My own pursuit of happyness: entrepreneur

Nolo 01.05.07, 4:30 PM ET

To raise money for your new business, you must decide whether you want to borrow money or sell ownership interests to equity investors. Often, you may not have many options--the person with money to lend or invest will obviously have a lot to say about it. But you should understand the pros and cons of choosing one over the other.

Taking Out Business Loans

Borrowing money to fund your business has many advantages. Often, you'll borrow this money from a friend or family member, but if you're lucky, you may be able to borrow from a commercial lender too.

Advantages of Borrowing Money

The main advantage of borrowing money is that, while the lender will charge you interest for using the money, the lender won't have any say in how you run or manage your business. More importantly, a lender won't be entitled to any of the profits you make; all you have to do is to repay the loan on time. In addition, you can typically deduct the interest payments (but not principal repayments) as a business expense.

If you can borrow money from a friend or family member, you'll typically pay a lower rate of interest than if you borrow the money from a commercial lender, and you can avoid paying the loan fees commercial lenders tend to charge. As an added bonus, you may be able to negotiate more flexible repayment terms than a commercial lender would permit.

Disadvantages of Borrowing Money

If you borrow money, you may be committing your business to a fairly large business expense. You may have to make loan payments when your need for cash is greatest (usually during your business's startup or expansion). And if you have problems paying the loan back or keeping up with the payments, you can ruin your relationship with family or friends.

If you borrow from a commercial lender, the lender may require you to pledge property as security for the loan. (If you don't repay the loan, the lender can take the property and sell it to recoup the money.) If you pledge business property as security for the loan, and your business slows down (or doesn't take off) and you can't make loan payments, you may lose these valuable assets just when you need them most. Worse, if you pledge personal assets, such as your house or stock portfolio, you risk losing them to pay a business debt.

Even if you organize your business as a corporation or a limited liability company (each of which provides owners with limited liability for business debts), almost all commercial lenders will require you, as the owner of a new or small business, to personally guarantee the loan and/or to pledge personal assets to cover the loan, which wipes out this limited liability.

Accepting Investments

If you have friends, family, or other people who want to invest in your business outright (become part-owners) instead of simply lending you money, you can raise money for your small business this way too. However, allowing people (called equity investors) to own part of your business comes with its own set of advantages and disadvantages.

Advantages of Equity Investors

First, there's a good practical reason to take investments: Raising money through equity investors allows you to use your cash to pay business startup expenses rather than large loan payments. And unlike a loan, if your business loses money or goes broke, you probably won't have to repay your investors their initial investment. As long as you've thoroughly disclosed the risks involved in your business, your investors should understand and accept that they are not guaranteed to get their money back.

Further, investors often have business experience and can offer you valuable advice, moral support and assistance.

Disadvantages of Equity Investors

On the downside, equity investors usually end up taking a larger share of your business's profits than a bank or other lender. (Since an investor is at a greater risk of losing his or her investment, you have to compensate the investor for this risk with a bigger payoff.)

In addition, your investors will be co-owners, and they have a legal right to be informed about all significant business events, as well as a right to ethical management. Your co-owners can (and probably will) sue you if they feel you are compromising their rights. This means you always have a responsibility to take your investors' interests into account when you make business decisions, even if it's not what's best for you.

In some circumstances, your investors may be considered passive investors and their investment interests "securities." Dealing with securities creates a lot of paperwork, starting with securities registration, and brings a host of other legal requirements down on your head. However, not all offerings of securities must be registered with the federal and state securities exchange commissions. The following are exempted:

--private offerings to a limited number of persons or institutions

--offerings of limited size, and

--intrastate offerings.

For a quick summary of these exemptions, see the SEC website at www.sec.gov.

Summary of Loans vs. Investments

	Loans	Investments
Advantages:	The lender has no management say or direct entitlement to profits in your business.	Investors are sometimes partners or board members and often offer valuable advice and assistance.
Your only obligation to the lender is to repay the loan on time. Loans from close relatives can have flexible repayments terms.	You can be flexible about repayment requirements.
Interest payments (but not principal payments) are a deductible business expense.	If your business loses money or goes broke, you probably won't have to repay your investors.
Disadvantages:	You may have to make loan repayments when your need for cash is greatest, such as during your business's startup or expansion.	Equity investors require a greater share of your profits than interest on a loan.
You may have to assign a security interest in your property to obtain a loan, which may place your personal assets at risk.	Your investors have a legal right to be informed about all significant business events and a right to ethical management.
Under most circumstances, you can be sued personally for any unpaid balance of the loan, even if it's unsecured.	Your investors can sue you if they feel their rights are being compromised

Loans or Investments: Which Should You Choose?

If you're trying to finance a startup venture, it's better to seek equity investments, because you generally only have to repay investors if the business turns a profit.

For ongoing needs, loans are better for businesses with cash flow that allows for realistic repayment schedules, and for businesses that can obtain the loan without jeopardizing personal assets.

Deciding whether to borrow money or to take on co-owners can be tricky. If you don't already know a tax adviser who specializes in small business issues, it would be wise to find one. Your personal tax situation, the tax situation of the people who may invest, the terms of a potential loan, and the tax status of the type of business you plan to open are all likely to influence your choice.

Damon Dash is in town for 24 hours. He's flown in on a private jet with an entourage that includes personal assistants, publicist, valet, cameramen, laptop geeks and sundry "friends". With this crew he'll work, party a little and then be back in New York in time to take the kids out the following evening. As you might expect from the man who admits he's the walking embodiment of his own multi-faceted, money-printing urban lifestyle brand, Dash doesn't do things on the cheap. Despite meeting in a luxurious suite at London's fashionable Soho Hotel he still insists on having his food prepared by his own chef.

How could you not say in the same sentence that this man was CEO and founder of Roc-A-Fella Records which had Jay-Z and Kanye West; who started Rocawear clothing; who was owner of Armadale vodka and America magazine; a man who bought Pro-Keds sneakers and who makes movies; a man who does a lot of things and does them well?" Answer: because most people would run out of breath.

The only reason why Damon Dash is where he is today is becase he always want more money. He never gets enough.

The 33-year-old thinks about money a lot. He grew up telling his childhood friends in Harlem that he would one day make it big and winning a scholarship to a leading private school meant he got to study wealth at close quarters. "I'm comfortable in very extreme situations," he says. "I can go into the depths of the 'hood with the roughest type of guys and feel 100% comfortable because I lived through it, survived it and felt comfortable with it. I'm also confident I can go into the boardroom with non-urban people and feel 100% comfortable because I have lived the non-urban life at times and I survived it. I can relate and I can also translate."
This ability comes in handy when it comes to dealing with what he describes as "square businesses".

"Some people have a serious disconnect with the culture of people they are trying to sell to," explains the self-proclaimed marketing manager for the street. "I don't want to talk about exploitation but business is business and if you want to sell to a certain demographic, you have to understand it. The majority of big corporations don't. They haven't any experience of struggle and they don't know what's cool. They're kinda nerdy actually."

Yet for all the ultra-bling diamond-encrusted watches, über A-list dinner-party guests and membership of the hip-hop aristocracy, there is something strangely nerdy about Damon Dash. Perhaps it's his easy fluency in marketing spiel or the towels and trainers discarded after a single use. Or maybe it's because becoming part of his entourage requires passing out of what he happily describes as "boot camp".
"When I want to employ somebody I try to build them from A-Z," explains Dash. "Before I put you in the field with one of my businesses, I would spend very intensive time with you to put you through the shit work so you appreciate the move up. You got to watch how I work and see what I expect from people. If you pass through boot camp, you can move on and get into my company."
Once there, he says, you're unlikely to leave. "I like to empower people and give them their own businesses so they can go ahead and run them. They can then run those parts of the world that I can't." The recent parting of the ways with Jay-Z has allowed Dash to put these theories into practice. The new Damon Dash Music Group gives individual artists their own labels under one umbrella, while Dash Dibella Promotions, a co-venture with wizened fight promoter Lou Dibella, aims to "empower" its stable of boxers.

He calls his personal assistant Sophia into the room. It's her birthday. "She is actually two years old," smiles Dash, "because I have been personally raising her for the last two years. She came and got into boot camp and I had her doing all kinda stuff. Crying was involved but she passed so I put her in the field. She's 23 years old. Imagine what she's going to be like when she's 30 after seven years of being around me and learning from me in an intensive way?"

FROM THE GUARDIAN UNLIMITED

You have a thing for vodka?
I have a thing about buying things and not owning them, ya know what I'm saying?
You have a hard time buying things and not owning them?
Yeah, like if we're promoting something we don't own ... we know what we like, and if it's real, we could do the research and make it better and then we could market it and sell it. I have a problem with making other people money.

You seem pretty passionate about making more money — but do you ever have moments when you look around and say holy cow... I'm really rich!?
The funny thing about that is the more money I make, the more I want. On my first vacations, I'm going to the Bahamas or something. Then, you make money, then you go to St. Tropez. And what you notice is everybody's richer than you in St. Tropez, so I don't feel rich. I can't afford to just frivolously buy a $30 million yacht, you know what I'm saying? So I aspire to have what everybody around me has and more...
I'm never trying to be a big fish in a little pond. I wanna be a big fish in the ocean.