Todd Plaskacz is a Senior Associate at Andrews Robichaud, as a registered Trademark Agent, Mr. Plaskacz regularly provides guidance and advice to clients on branding, internet domain name protection and trademark prosecution and registration in Canada and the U.S. in addition to advising on a wide array of business and corporate matters.
In a previous blog, I touted the importance of always meeting the funding or financing challenges that are faced by start-up businesses. So let’s look at the early start-up funding options and consider the pros and cons of tapping into certain sources of funding.
Entrepreneurs often use their own resources to begin converting their business ideas into reality. Generally, it doesn’t take an entrepreneur very long to exhaust his or her savings in seeking to create a business and can even quickly blow though second mortgage financing on a principal residence.
Assuming the business has been incorporated, banks may provide a line of credit but that will invariably be tied to the credit worthiness of the owner’s personal guarantee. The usual next step is looking to family and friends that support the entrepreneur’s passion and are prepared to throw some “love money” at the project in hopes of a return some day. This family and friends round of start-up funding comes at a potentially risky cost. One must always consider the awkward downside risk of losing not just the money to a potentially unsuccessful venture but also a loss of friendship or family trust that triggered the “investment” in the first place. Is it really worth the risk of damaging one’s social fabric if things don’t go as planned? The answer is that an entrepreneur or start-up must always couple the hype and passion for the prospective business with a healthy does of what is known in legal circles as “Full, Plain and True Disclosure”.
It is not often that new businesses highlight the risks that their friends and family may be taking when pitching their project, but it is exactly that discussion that really must become part of the equation. If part of the conversation with friends and family focuses on the downside risks, (what if this or that happens), and the friend or family member is fully aware that they could lose all of their investment, then they will provide only as much money as they can afford to lose. If the business is successful, everyone wins. If the business is not successful, the bonds of family trust or friendship may in fact even be strengthened because they supported you knowing full well that failure was one potential outcome.
After all, how many times did Thomas Edison try before he finally discovered the light bulb?