Pros & Cons of Selling Stock for Capital

If you operate a small or large business, one of your ongoing challenges is ensuring that your company has enough capital to invest in future projects, meet payroll obligations and handle the basic operating costs that fluctuate from day to day. One option for raising capital is selling stock, but not every company is in a good position to sell stock or take on the changes it requires.

Preparation

• Prior to selling stock, you need to make sure that you company is in a financial position that will appeal to potential investors. This means you must have your accounting in order and ready for scrutiny from those who will want to know your operating costs, profit projections and current assets. You'll also need business plans to explain, in detail, how you plan to grow your business in the near- and long-term.

Benefits

• Selling stock for capital has the primary advantage of giving you an influx of cash. You can spend this money in a variety of ways, such as paying off costly debts, hiring new employees or moving into a new office or manufacturing facility where you'll have room to grow. Selling stock can also help legitimize your business within the industry, especially if you attract investors with a history of supporting successful companies.

Types

• There are several ways to sell stock to raise capital. For large businesses, the most common option is filing with the U.S. Securities and Exchange Commission and selling stock to the public through an exchange. Small companies can do the same thing or sell stock to a limited pool of investors, which is known as private placement. You can also offer an employee stock ownership plan (ESOP). This will keep control of your business within the company and provide an added incentive for employees to be productive and develop loyalty.

Regulations

• The U.S. Securities and Exchange Commission oversees stock sales in the United States. However, small businesses that don't offer stock to the public are exempt from this process. According to the SEC, if you wish to sell stock to the public you must file Form S-1, which will include a prospectus that describes your business and also lists any risk factors you face. Businesses that plan to raise less than $10 million may file Form SB-1 instead (as of November 2010), which simplifies the process.

Considerations

• Selling stock to raise capital means you'll be giving up a great deal of control in your business. Stockholders will be able to vote for board members and may voice dissatisfaction with company policies or actions. If you founded the business on your own, you'll no longer have complete control but instead bear responsibility to your stockholders who also have money on the line. Selling stock to the public also means your business's value will depend on what buyers are willing to pay for the stock and give control of your financial prospects over to often-unpredictable market forces.