The Entrepreneur's Wife

Sunday, June 04, 2006

Where's the money coming from?

There are many ways your entrepreneur might raise money to fund their venture. Here are a few of the most popular, and what each one might mean for you:


Many businesses are funded entirely by the entrepreneur (which could mean you too, if your money is mixed together). If this is the case, be sure that the entrepreneur creates a separate bank account for the company money. If they leave your personal money mixed up with the company money it will be that much harder to keep track of what's being spent where. What you don't want is for money to be mysteriously disappearing from your personal account, never to be seen again. Hopefully, your entrepreneur has written out a business plan, so they know how much money to transfer to their business account. They'll, of course, also have a clearer idea of when it's running low.

If it turns out that they need additional funding, then you can know for sure how much additional money you're able and comfortable transferring across to the business. In a more formal business set-up, additional funding could be given for an additional percentage share of the company. It might be that you and your entrepreneur each own different percentages of the company-- maybe they've invested more, or you did. Be sure you're both happy with how this is arranged. And if extra investment is needed, be sure that that is done fairly too. I strongly recommend you actually issue shares, or at least have a contract outlining who owns how much. This can save a lot of headache down the road in case of unexpected death, divorce or other unforeseen events.

Friends & Family

This is a common kind of fundraising, especially at the beginning of a business's life. If your entrepreneur decides to pass the hat around your circle of pals and relatives, bear in mind a few changes that this will mean for you.

  • The friends and family who invest may come to you asking how the business is going. It is best that you don't give them a blow-by-blow of every niggly detail. People can get spooked easily, and typically remember the bad things longer than the good. So if you describe 3 disasters your entrepreneur is facing and one good thing, your friend of relative will remember those 3 disasters longer than the good thing. And if there are 3 good things and one disaster, they'll probably still remember the one disaster. I'd recommend that you be vague but positive about how things are going, and if they press for details, tell them to ask the entrepreneur directly.
  • Another problem with friend and family investors for you, is what happens if the company goes belly-up. Before any investment is made, discuss with your entrepreneur what the reactions might be from each potential investor. If losing your uncle's money means that he can't retire comfortably, or that you'll never be invited to Thanksgiving dinner ever again, think a lot about these additional risks.
  • Surprisingly, also consider what might happen if the business is a success. Sometimes, this can bring the worst out of the people who you'd least expect. Greed takes over and people want a bigger slice of what's on the table. Having a formal company set-up can help reduce this problem, as well as a shareholder's agreement that each investor would sign, outlining how much you might sell the company for, and other key details.

Bank Loans

Bank loans are not a bad source of funding, if you are extremely sure that you'll be able to pay it back. Also, beware of situations where the bank asks you to secure the loan against a key asset you have, like your house. Do you really want to risk losing your house if the business takes longer to generate sales? Or worse, if it never gets off the ground?

Before going this route, look into Small Business loan programs- most governments offer some form of these, and often the interest rate is better, as well as the other terms. At the very least, go to a small business center with your entrepreneur to learn about bank loans and the risks involved.

Venture Capital & Other External Investment

This is a topic that I'll discuss more in the next article, as it's important as the Start-up Spouse to know what's involved in securing this, what's asking too much, and how to avoid some pitfalls.


Post a Comment

<< Home