Outside Money Is Never 'No Strings'

Outside money is never "no strings." Some advice on how to expand your business without compromising what you've already built.

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Dear Norm,

My partner and I are working on a new, cloud-based software application that we're convinced has some serious potential. The problem is that our existing company doesn't have enough cash flow to fund the project, so we'll need to look for outside investment. My gut tells me that I should start a company specifically for this application and keep it separate from our existing company, which is successful on its own. I'm just not sure how to structure the new entity, considering that my partner and I want to retain majority control.

--Justin Farmer
President, Kernel
Aurora, Colorado

Taking on outside investors is a much bigger deal than most entrepreneurs understand when they go out looking for capital. The money always comes with strings attached. For that reason, if no other, I agree that Justin Farmer and his partner should create a separate business entity for their new application, especially because it has nothing to do with their main business. That business provides IT professionals to oil and insurance companies operating in remote parts of the world. The application is a tool for tracking the location of equipment and other assets. Neither one adds value to the other, and there is no connection between them.

At this point, the application is little more than an idea. The partners are still trying to get a prototype built. Even then, they'll have to demonstrate the size of the potential marketplace for the product before they'll be able to raise the $150,000 they think they'll need to get the program up and running. Meanwhile, they should keep in mind the old rule that the earlier you try to raise money, the harder it is to get and the more equity you have to give away if you do find a willing investor.

As for the structure of the new company, I thought Justin and his partner would probably want a C corporation or an LLC, a limited liability company, but I told them they should talk to their accountant about it. They should lay out the entire situation to him or her and follow his or her advice. Questions of corporate form are best directed to a specialist with all the details at his or her fingertips.

 

Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and grown six businesses. @NormBrodsky