A New Year can’t help but bring with it a fresh outlook, challenging goals, and a willingness to test unchartered waters. As you are assessing your small business and planning for 2015, you may be considering whether or not your company should delve into the world of securities and stocks. It’s quite complicated, so here are a few basic points for you to ponder before making this important decision.
I am a fan of the television show Shark Tank and I love watching entrepreneurs with innovative ideas vie for the attention of wealthy investors. I’ve watched countless episodes and the two biggest mistakes that people make on the program are 1) overestimating the value of their company based on speculation (or optimism) and not cold, hard facts, and 2) not doing their homework to provide credible answers and a solid business plan. Unfortunately, this is also a problem in the real world too. Financiers want the same thing these multimillion dollar sharks want: credible data and a feasible plan of action. If an entrepreneur just has a dream and an idea, it’s not enough to appeal to potential investors. Current accounting records listing operating costs, profit projections, and current assets need to be provided along with detailed long-term and short-term business plans.
Next, there are several types of stocks to consider: large companies usually file with the U.S. Securities and Exchange Commission to sell stocks to the public. Small companies can do the same thing, but tend to sell stocks to a limited pool of investors (which is known as private placement). Many companies also offer an employee stock ownership plan (ESOP) to reward high producers and to develop company loyalty. (While angel investors are a hot topic right now, they fall into another category. They are required to have at least $1 million in net worth or an annual income of more than $200,000 or $300,000 if married and fall under a different set of SEC regulations).
While the extra capital is appealing if you are looking to fund new projects, there are some downsides to selling off part of your company. Management becomes accountable to the board of directors and other shareholders and cannot operate independently. Profits, dividends, and stock prices may also become the foremost goal causing management to emphasize short-term strategies rather than long-term goals. In addition, the demand for paperwork greatly increases as companies must submit reports to the SEC and shareholders on a regular basis. This can incur substantial costs pertaining to time, materials, underwriter’s commissions and expenses, legal and accounting fees, and registration fees.
The best way to decide if your company should sell securities is to meet with a business lawyer. He or she can perform a company evaluation to determine if this is your best option for garnering additional funding.