Pitfalls to raising capital and getting investors for your business
Starting a business is not as easy as it sounds. More than a genius idea and a plan, there is something else needed that is often where aspiring entrepreneurs fall short — capital.
To start a business, one must have saved up enough money to fund their start up venture. No business is profitable at the start, and it could take several years before it gets a good ROI and starts earning.
For aspiring startup business owners who have not saved up to fund their companies, they can earn capital by reaching out to investors or funders. However, people don’t realize that it’s more challenging than it seems.
There are a lot of legal pitfalls to raising capital and getting investors for your business.
1. Legal Regulations
No one can just go out and request for money to start their businesses. There are many local and State laws and regulations in place that cover raising money. This is to protect investors and funders from getting ripped off.
The Securities and Exchange Commission is the biggest regulatory agency whose laws apply even to the smallest companies. So any business, whether a huge corporation or a startup, is bound by securities law. In fact, even loans, promissory notes, or small investments are covered by the State if California and federal regulations.
So a person looking to ask for funding needs to comply with various statues. They need to meet disclosure requirements, and in some instances, a private placement memorandum. These documents usually stipulate terms like:
- What does the investor get in return?
- What are the terms of the investment?
- What are the risks involved?
2. Exposure to lawsuits
People do not take this matter too seriously, but getting capital and investments for a business can expose them to lawsuits.
If a person asking for capital does not disclose possible risks, or does not deliver on his or her promise, there is a high tendency for the investor or funder to sue them.
Regardless of whether or not you are friends with or related to the lender, lawsuits can arise whenever money is involved — and it doesn’t even matter how much.
Raising capital or getting investments into a startup company is a serious, legally regulated thing that people should stop taking so lightly. People should do their research, or even better, hire a lawyer who can help them navigate all the specific issues and laws involved.