Starting a business is an exciting time in anyone's life. And often when we're in those "early moments," we make decisions that have unintended consequences in the future. This is particularly true when it comes to finance and partnership decisions - which are often extremely difficult to unwind.
It's important to slow down and think ahead. You need to think through how you imagine your business evolving, how quickly, and what your ongoing capital requirements will be. And you need to make sure that you talk about long-term financing issues and possibilities with your partners to make sure that everyone is in sync.
Let me share three true stories to help illustrate the point.
I recently met with two entrepreneurs who sold a twenty percent stake in their business to a wealthy angel in early days. Their company has now grown considerably and is doing well. But they desperately need working capital to keep up with growth in the form of a line of credit or an asset-based line. The problem is that the bank requires any owner with 20 percent or greater to personally guarantee the loan, and their investor is not willing to do it. They are stuck.
In another story, three partners recently started a business and they each invested $50,000. The company is now off the ground and slowly starting to gain some traction. They will shortly need more capital. The issue is that two of the three partners are not willing to personally guarantee any debt. The company is now forced to look for an investor, and existing partners will be diluted.
In a final story, I just read a manuscript of a book that tells the story of an entrepreneur who spent years of his life working on a fin-tech company that built to 60 employees and recently blew up. His story describes the ups and downs and nail-biting adventure of raising multiple rounds of funding. And it made me wonder, had he thought through his capital structure early on, and perhaps made choices to grow at a slower pace, would he have ended up in a different place.
If you're getting ready to start a company or running a business and looking for an additional round of capital, my best advice is to slow down before you speed up and think two steps ahead before you make decisions.