You have the big idea. Now you need money. This is the next big hurdle you need to get over to bring your company to fruition. Raising money to launch your small business is a full-time job and usually takes much longer than you think it will. Even after you have successfully obtained funding, you will still need to allot some time each month to raising more money because many businesses need more than one round of capital to keep the doors open.
It usually starts with you–your savings, credit cards and second mortgages (not all of which are recommended). From here the typical entrepreneur turns to family and friends, with whom you should be clear whether the money is considered a loan or a small equity position. High net worth investors like angels and venture capitalists, who invest for what is usually a large equity stake, are the next potential source of capital. You may also consider a bank loan, but this tends to be more suitable for existing businesses that are looking to expand. This video is an excellent primer on the different avenues to fund your business.
Crowdfunding
A new source of funding for startups and/or small businesses, known as crowdfunding, is “coming of age.” For several years, companies such as KickStarter, Indiegogo, and RocketHub have offered organizations, individuals or businesses web-based platforms on which to raise money. Founded in 2009, Kapipal is a small, international crowdfunding platform that does not charge a fee (although Paypal will) for campaigns. Most crowdfunding projects are geared towards raising money for non-profits, community projects and the like because companies are limited to incentives like free product, tee-shirts and karma. Until recently, for-profit companies have not generally used crowdfunding, as SEC guidelines currently prevent startups from offering equity on these sites, meaning that donors have less incentive to contribute to for-profit enterprises. However, 2012 has seen several tech companies raise millions of dollars for the promise of a product. Examples include the Pebble Watch and Double Fine Adventure. Here is TerraCycle Founder Tom Szaky. This video gives you the lowdown about why crowdfunding matters and how you may be able to use it to fund your small business.
On April 5, 2012 when the JOBS Act was signed into law, a new source of raising capital was created with crowdfunding for equity. The basic idea is that entrepreneurs will be able to offer equity in exchange for investments in their startup or small business—something that was illegal before this new law. Although the JOBS Act has been signed, the Securities and Exchange Commission (SEC) had until the end of 2012 to create the necessary regulations. Startups cannot use this new fundraising tool until the SEC completes the regulations.
UPDATE: On September 23, 2013, the SEC lifted the ban on general solicitation for certain private offerings among accredited investors. This new legislation known as Title II makes it legal for companies to begin advertising their private placements and accept investment from accredited investors. Entrepreneurs will be required to validate the accredited status of each investor and any entrepreneurs considered to be “bad actors”–meaning they have been criminally prosecuted by the SEC–are not allowed to conduct a Title II offering. Also, entrepreneurs will be required to file Form D 15 days after the sale of their securities if they generally advertise their offering. Entrepreneurs can conduct a Title II campaign on their own, through an attorney or on an online platform such as AngelList, EquityNet, and FundersClub. We recommend that entrepreneurs seek the advice of an attorney or accountant before implementing a Title II crowdfunding offering in order to comply with the securities laws.
The laws enabling entrepreneurs to raise money among unaccredited investors were published on October 23, 2013 and are open to public comment. This law is known as Title III of The JOBS Act. The comment period will run for 60-90 days and the SEC is expected to enact this law shortly thereafter.
For legal advice pertaining to crowdfunding, Doug Ellenoff, a New York based securities attorney can assist. A highly sought-after speaker on the subject, he is probably the most knowledgeable attorney about the use of crowdfunding and The JOBS Act legislation.
Education for entrepreneurs considering crowdfunding is available here on CareerFuel and with the purchase of Crowdfunding for Dummies, the best selling book on the subject and written by the individuals who helped create the crowdfunding laws.
Alternative Investments
Another means of accessing personal capital to launch a small business involves converting some of your retirement assets into Rollover for Business Funding (ROBS). It allows you to use your retirement savings, tax deferred and penalty free, to fund a startup. This funding mechanism can include a rollover 401(K), IRA, or SEP (if the SEP is open for more than 2 years) or any combination of the 3 acceptable types. ROBS works by creating a corporation with its own retirement plan. The 401(K), IRA or SEP funds are rolled into the new entity’s retirement program. Stock is purchased in the new company using these funds. Capital is now available to buy a business, start a business, use as collateral for an SBA loan, etc. Basically, you are up and running and have cash flow to manage your business. This is one of the companies that offers this service.
For more info on using ROBS, read “Roll With It.” To get the skinny on crowdfunding– the latest blogs, videos and news– click here.