Should I sell stock in my company if I don't need to for capital?

Discussion in 'Growing and Managing a Business' started by Dallin, Jun 22, 2011.

  1. Dallin

    Dallin
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    I'm in the process of starting a business and visited my local SBDC to get a little counseling. One thing I like about my business idea is I can do it all with a small loan and should not need to acquire any more capital after that. The business professional at my local SBDC though told me I should still create a corporation and sell stock in it, even though I wouldn't need any more capital for expansion and the loan would give me all my startup capital. It should be noted my exit plan is to sell the company in 5 or so years.

    I couldn't understand why he was so adamant that I should sell equity in the company if I didn't need capital. The only thing he said that made sense is I would have complete owner's liability if I didn't sell stock, even though it is limited in a corporation or llc, but I would think the added profits from owning 100% of my business would be more important. Is there any other reason I might sell equity if I don't need capital to run the business and I plan on selling it in 5 years? Should I do this? Thanks!
     
  2. Fergal

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    Welcome to our Business Forum Dallin. I really don't see why you should sell stock if you don't need the investment. Selling stock would dilute your ownership and control over the business and it is not something businesses do unless they can get a significant benefit from it. The benefits from taking on stockholders would include the additional investment and perhaps access to additional senior management expertise and experience. However, neither of these seem relevant in this instance.
     
  3. ArcSine

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    Agreeing with Fergal; no need for dilution at this stage of the game.

    It sounds like there might have been a simple misunderstanding. The SBDC fellow may have simply been advising you to form a corporation or LLC for liability-protection purposes. That's very different from advising you to take on co-owners for no good reason.

    Just form a corp / LLC and issue all the shares / equity units to yourself. You'll be the sole owner, while still obtaining the protection benefits.

    There's also the possibility that he was just saying that you'll need some equity in the company before you can obtain the loan (100% debt financing is virtually nonexistant these days, esp. for a startup.) Again, that doesn't necessarily mean the equity must come from other investors; outside investment would be required only if you don't have sufficient personal funds. (Note here that it mightn't be necessary to physically transfer the capital to the company....depending on the lender, it might be enough if you'd just co-sign the loan and collateralize it with personal assets.)

    Given your exit strategy, Fergal makes an excellent point about talent retention. You'd generally fetch a better price if the buyer sees that you've assembled a team of top performers who'll stick around post-sale. In turn, depending on the circumstances, you may have to offer a little equity as a sweetener in order to entice these thoroughbreds into your barn. Plenty of time of think about that later, though, as you see how things unfold.

    Best of luck with it, Dallin!
     
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  4. Dallin

    Dallin
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    Thanks for your replies! Awesome advice and I feel very welcome. I feel like I have a new online home while starting this crazy roller coaster of an endeavor!
     
  5. Fergal

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    Thanks for replying back Dallin, we'd be delighted to offer you suggestions and feedback any time we can and we wish you every success with your new business.
     
  6. JBMedia

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    Definitely should not if you're not needing the investment for expanding or to keep your business alive. Generally the only other way I'd open up stocks or ownership shares to my company would be if it was expanding at a rapid rate and to give the employees themselves and only them a right to buy shares. Therefore it is privately held and you have less of a chance of having your company get sweeped from underneath you. Then of course your employees benefit as well.
     

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