by elmads

DISCLAIMER 1: This is a work of fiction. Unless otherwise indicated, all the names, characters, businesses, places, events and incidents in this blog are either the product of the writer’s imagination or used in a fictitious manner. Any resemblance to actual persons, living or dead, or actual events is purely coincidental. This article’s purpose is to show the general overview of a business raising capital and also how important partners/shareholders are in the process.

In the Lens of a Kid’s Small Business

In a small town somewhere in South East Asia, there is a grade schooler kid named Louise who just loves to play around and do things that makes him happy, and he usually does this with his closes friends Nathan, John and Eugene. But unlike Louise, John and Eugene, Nathan has this natural affinity to entrepreneurship.

At a young age, Nathan was already buying and selling NBA cards. He enjoyed the idea and process of making extra money by trading and selling cards, then using the money gained from the transaction to buy more NBA cards. Nathan loved the fact that the more NBA cards he sells, the more cards he actually can buy afterwards and the more he can sell it again, to the extent that he was able to hand pick what to collect and what to sell. What made Nathan a good NBA card trader/seller is his love about the NBA, and his understanding of the NBA trading cards’ popularity.

One summer, which was an unusual summer because the temperature levels were higher than it was a year ago. Louise was hanging out with his friends (Nathan, John & Eugene) with the radiating heat brought upon by the bright rays of the sun. Louise just felt very thirsty that day, which he immediately shared his thoughts to his friends by saying; “I would love to have a drink of lemonade juice with tons of ice everyday because of this heat”, which the other John & Eugene nodded in agreement, but Nathan was just quite, did not agree nor disagree to what Louise has said.

What happened next surprised Louise and the other two, because Nathan just suddenly stood up and hurriedly went back home without saying anything.

For 4 days, Louise, John & Eugene were not able to see Nathan, which kept them wondering if they did say anything to offend Nathan. But, on the 3^rd day Nathan called Louise and invited him to come to his home. As Louise arrived, Nathan immediately showed the lemonade stand he built, which was just in front of his home.

Nathan did apologize firstly for suddenly leaving their group 4 days ago, but he did explain why he left. He said that he was so excited to start and sell lemonade juice immediately, after what he have heard Louise had said that day. He then proceeded to thank Louise for imprinting that simple idea to his head.

Nathan started gathering all of the things for the past 4 days to make the stand, hence his absence in seeing his friends. And, today is the first day of him selling fresh lemonades.

Days went by, and Nathan’s lemonade stand did fairly well.

The Planning & Execution

Nathan learned how to make a lemonade from scratch with the help of his parents, reading some articles and books. He was able to understand what are the ingredients and the equipment needed.

He planned, looked for a good spot to place his lemonade stand, learned where to buy the ingredients and get the equipment. Plus, he got a certificate from the local government with the help of his parents, to start a lemonade stand and sell.

The money Nathan used to buy some of the ingredients and equipment were all from his accumulated savings. (Allowance given by his parents and also from the proceeds he got from buying and selling NBA cards)

Nathan gathered the equipment to start a lemonade stand (most of it all came from his mom’s kitchen. haha! This is by the way, with his mom’s consent and guidance). See below:

• A lemon hand juicer or squeezer
• A measuring cup
• A strainer
• Glasses or Plastic cups
• A sauce pan (for making a syrup)
• A stove or other ways to make a fire to heat the mixed sugar and water in the sauce pan.
• A Lemonade dispenser
• The lemonade stand made and built from wood

The ingredients:

• Lemons
• Sugar
• Water
• Ice

How did Nathan earn money from it? he sold the lemonade juice more than the amount he spent for the ingredients and equipment.

Basically what Nathan did is, he spent $0.50 for every glass of lemonade he did, while he sold it for $1.25 (The unit economics of Nathan’s small lemonade business)

The following below is the simple summary of Nathan’s asset and liabilities for his lemonade stand.

Nathan and “The Lemonade Bar”

As time passed by, Louise, Nathan, John & Eugene grew up, and every summer without fail, Nathan continued to sell lemonade juice via his lemonade stand.

He got better at it, learned a lot of stuff, and he even asked his friends to help him sell, which his friends got a small side income from it. Time marched forward, the four close friends went to university and each one of them eventually graduated from their own respective chosen degrees.

Nathan, who really enjoyed selling lemonades, immediately started his own Lemonade business after he finished his university. He opened a Lemonade shop which he named “The Lemonade Bar”, and it has been successful since day one.

Today, Nathan has been looking into expanding his lemonade business to other places. He plans to buy new equipment, start to employ people, rent a commercial space for the shop, make his own webpage for his lemonade business, to start putting time and resources for marketing and advertising, and start researching and developing new products to expand his product menu/product portfolio and also improve his current served products as well.

Unfortunately, he has a problem with it, he doesn’t have enough capital to proceed with his plans. He would love to raise capital through a bank business loan, but he said that his current business is already leveraged, and having additional debt would lower the margins of his business further, and/or worse could cause financial problems for the business in the long run. Therefore, he though of just raising capital by giving a piece of ownership of his lemonade business to people who are interested with it, or better, the ones who he trusts and would give additional insights, support and knowledge to further improve his business.

While all of this is happening in the mind of Nathan. Louise, John & Eugene on the other hand are working, enjoying and progressing in the field where their heart is at. Despite this, the three of them also understood that they need money to work for them, and not just work for money for the rest of their lives.

In the Lens of Partners/Shareholders/Investors

One day, Nathan contacted Louise, John & Eugene about a partnership business proposal. The three, although were hesitant at first, eventually agreed to hear what Nathan has to offer. The plus about this is that the three of them (Louise, John & Eugene) has known him since they were young, and how passionate and dedicated he has been with his small lemonade business, his entrepreneurial skills. The three of Nathan’s friends agreed with his proposal and gave the required amount of money that he needs to expand his business. In return, Nathan will be giving 10% ownership of his lemonade business to Louise, John & Eugene.

Nathan still has the 70% ownership of the business, which makes his decisions as paramount, he will always have the final say. While Louise, John and Eugene, though only having 10% each, have substantial influence to their business by giving insights and suggestions to Nathan. It would then be up to Nathan if he’ll accept others’ advice and proposition. (In large corporation level, the 4 of them could be compared to the board of directors, Nathan being both the CEO and the Chairman of the board and the Majority owner, while the other 3 are part of the board and also stakeholders of the business).

Going back to the Lemonade Bar business. Nathan has been able now to open a new branch of his Lemonade Bar in other towns and cities, and also follow through his tactics and plans for it moving forward. The good part of this partnership is that, when the business grows, so as the money that Louise, John and Eugene have invested in the business.

The three of them have the skin on the game. It is now in their utmost best interest to improve and further grow the business.

Ownership of the Business. Buy, Hold or Sell?

Louise, John & Eugene, as the part owners of the business, could sell their piece of ownership of the business to either, to their other co-owners, or to another person who is willing to buy it from them for a higher price and who is also interested to be the new part owner of the business.

• If they sell it: They could use the proceeds to purchase other things, or use it to make more money like starting their own business, or invest it into other assets. Unfortunately, by selling their business ownership rights, they’ll not be able to be a part of the business anymore moving forward, including its potential growth or decline in the future.
• If they’ll not sell it and just hold it: if Nathan does well and further grows the business, then his partners’ share ownership of the cash flow of the company also goes up. The reverse could happen as well, if Nathan mismanages the lemonade business causing it to decline, lose money or worse go into bankruptcy, then the amount of money the partners could sell it in the future could also decline, or worse not even get a dime from their initial invested capital.
• If they’ll want a lager chunk of the ownership of the business: This needs to be discussed between the owners of the business. Buying more stake of the business is not easily executed, unlike when buying a share of a company in the secondary markets.

NOTE: Selling a major stake of a business is not easy as selling a stock of a company in the stock market, because there are a lot of legal laws that needs to be considered and followed first. Plus, all partners need to have an agreement regarding buying more, or selling, or swapping percentage shares of their business.

To Sum It Up

Raising capital by giving a piece of ownership of a business doesn’t just apply with large corporations, but can also be used by small businesses. This is why there are partnerships in a business.

There are legal laws that needs to be done first for most of this process, which this blog did not discuss. This blog’s purpose is to give readers an overview of the relationship and process of a business, shareholder and the incentives of having a good relationship between the parties involved.

This blog tells a made up story of a person starting a small business > a person who wants to raise capital via equity financing (Giving a piece of ownership of the business, to people who are willing to be partners or shareholders of his small business) for expansion & growth purposes > and the “what’s in it for the potential investors/shareholders/partners?”, what would incentivize them to give money to the business and be part of it? > and lastly, a win win situation when both the initial business owner and the investors/shareholders/partners work well together and be able to grow the business to its maximum potential.

“If everyone is moving forward together, then success takes care of itself”

-Henry Ford

Knowledge is my sword, and patience is my shield

elmads

DISCLAIMER 2: This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.