As an entrepreneur and business owner you will probably have to raise capital one or more times throughout your company’s lifecycle. You will meet with your share of private investors and bankers over the years, and in some cases it will make sense to accept funding from these groups. And for many, these will be the only sources of capital that will be required for their company to achieve great success.
However, for others, a willingness to explore alternative sources of financing will be necessary to ensure your company has the proper amount of capitalization to survive and thrive. In a white paper I authored last decade, “65 Ways to Finance Your Business”, we took a detailed look at both the well known sources of funding (bank loans, angel investors, etc.) as well as many of the lesser known financing options (SBIR Grants, Life Insurance Policies, Trade Credit, etc.). Over the coming weeks, I will review many of these sources of financing for you on this blog.
Today, I want to mention one of my personal favorite sources of financing – employees. Your employees can be great partners in helping you quickly solve your capital puzzle.
You can offer certain senior and trusted employees the opportunity to become shareholders by purchasing stock in your company. Employees usually have limited discretionary funds for stock purchases, but every dollar counts equally. Employee dollars also come with an added benefit – that individuals increased motivation to help improve the results of the company, thus the value of their investment. Furthermore, by being part owners and participating in the company’s profits, employees will more likely choose to remain with your company instead of looking elsewhere for work.
Common shareholders often have the right to a say in the management of the company, so be careful how you structure the investment to limit their participation to something you can live with long-term. Another possibility is to offer employees nonvoting preferred shares of stock in return for their investment.
Many companies in their early phases of growth offer key employees or business partners options to purchase certain amounts of stock at later dates, often at a discount price or on very generous terms. The stock options help supplement the employee’s salary, which may be agreed to at below industry standards so that the company can retain as much cash as possible during these formative years.
The lure of stock options is often a major lure for attracting talent to start-up companies in new technology industries. However, while there are many advantages to a company offering stock options to employees, be careful not to give out options too easily, too quickly, or to persons whose true expertise and loyalty has not been fully demonstrated. What may not seem to be costing you much early on in the business can cost you dearly in terms of money and time later on, should your relationship with stock option holders deteriorate.
One final word of caution: As with any individual investor, always document this investment relationship thoroughly. Invest in a good attorney to make sure you get the paperwork right the first time.