure to stay ahead in the exit planning. It should be a part of your business decision-making and risk management.
Conclusion
Funding is one of the major factors that affect the growth of any startup. There are multiple legal considerations that an entrepreneur should take care of. It would be a great idea to hire a legal expert to understand and implement the required legalities. Getting the desired funding can help you meet the expansion goals set for your company. Use these legal considerations to make informed decisions that work in favor of your company.