Avoid Crowd Funding and Acquire Human Capital

By:  Gabriel Rotman

Since President Obama signed the JOBS Act into law this week, small businesses and entrepreneurs have gained another option to raise funds. They’ll have to wait until early 2013, though, because the Securities and Exchange Commission has 270 days to write up the rules and set up the registration process. As the bill’s name suggests, the JOBS Act is supposed to drive the recovery and creation of jobs, but with it comes its faults. Many financial analysts, lawyers, and bloggers have made their case that people with less than $1 million in assets will not have the capability to avoid scam artists that use the new law to create phony investments. As a result, crowd funding may not be the best option to create new jobs.

Small businesses and entrepreneurs that use crowd funding as a method to raise financial capital will most likely have to face a large amount of investors. As Jill Radloff explains, “Acquiring numerous shareholders through crowdfunding can have unintended consequences.  It likely will make investments by venture capital groups impossible and can significantly complicate or block an exit.  An entrepreneur can lose control of his or her company.  It will require an entrepreneur to function as an investor relations officer and respond to numerous inquiries from shareholders.  Lastly, the likely impersonal nature of crowdfunding increases the possibility of attracting disruptive investors.” As the effects for the crowd funding option become clearer to small businesses and entrepreneurs, they may want to avoid the option altogether to protect themselves from its overbearing consequences.

One of the more tried and trusted methods to create new jobs include using the concept of sweat equity to acquire human capital. Small businesses and entrepreneurs have been using sweat equity for decades to create their initial team. Companies that relied on sweat equity investors include Microsoft, Apple, and Dell, and by all means, these companies created thousands of jobs. The founders of these firms convinced their initial team members to work off a combination of equity and cash, which by characterization is a form of sweat equity compensation. Sweat equity is defined as offering one’s sweat, or services, in exchange for equity. Using this method, small businesses and entrepreneurs can avoid short term investments from the crowd by convincing managers, consultants, and/or independent service providers to provide their expertise in exchange for ownership in the company plus any cash that becomes available throughout the development of the business.

According to successful entrepreneur Mark Cuban, sweat equity is the best start-up capital. Using sweat equity to acquire human capital enables small businesses and entrepreneurs to rely on the collective sum of the attributes, life experience, knowledge, inventiveness, energy, and enthusiasm that its people choose to invest in their work. Evidently, human capital is a powerful asset. Even without any funds available, a team of skilled, experienced, knowledgeable, energetic, and enthusiastic people can be capable of anything. Entrepreneurs may realize that soon after acquiring a powerful team, full of successful people, your company will be more likely to develop a business that produces positive cash flows, which most people, especially investors, will see as a sign of viability.

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About sequityconnection

Sweat Equity Connection is the only portal connecting startups with potential employees and co-founders who are interested in helping your idea prevail, and are interested in equity compensation to begin.
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