My business is always short of cash

My business is always short of cash. I worry about it all the time but I do not want to give away any more equity when the business is still in the development phase.

I hate asking customers to submit their payment. Some are more than 2 months overdue, but I just can’t bring myself to go sit in their offices to collect cash. I always pay my bills at 30 days because it is the right thing to do.

I have too much stock but I do not want to reduce my margins and profits.

I had to buy new computers because the others were two years old.

I could have/should have delayed the order for a new machine.

Lifestyle: My family keeps asking me why I didn't go back to McKinsey

I did my undergraduate degree and then went to work for McKinsey. I enjoyed the work but wanted to do something that had more meaning to me. I left McKinsey and worked for a Foundation that was developing low-cost energy solutions for rural economies. I really enjoyed the work but I did not like the way foundations operate and the lack of focus on results.

I decided to get an MBA and start my own business in the same field.

I returned to my home country with an MBA, a business plan, and $500. My wife is supporting me and the business. It’s been a struggle and my family keeps asking me why I didn’t go back to McKinsey. All my friends make more than $200K a year. What was I thinking???

I thought managing my own accounts was good enough until the investors looked at my books

I own my business and did most the accounting myself using Quickbooks. I’ve never had a proper audit but I file and pay my taxes on time. I keep most of my receipts but sometimes when I was paid in cash, I just put the money in my pocket. I wasn’t taking a big salary from the business, so I thought this would be okay.

As sales increased, I needed more money to grow. I went to the bank and they went through my accounts and tax filings. They said that I was not making enough for them to give me a $100k line of credit. I told them about taking money out of the business, but I still had to agree to put my house up for collateral to get the line of credit.

Then my product featured in a national paper and later in a nationwide TV program. Sales immediately increased and three investors approached me. They all wanted to do due diligence. I thought I knew what due diligence meant, but I was shocked by how much information and detail they wanted.

They went through three years of accounts and had five pages of questions; I couldn’t answer most of them. They tried to reconcile our bank statements, accounts, and tax filings and couldn’t do it. They each concluded that we were overstating our margins and profits. I then explained how much cash I was taking out of the business.

Two investors dropped out because it was taking so much time. The remaining one had their own auditors rework the accounts. They offered to make an investment at incredibly unfavorable terms payable in tranches over two years. I had choice but to accept their offer. I wish I had good accounting in place from the start.

The investor suggested I learn more about finance before approaching other investors

I started a new company; I have significant industry experience, but not much experience with finance and accounting. My friend works in an investment bank has been helping me. He is very smart and I trust his advice.

He did some work me and concluded that my company was worth $4m. I have less than $100k in revenue, but I have good distribution for my products and I am the first to market. I was thrilled, but when I mentioned the $4m valuation to others, they were skeptical and warned me not to take it too seriously. But I trusted and believed my friend. It also made me feel good because it told me all my hard work was paying off.

I was ready for investment, so I prepared my business plan and my first investment deck. I prepared my financials and I used my friend’s Excel spreadsheet with the $4m valuation. The first investor rejected me, calling the valuation absurd. Another asked me to justify the valuation. I don’t know anything about finance but I told the investor my friend who worked as an investment banker prepared it. The investor suggested I learn more about finance before I approach others. Four other investors rejected me without any explanation.

I finally sent the deck to some other friends and advisors- each said the same thing. The valuation could not be justified. The real value was under $500k. I was shocked. I did not know who to believe. If the valuation was that low maybe I was not doing a good job. I own 80% of the company. One day I was worth $3.2 million dollars, the next day $400k.

Advisor and investor whiplash: Who do I trust?

This is my first business, so I’ve been seeking advice everywhere I can. Now so many people have given me advice on what to do and why. A lot of the advice contradicts what other people are telling me. Honestly, I’m confused. Who should I believe?

I know a little about a lot and I am certainly not an experienced finance person or CEO. I have a lot of book learning but not a lot of practical experience. I implemented many things that I learned at graduate school – some worked and some did not. I am not entirely sure why this is the case.

I’m also not sure where to go to raise funds. The bank is risk-adverse. And despite what investors say, they clearly do not have my long-term interest in mind. I went to an incubator and gave them 6% of the company for $15k and some support for 4 months. None of the mentors from the incubator respond anymore now that I’ve “graduated.” An angel investor wanted 50% of the company in return for $150K. This seemed like a lot to give up, especially since I’d probably have to raise funds again and would lose even more control. I’d be working for someone else. It wouldn’t be my business anymore.

Where do I get sound advice? Who should I trust?

Corruption: He told me to send 25% of the material cost to his personal account

I have a business based in my home country in Africa that currently imports materials from China, but I wanted to begin sourcing from the continent. I went to a neighboring country to negotiate a supply contract.

The owner was very friendly; he took me on a factory tour and for a wonderful dinner. We met again for breakfast and he talked about price and minimum orders. His price was 15% higher but the shipping cost was less; when I ran the figures through my head, there was still enough margin for my business. I told him we had a deal and we shook hands.

Then he told me how to submit the payment. He said to send 25% of the material cost to his personal account in the UK and not to show that on the invoice. I had no idea what to say or do! All I could think to say was that I needed to talk to my accountant to see if that was possible.

I knew what he is asking is illegal. I also know this is how business is done. I want to keep my business on the continent when possible. I’ve never encountered this before though and don’t know what to do. What will happen to me if anyone finds out?

How did I lose control of my business when it was my idea?

I had a great business idea but knew I could not do it on my own. I found someone to work with on the proposal; her skills complemented mine and we worked well together. We decided to start a business together and that we would each own 50%. Things moved slower than expected, as sometimes happens with a startup. My co-founder then decided that she wanted to concentrate on her full-time job and family. She stopped working on the business and ended up moving to another part of the country for her partner’s job.

I continued to work on the business and brought on someone new as a business partner. We developed a website and started to sell products. We’re doing well and my new partner wants a share of the business, but my original co-founder objects to that. Now she’s not talking to me and my new partner doesn’t want to put in all the work without getting a fair share of equity. This was my idea and now someone who’s not even working on the business is keeping me from going forward. What do I do?

We didn't realize 1% a year would cost us so much down the line

We did not have any money to pay people so we decided to use share options. We offered options that vested over three years to three people. Each would get 1% of the company’s voting shares each year for three years. If they did not complete the year then they got nothing for that year. We solved the problem of getting people to work for us but we did not understand the implications of giving away 9% of the company at the time.

All three people stayed for three years and left during year 4. When they left they took their voting shares. Our shareholders agreement said that it took a super majority to approve issuing new funds. The other shares were distributed as such that people who left held enough shares to block the new fundraising.

We eventually arrived at a compromise but it meant the people who were actively managing the company got a bad deal. It also meant that this situation would recur with future fundraisings unless the Shareholders Agreement was changed. To change the document required the agreement of all shareholders (100%). The founders and future shareholders would be at a disadvantage every time funds were raised.

We didn't want to spend any money on legal fees and documents

We entered three business plan competitions and launched a business from the winnings. We did not want to spend any money on legal fees and documents, so we did not register our business. The business started to grow but it could not support two people so my cofounder went to work for a company in our industry while I worked on our business full-time. My cofounder contributed a few hours of work per month while I spent at least 60 hours/week on it. As the business grew, we had to raise money to finance expansion. The investor did due diligence and found that there was no documentation regarding shareholders. We cofounders did not agree on the holdings. I assumed I’d have much more for running the business full-time and my cofounder assumed since we started the business together, it would be 50/50. The investor withdrew their offer. 

I should have paid better attention to the formation documents and shareholder agreements

I thought startup documents were just necessary and standard paperwork. The four of us co-founders went to lawyer who helped us incorporate and gave us a Shareholder’s Agreement and Option Plan. I read all of it but didn’t really understand what it meant and didn’t think it was that important. We each got 25% of the company. These were Restricted Shares, which vested over time – 6.25% for each of us each year for 4 years.

After six months one of the cofounders decided to leave the company and move away. He wanted to take his share of the company, which he thought was 25%. He was told that he did not have any shares as the stock did not vest until after the first year. The situation turned nasty and interpersonal. He hired a lawyer who threatened to sue the company. They claimed that the shareholder agreement was not adequately explained to him and that it was the company’s responsibility to do so. The company did not have any money to meet legal cost and settled by giving him his first year’s shares, 6.25% of the company.

In year 2, at the first fundraising, the absent cofounder refused to agree to the terms. He was able to do this because decision-making called for unanimous approval by shareholders. So, even though the rest of us, who owned 93.75% of the company agreed to the terms, the deal was held up and our investor moved on because of this one guy.