A Strategy to Lighten Your Debt Load and Release Equity
There are some crucial steps to release equity from your company. If you’re one of the entrepreneurs who are looking to take their business to the next level and want an easy way out of their ownership stake, you need to know how to release equity, in case you need it.
Sign a Formal Written Agreement. This is the first and most important step of releasing equity from your company, so it’s crucial to make sure you have all the details taken care of. You need to sign an agreement with investors that includes things like how much they are buying, when they will buy it (whether in installments or as one lump sum), what specific shares they’re purchasing, and any other restrictions on these shares (i.e., non-voting stock). The agreement should also include information about dilution for employees who want to exercise their options by selling some percentage back to the company—if this applies to you, be sure there is enough room for them in the deal structure.
Calculate the Valuation. You need to know what your company is worth before you can release equity, so be sure to do a valuation on your business—usually involving some form of expert analysis or an online tool like NewCo’s Startup Toolkit. Once you have this information, it will help determine which percentage of ownership in that valuation your investors are purchasing and how much money they’re putting into buying these shares (i.e., their contribution).
Determine Your Exit Strategy Depending On The Situation And What Is Best For All Parties Involved. This step may take time for entrepreneurs who want to use private equity financing as a means to exit the company because there needs to be liquidity in order to execute the sale. The exit strategy will vary depending on whether you are planning to sell or go public with your company, which in turn has a huge effect on how much money can be raised from investors and when this is done.
There’s no right way to release equity from your business, but there are some critical steps that need to happen first—especially if you want it all taken care of legally.