Minimizing Owner Dilution
When company founders go out searching for early- stage financing, they frequently fall into a trap: aiming to put their financial worries behind them, they seek more money than they need in the short term -- and forfeit more equity than they have to. But Scott Buske, president of Table Toys, a $1-million maker of children's furniture in Houston, managed to skirt that outcome. Since March 1990, in fact, Buske and his partner, Bill Schiel, have raised just over $1 million in three small financings; in the meantime, they have held on to 56% of the company shares. Here's how they did it:
Round One. Originally, Buske, a former restaurant owner, wanted to raise $800,000 to $1 million in one shot. As he saw it, Table Toys (which makes special tables for children to use when playing with Legos and other brands of interlocking plastic blocks) needed funds for everything from product development to marketing to manufacturing. But it became clear that obtaining the money would be both difficult and costly. "Assuming we could even get it, we would have had to sell as much as 80% of the business," Buske says, which he wasn't prepared to do.
So Buske and Schiel switched gears. For the first several months, they figured they needed a mere $67,500 to do market research, develop the products, buy small amounts of inventory, and design brochures. Instead of buying their own production equipment, they subcontracted manufacturing out to a third party. Based on the plan, 12 people, including friends, relatives, and one person Buske had met through a local investor network, bought 20% of the stock for $67,500 (at an early price of $1.50 a share).
Round Two. By the fall of 1990 Buske was preparing a second round, for $125,000, to be used for marketing, adding inventory, selecting and training distributors, and computers. With the product catching on in schools and other institutional settings, Buske talked to new, more sophisticated investors. After several months of pitching, seven Texans and one Arkansan agreed to buy the entire round (the largest stake was $40,000); this time the stock jumped to $2.50 a share.
Round Three. Buske began planning the third round right after completing the second. He and Schiel wanted to create a new line of lower-priced products for the retail market, which required large up-front costs. To pay for molds, product brochures, and in-house manufacturing, Buske aimed for $850,000 and, by June, had commitments for $880,000. Still, only $130,000 of the new money was raised by selling stock, at a new price of $4 a share; the rest came from subordinated debt with warrants from an investor group, and a term loan and a credit line from a local bank.
Would Buske take the same approach to money raising again? "It's a lot of work," he admits, "and there are periods when you go without paychecks." But, on balance, he feels the limited budgets forced him to think about the business more creatively. "If we had raised all the money at once, we would have done some stupid things. And we wouldn't own as much." -- Bruce G. Posner