Rules for Raising Capital

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If your company isn't winning interest, make sure you locate the problem and are prepared to state your solution to it in a concise, compelling, and complete way. If it's gaining interest, then pursue more investors.

Do you want "active" or "passive" money? Active money is from financiers who will work with you closely. They'll add value by introducing you to sales prospects, influential people, and more. Passive money is just money—no connections, no additional value. If your company is seed or early stage, or if the financier has key contacts you should tap, take active money. If you already have enough active connections and just need cash, take passive. Investor relations can be time-consuming. Plan for this.

4. What Compromises Will You Accept?

Rule No. 1: Don't be greedy. Rule No. 2: But don't be taken advantage of, either. If you're seeking equity financing, you will be selling pieces of your company repeatedly. As the pie gets bigger, the increased number of pieces get smaller. This is called dilution. If you start out by owning 50% of a company, pre-financing, don't be surprised if you own 10% or less at the exit. In the beginning you will sell off big pieces, often 20% to 40% per financing. I personally don't like selling more than 33%. I figure if you're going to sell a big piece, sell it for a high price.

Loss of equity is one compromise, loss of control is another. Investors should comprise 20% to 40% of the board. More is trouble. I've seen way too many cases where the investors ran the company because they controlled the board. This rarely works out. I've also seen too many cases where the entrepreneur wanted a far higher valuation than he deserved, and either lost valuable time to market or lost the financing altogether by greedily stretching the deal.

And last, it's worth taking a lower valuation to get a stronger group of investors. Strong, active investors can make all the difference—not only in helping build the company but in participating in future financing rounds and helping raise cash when the chips are down.

The higher your company's valuation, the more favorable the financing terms. Always remember that a company's valuation is emotional: It's based on perception. Present your company with great passion, showcase your executive team, explain the realistic plan to make your vision a reality, and the results just might rock your world (see BusinessWeek.com, 3/2/06, "You: The Brand").

Christine Comaford-Lynch is CEO of Mighty Ventures, a business accelerator with offices in Napa Valley and Silicon Valley (Calif.).