Attracting Equity Investors

Talk with your lawyer firstPeople don't invest in small companies to lend a helping hand. They invest to make money. And they expect to make a lot of money. If they expected to make just a 10% or even 15% return on their investment they would invest in largely less risky major public companies. Instead they invest in small companies because they expect to get huge returns on their investments. Often these returns do not materialize. Even if the company is successful in the eyes of the founders it may not meet the expectations of outside investors. And disappointed outside investors will often look for someone (read the company founders) to sue. This is just one reason you need to consult with a highly experienced business lawyer (not your family lawyer) before you to try to seek equity capital. There are also a lot of laws restricting how equity money can be raised from the public. And you need to be careful to structure any equity deal in your best interest--including all of the fine print.
Venture capitalistsVenture capitalist firms get a lot of attention in the financial press and they look at a lot of deals. But chances are that you are not going to get a nickel from them. Venture capitalists finance a very small percentage of new businesses. And most firms have fairly specific criteria for what type of situation they are interested in. Venture capitalists are typically looking for a company that has a realistic possibility of becoming a very large business within 5-7 years, large enough for a major public offering or for sale to a Fortune 500 size company. This would allow them to cash out their investment which they hope will have multiplied in value. Contrary to popular belief many venture capital deals are not for high tech companies, and many are for second or third round financing. Because venture capitalists are approached with many potential deals everyday, you should try very hard to get a personal referral to get your plan carefully considered.
RelativesI know that you hate to ask relatives for money--it feels like begging--but I've done it. And you can do it too. When you need money for a business you just have to swallow your pride. Approach your relatives very much like you'd approach any other outside investor. Explain not how they can help you out--but how they can make money. Have a written agreement--and have your attorney read it. A written agreement with relatives will not only help avoid legal problems but will also help avoid potentially bitter family relations. Even with your parents, siblings or spouse keep your business relationship formal. When I borrowed money from my father he was tougher than the bank--demanding interest every 30 days. But by adhering to his strict terms I was able to borrow money from him on more than one occasion.
Employee investorsOne of the most common sources of equity money is potential employees, especially people you either worked with in the past or you have personally known in the same industry. By offering equity to potential employees you not only get an equity investment but you also get (presumably) a talented and committed employee. Usually employees who have invested in a company are willing to take a significantly below market salary--but they will expect that the principal founder does likewise. While raising equity from potential employees has obvious pluses it also can raise a bunch of serious issues. What happens if the employee's work proves less than satisfactory? What happens if the employee decides to join or start a competing company? These are all issues that need to addresses with a good business attorney before you even approach a potential employee-investor.