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Home: Patents:
Inventors Handbook
II. Sources of Financing – Debts and
Equity
The most commonly used sources of financing are debts and equity.
Most businesses need both and must use each in the right way at
the right time. Normally, debt follows equity. Equity is best used
in the initial stages for research and development, product development,
and later for sales and marketing initiatives. Debt is ideally used
for meeting working capital needs and building infrastructure.
Equity Financing
Equity Financing is the grant of financial funding in exchange of
a proportional allocation ownership in the business. Equity financing
is considered risky for both the investor and the owner of the business.
An equity investor, unlike a debt financer is totally at risk and
has no absolute guarantee of returns. It may prove equally costly
for the owner of the business as depending on the size of investment
and level of risk, they may seek a control position and seats on
the company's board of directors.
Major sources of equity financing often include
Friends and Relatives: A source of additional equity from non professional
investors such as friends, relatives, employees, customers or industry
colleagues.
Venture Capitalists: Institutional risk takers are one of the most
common equity finance providers. They may be groups of wealthy individuals,
government assisted sources or major financial institutions who
normally specialize in one or a few closely related sectors. They
will support any venture which they feel is worth the risk, be it
start-up businesses, a company that is expanding or acquiring another
firm. The characteristics in your business that may attract the
interest of a venture capitalist include:
a. A Strong Management Team – with finance, sales and technology
expertise and business acumen
b. Return on Investment – a ROI of 25% or more
c. Unique Product - a different, innovative, better and useful product
or service mix
d. Patent – the product should be patented or patent pending.
e. Ownership – proportionate allocation of shares as well
as membership in the board of directors
f. Agreement on Exit Strategy – Normal investment term may
be 5-10 years and the preferred exit options include an Initial
Public Offering (IPO) or strategic purchase of the company by a
third party.
More information is available at the U.S. Small Business Administration,
and The National Venture Capital Association (NVCA).
“Angels”: This term refers to high net worth individuals
who are prepared to take substantial risks by investing in business
ventures that may interest or inspire them. Investment decisions
are typically based on a number of parameters that may include:
a. A strong management team with finance, sales and technology expertise
and business acumen
b. A high return on investment
c. Documents reflecting the existing investment in the business
d. The support of a lead investor, an expert evaluation of your
product and market, and expert due diligence.
e. Exit options, including sell out provisions.
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