Get Financing but Don’t Lose Control of Your Company

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How you choose to finance your new business venture can have a dramatic impact on the type of entity you use for the venture, the structure of that entity and the direction your company takes in the first few weeks and months of its existence.

Companies that are funded entirely by you and/or your close friends and family members will operate in a dramatically different way than one that is funded by outside investors. Similarly, a company funded by the entrepreneur or owner (or his or her family and friends) will likely afford the individual greater control over the direction of his or her business as opposed to a company that
receives its initial capital and funding from other types of investors.

Sources of Capital and Financing Impact Who Has Control of Your Business

Selecting an appropriate funding source or sources for your new business is critical, then, maintaining the level of control you desire over your new enterprise. Some possible sources for funding include:

•Yourself, your family, and/or your friends: You may choose to fund your California business start-up using your own savings or assets or those of your family and friends. You and/or your family and friends may also attempt to obtain loans from banks or other lenders to provide your business with the requisite capital. While the amount of capital you may gain from any of these sources may be small, these sources afford you the opportunity to retain the greatest amount of control over your business.

•Angel investors: An “angel investor” is one who provides capital to help support a new business in exchange for an ownership interest in the business. The hope of the angel investor is to be able to share his or her ownership interest for a profit at some point in the future. As a result, an angel investor might take significant interest in the direction of the business and may attempt to exert control over the direction of the business.

•Crowdfunding/”Kickstarter” loans: In recent years, crowdfunding has become an increasingly popular method to fund startup businesses, especially businesses related to the arts. Here, hundreds (or even thousands) of individuals contribute money toward the entrepreneur’s project. Non-equity Crowdfunding offerings do not permit investors to obtain equity in the new business venture they are investing in and these investors do not share in the success of the business they are funding. Nevertheless, because these investors usually give capital to projects they truly believe in, such investors may try to exercise influence over the direction of your business.

James H. (Jim) Gulseth was born and attended high school in Devils Lake, North Dakota and graduated with an A.B. degree from the University of California at Berkeley. He earned his JD degree at the University of California Hastings School of Law in San Francisco. He is a member of the Corporations, Business Transactions, Securities and Tax and Intellectual Property Sections of the State Bar of California and is a member of the State Bar of California, the Alameda County Bar Association, and a member and past President of the Eastern Alameda County Bar Association.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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