Skip To Content

The Pitfalls and Potential of Startups

Creating a business can let you control your destiny, but what happens when investors want to control your company?



For many entrepreneurs, starting a business begins with the desire to control their destiny and an idea that they believe can fulfill an unmet need in the marketplace. Invariably, the first step is to develop a business plan — including growth prospects and development costs — that will attract investors with the necessary capital needed for expansion. Further down the line there may be an initial public offering (IPO) or a merger and acquisition (M&A).

As it happens, the current pool of capital available to startups may be larger and more diverse than ever before. The 2016 U.S. Trust Insights on Wealth and Worth® survey found that more than one-third of business owners used their own or their family’s savings, almost one-fifth used a personal or business credit card, and nearly a quarter took advantage of a loan from a bank or financial institution. About 6% took advantage of the recent trend of crowd-funding — small contributions typically made online by multiple contributors — and close to one in 10 accepted funding from venture capital (VC) firms.

As it happens, the current pool of capital available to startups may be larger and more diverse than ever before.

Consequences of capital

It’s important to understand the possible consequences of accepting – or not accepting – outside funding methods like the following:

  • Bootstrap If you delay accepting third-party capital, you can call the shots and drive your plan forward. Yet this kind of extended “bootstrapping” may limit the expansion potential for your product or client base.
  • Venture capital If you plan to obtain venture capital, be sure to perform due diligence on the prospective firms. Determine how much control they seek versus the contribution they are willing to make, while also assessing the kinds of introductions and connections they may be able to provide.
  • IPO or M&A While many companies are waiting to go public due to the availability of capital, doing so can raise a number of concerns — keeping employees engaged and staying above water in the event of a funding downturn, for example.

Passion and practicality

Entrepreneurship can provide a person the opportunity to pursue something that they are passionate about, but just as vital as that passion is the grasp and understanding of the practical aspects — considerations of capital-raising and liquidity during the growth cycle, for example — of running a company. Making informed decisions can help develop the product or service into a market leader rather than letting it languish as a great idea with inadequate funding.

Consult with your Private Banking and Investment Group advisor to understand what funding approach makes the most sense given your circumstances.

START UP

 

Idea

  • Create a business plan
  • Research proposed business and competitive environment

 

  • Forecast startup costs
  • Interview attorneys, bankers, CPAs and consultants
 

Formation

  • Decide on an ownership structure
  • Determine form of business (corporation, partnership, LLC)
  • Engage with professional advisors and leverage their areas of expertise
  • Register and file organizational documents
  • Determine tax status
  • Choose a work location

 

  • Set up a payroll and accounting plan
  • Obtain state and local business permits

Employees

  • Build your initial team

Personal

  • Draft individual estate planning documents (e.g., will, business power of attorney)
  • Consider wealth transfer techniques
 

Seed

Budgeting

  • Cash flow projections

Banking

  • Working capital accounts
  • Emergency savings accounts

 

Funding Sources

  • Friends and family
  • Crowd funding
  • Seed money
  • Personal line of credit

 

GROWTH

 

Survival

Business Focus

  • Handling increased sales and customers

Banking

  • Treasury management accounts
  • Card solutions
  • Working line of credit

 

Employees

  • Recruiting new employees
  • Compensation and benefit plans

Funding Sources

  • Angel investors
  • Venture capital
  • Debt financing
 

Expansion

Business Focus

  • Finding new revenue channels
  • Adding new products, services or geography to existing markets

Management Issues

  • Having the right management to handle growth and expansion
  • Potential mergers or acquisitions

 

Banking

  • Equipment leasing
  • Commercial real estate financing
  • Acquisition financing

Funding Sources

  • Later-stage venture funding
  • Debt financing
 

Harvest

Business Focus

  • Product or service improvement

Management Issues

  • Structure a business succession plan
  • Insurance for certain employees
  • Update business continuity (POA, buy-sell)
  • Preserving business culture

 

Employees

  • Focus on retention of key employees
  • Structuring equity/deferred compensation for key employees
  • Personal

  • Continue wealth transfer planning (grantor retained annuity trust, or GRAT, donor advised funds)

A private wealth advisor can help you get started.

Find an advisor