An opportunity to raise capital that most entrepreneurs miss

Written by John Paul

Today’s lesson concerns an important opportunity to raise capital that most entrepreneurs miss.

And most people miss opportunities like the one I’m about to discuss either because of greed or fear.

Sometimes we get greedy because we want to preserve the pride and ego that comes with getting the bigger share of profits and equity in a business.

But most times, the problem is fear.

Sometimes you may feel threatened and afraid that if you allow a friend, business partner or investor come into the business, they could sabotage or overshadow you.

This is a big reason many businesses and entrepreneurs are still playing small.

The truth is, if you need to raise capital to get to the next level, you’ll have to give up something.

That something may be a chunk of ownership in your business, some control, some profits, or a lot of effort, sweat and tears.

So, the earlier you make up your mind about what you’re willing to give up in exchange for the capital you’re looking for, the easier the process will be for you.


Hi John-Paul,

I am a young entrepreneur who specializes in paddy rice post-production.

80% of my production activity is outsourced because I don't have the financial strength to procure the various rice processing machines.

Recently, I met with a rich man who showed interest in my business and he intends to partner with me.

Please, kindly advise the best way to establish a business deal that will favour me in the long run since he is bringing 100% of the money and my own contribution is the technical know-how.

Thanks in anticipation of your response.

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Great question, Tope. I’m glad you asked this interesting question.

I’ve seen a couple of situations and opportunities like this where the entrepreneur did not even consider the deal.

You know why?

They felt intimidated.

They were afraid.

When a person is contributing 100% of the capital to your business, most people feel intimidated.

Entrepreneurs like to be in charge and enjoy the pride of business ownership. That’s why we feel intimidated by anybody we think could take it away.

So, the very first and most important thing you should ask yourself before you walk away is this:

“What exactly am I afraid of?”

AND

“How can I enter this deal and still win?”

Only walk away from the deal if you’re convinced that the answers to both of these questions do not favour you.

So, let me help you address and answer both questions:

1) What are you afraid of?

If you’re like most people, you’re afraid that you’ll end up being the servant to this rich man in the business.

And the reason you’ll feel this way is because he’s bringing 100% of the capital. And you’re bringing ‘nothing.’

But really, are you bringing nothing?

Do you know why that man is willing to risk his money in your business?

I’m not sure what you said to him, but he made the decision to give you his money for two key reasons:

First, he believes doing business with you will make him money (profits). He has a good level of confidence in you.

And second, like most rich people, he craves the pride of ownership that comes with owning an asset (business or investment).

But to achieve both goals, he needs two things YOU already have.

The first is market insight and access.

Starting a new business from scratch is a lot of hard work. Finding customers, getting the right suppliers, understanding the market, adapting to the competition, figuring out pricing, and a lot of other hard stuff.

You’ve already done that. You already have the market experience.

The second thing he needs from you, which you already know, is the technical know-how.

You’re going to save him the stress and execution risks of running the business.

The bottom line is, this deal requires two types of business partners to work – a financial partner and a technical partner.

Both of you play very important but very different roles that need each other.

When you see your situation from this perspective, you’ll understand how much leverage and power you truly have in this relationship.

Now, let’s address the second question:

2) How can you enter this deal and still win?

Will the capital you'll get be used to purchase land, equipment or any type of hard assets that ‘ties down’ capital?

Because your partner will bring most of the cash, his claim over the ‘ownership’ of the business will be stronger if hard assets are involved.

Therefore, the more flexible you are in the relationship, the more power and leverage you can use.

That’s why you need to focus more on the ‘arrangement’ and not the 'assets' between you and him.

If you take his contribution as debt (loan), then you’ll bear most of the risks. No matter how your business performs, you’ll still be obligated to pay back the debt with interest.

That's too risky. You need him to take on more of the risks in the business.

An equity arrangement would have been great, but there’s going to be a challenge.

If the two of you jointly own the company, your partner will instantly have more equity. The problem is as you add more value to the business and it grows over time, your equity stake will still be small even though your efforts have built a bigger company.

On top of that, your partner could push you out of the company at any time since he owns the majority stake.

So, at this stage, I wouldn’t recommend ‘joint ownership.’

Rather, the two of you should share the risks instead.

Here’s what I suggest:

He contributes the capital. Whatever land, equipment or hard assets should be bought in his name. It should be his property.

That way, he retains the risk of ownership and you are not tied to anything.

Better still, you will retain the flexibility and freedom to walk away if the deal doesn’t favour you in the future.

On your part, you will contribute your technical know-how and market access, and run the business.

After all the sales, the expenses should be deducted, and the both of you share the profits.

You will get a percentage of the profits as a “management fee or commission” for your technical contributions and role in managing the business.

If you want your share of the profits to be large, you’ll need to work hard. That’s because the larger the profits, the larger your share of it.

The profits could be shared 60/40, 70/30, or 80/20. I would suggest you start the discussion/negotiation at 30 or 40% and negotiate down.

With this arrangement, you can build up your own capital for a future equity arrangement, or move out on your own if you wish.

As long as you're not tied to anything (like assets, equity, or a loan), you will always have flexibility and freedom. And if you have both, you'll never feel like a servant or minion in the business.

This is just one option you can consider.

I explained a lot of these risks between pages 170 and 195 of my book. I’m sure you’ll get more ideas from there on how to structure a funding deal around the critical risks that usually affect most businesses.



Raising capital is usually about trade-offs.

You need to find a way to give the other side what they want and still get what you want.

Greed and fear will be your biggest enemies. Unless you have an ego problem, it’s always better to get 20% of $1 million than to own 100% of $10,000.

However, if you ever feel intimidated by a potential deal, always ask yourself these two questions:

1) What am I afraid of?

2) How can I enter this deal and still win?

That’s the best way to help logic to override your emotions.

I hope this lesson helps you to make the best decision that favours you.