But many business owners are reluctant to accept conditions and strategic moves the investors have linked to the funding deal. So it's very important to understand the way return is measured and anticipated by the funding source. This can clear much of the air in the early stages of the negotiation and perhaps set the stage for a more realistic chance of closing a deal. The first is the initial form of the funding. This is where the baseline percentage return starts.
Notes often have assets pledged as collateral.
Preferred stock removes that voting right but locks the firm into a fixed after-tax dividend payment prior to calculating company earnings. And unsecured debt only works if the new business has a solid lock on significant revenues from one or more large and reliable buyers who have long-term contracts with the new venture. The second issue involves management's impact on projected future cash flows. Regardless of the debt or equity position, investors increase their required return when there's less certainty in the senior team's ability to deliver strong and growing sales and manage costs profitably. The third issue involves investment timing and the strength of the proposed exit strategy.