Question

Imagine that you are the sole owner of a 1-year old startup company. Your have an exciting product development roadmap, but you need additional cash to move forward. Your advisors suggest selling shares in the company privately, in exchange for equity. What are some of the pros and cons of this decision?

Answer 1

Pros -

1. You get the much needed cash

2. The one who invests obviously believes he will get return. He will help from his side too to expand the business. If he knows about the business, his technical expertise may be of huge value

3. Investors connection can help the company grow.

4. You don't need to pay interest like in the case of loan

5. Risk gets diversified. If the business doesn't do well you don't lose your money or dont have to pay back

Cons -

1. You give equity, control to the investor.

2. Your say in the business can be reduced hiven the extent of equity given. His interest and vision may not be aligned to yours which might hamper growth

3. Your upside is reduced. If the business became a huge hit and earned a lot, you would have to share that with the investor. That may be a very high amount compared to his investment.

4. Both parties dont know the value of the business. So the extent of equity shared may be detrimental to the entrepreneur. If you give high equity, you lose a lot of things. And it may be the case that without high equity you aren't able to raise money.

5. It may be costly than other forms of debt available