But there's a third way you can raise capital for your growing business that's easier and more effective than both of those methods: a private placement agreement.
"What's that?" you ask. It's an underutilized, early stage fund-raising technique that will infuse capital into your business without diluting your equity.
If you're looking to raise less than $1 million, private placement will allow you to raise capital, without losing a disproportionate amount of equity to a VC.
Here are the basic steps:
Develop a subscription agreement.
For this, you will need to hire a lawyer. The agreement should detail the types of shares your company is offering, how much stock is available, and at what prices--plus the disclaimers that potential investors should be aware of and a litany of other legal details that are much better left in the hands of an attorney.
Legal fees should be about $10,000, but the stake in your company that you will retain by using private placement--rather than resorting to venture capital--will make it well worth it.
Place a valuation on your company.
Disclosing the worth of your company to potential investors may cause pause for some business owners. But it's important to be able to show tangible value, and a realistic plan for growth, before you begin to sell shares in your company.
Among the issues to consider: If you place the value too low, someone will take advantage by buying a large stake in your company. But if the value is too high, no one will be interested.
Sell the shares.
Seeking out potential investors and selling them on your company's growth potential might not be the most fun part of the process--but it's essential. And, let's face it: If you're starting any kind of a company, you need to be able to sell and network.
Almost every community has entrepreneurship groups, and you have to be very good at working these communities. Get involved, meet lots of people, and network at venture capital firms-- the firms themselves may not invest, but they may have individuals who will.
Your target number for early-stage shareholders should be fewer than 20. Beyond that, you're going to have to juggle a lot of expectations and personalities.
Most important, make sure your investors are accredited--meaning their net worth is more than $1 million--and that they believe in your vision. They are your partners now.
Other companies may boast about closing about closing multimillion-dollar rounds of initial funding, but remember: That's the most expensive form of capital.
Someday, your company may indeed need to reach out to VCs for that kind of money. But there is a chance that you will never need VC money. And once you've used the capital gained from private placement to grow your business and you need follow-on funding, odds are those initial shareholders will invest again.
BRIAN HAMILTON is the co-founder and chairman of Sageworks, an Inc. 500 honoree. Hamilton is an original co-developer of FIND (Financial Information into Narrative Data), which converts financial numbers into plain language.