Equity Financing vs. Convertible Debt

 

For many entrepreneurs, the most obvious and immediate solutions for a business cash crunch problem is to use their credit cards or borrow against the equity in their life insurance policies, cars or homes. While these might be the paths of least resistance, they might not be the best or the wisest choices.

Equity financing

When a business wants to raise capital, it may sell equity – or stock – in the business. This gives investors a share of ownership in exchange for cash. On the face of equity, selling stock is like getting money free and clear of debt obligations. A smart entrepreneur will look for equity investors who have experience in their fields and who can offer not only cash but also advice and help getting a product to market. These angel investors and venture capitalists are willing to take higher risks on startup companies. If your company fails, you don’t pay the investors back; it’s their loss.

The primary problem with selling equity to raise capital is that unless you’re in a very “hot” market – typically tech – or have a patent on a useful and unique product that fills an important niche, finding investors can be difficult.

Your best route to finding investors is by networking, talking to founders of similar ventures and spreading the word through your network of contacts. If you use an attorney who specializes in startup businesses, he or she can also guide you to these resources.

Convertible debt

In convertible debt financing, you borrow funds for your company, but that debt can be converted into equity based on certain options or triggering events, such as an amount of annual revenue or a valuation target.  Depending on the deal, the borrower and/or the lender may opt to pay off the debt or convert it into stock or some other equity of the company.  [More on promissory notes here.] You can also sell equity that converts into debt, but that is less typical.

Conclusion

Structuring and documenting a stock sale or convertible debt deal can be quite complicated and should be done with the help of your lawyer and accountant.  This is one of those areas where you should not be “winging” it.

Photo Credit: MIKI Yoshihito

 

 

Three Must-Know Tips for Law Firm Success

Consistently carrying out effective organizational habits will not occur overnight, however, by following helpful tips, you’ll be well on your way to running a successful law firm.

When running a law firm, you need to know the ins and outs of what works and what doesn’t.  Although experience goes a long way in helping you run a smooth firm, there are things we do when we first start any business that we lose sight of as we grow and change. In the post below, attorney Mark Briggs outlines three tips for running a successful law firm.

What To Look For When Choosing an Attorney for your Business

Finding the right small business attorney takes research, patience and a bit common sense – but the effort is well worth the peace of mind good representation brings.

Whether you are just starting a new business or have been established for years, you want an attorney who can meet your needs.  A business attorney helps clients with many important matters, such as:

Staying Legal When Starting An Online Business

The steps to opening an online business are fairly complex, and mistakes and missteps can be costly. Getting legal guidance at this critical time makes sense.

Both new and established businesses can benefit from opening shop online, but getting started is more than just adding a “.com” to the end of your business name. After you have taken the steps to decide which type of business entity you need to create and formed it, here are the primary steps you’ll need to take to start doing business online in Arizona. 

Mark Briggs Attorney Explains Class Action Lawsuits

Class-action lawsuits are those where one or more individuals sue on behalf of the group. The  subject matter of these types of lawsuits varies, but always has two elements. The disputed issues  are common to all parties of the class-action lawsuit, and individual damages vary to the extent that  it’s not feasible to bring them all before the court. Class-action lawsuits may be brought because of  deceptive practices, illegal conduct, defective products and fraud.

Mark Briggs on Employment Lawsuits: Wrongful Termination

Most Arizona businesses can legally fire employees whenever they want, but business owners should understand the law as it applies to wrongful termination lawsuits. Phoenix lawyer Mark Briggs provides tips on how to protect yourself and your business. 

Don’t Let Unpaid Overtime Lead to Employment Lawsuits

The number of unpaid overtime employment lawsuits is increasing. In this week’s blog, attorney Mark Briggs discusses how to protect yourself – and your business – from being a target.

Who Is Mark Briggs?

Mark Briggs is a Phoenix-based lawyer with nearly 20 years of experience representing entrepreneurs, businesses and their owners. His background in corporate services and administrative law makes him a viable resource for Valley businesses.