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How Can Astute Entrepreneurs Reduce Risk On Share Capital?

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How Can Astute Entrepreneurs Reduce Risk On Share Capital?

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Who is an astute entrepreneur? Well, this is someone who has recognized an opportunity where there are challenges or is about to launch a new business with the hope of making it successful. As you can already see, most astute entrepreneurs are risk-takers.

Below we will discuss some of the methods that can be used to reduce risk on the share capital.

What Is A Risk?

Risk is inherent in any business, and it refers to the possibility that an entrepreneur may not be able to recover the invested capital.

This can happen due to various factors such as economic recession, political instability, natural disasters, and so on. Therefore, entrepreneurs need to identify and assess risk before investing in a new business.

How Can Astute Entrepreneurs Reduce Risk On The Share Capital?

Doing A Feasibility Study

This is one of the most important steps that should be taken before startup investing. The purpose of a feasibility study is to identify and assess all the risks associated with the proposed business. You can conduct a study by yourself or hire a consultant.

Getting Advice From Experts

Astute entrepreneurs should seek advice from people who have conducted feasibility studies, and they might be able to identify flaws in the study that you may not be aware of.

An expert can advise you to abandon a project that is not viable or offer suggestions on how to reduce the risk.

Draw Up An Agreement With Investors

An agreement between an entrepreneur and an investor should spell out the risks associated with the investment. This will help to protect both parties in case of any unforeseen events.

If investors are interested in what you have to offer, they will be more willing to sign an agreement.

Use An Existing Business Model

If you are embarking on a new business venture, it might be wise to find out if any other similar business has been successful.

This will help you come up with ideas on how to reduce the risk on the share capital.

Sector Diversification

Investing in different economy sectors can help reduce the overall risk exposure of a business. While it is impossible to have a 100% diversified portfolio, spreading your investment across different sectors will definitely minimize risk.

For example, if you are in the technology sector and there is an economic downturn, your business may be adversely affected. However, if you have investments in other sectors such as real estate, you can manage to protect your share capital from such risks.

Employee Stock Option Plan (ESOP)

This involves employee compensation plans that are offered by a business. They allow employees to buy equity or company stocks at a predetermined price, and this is usually specified during the hiring process of an individual.

There are many benefits of having an ESOP, and one of them is that it helps to reduce the amount of risk on the share capital. This is because the employees become owners of the company, and they have a vested interest in ensuring that the company does well.

Pro-Rata Share Offer

Another way in which astute entrepreneurs can reduce the risk involved in a business is by offering pro-rata shares to all shareholders. In this situation, when a person purchases shares in a company, they are entitled to what percentage of ownership they have based on the total number of shares issued.

This ensures that all shareholders are diluted equally when equity or the company’s stocks are sold. This helps to reduce the risk on the share capital as it is spread among all the shareholders.

Stage Diversification (Early And Late-Stage)

Another method used to reduce the risk on the share capital is by moving from one stage of funding to another. This is referred to as stage diversification or multi-stage financing. It involves an entrepreneur who starts small, bootstrapping their businesses, and then gradually moves on to having seed funds, angel investors, and eventually ventures capitalists.

This can be an expensive way of reducing risk, but it is worth it as you are able to reduce the overall risk on the share capital.

Time Diversification

It’s important for all investors to consider this diversification idea. The more diverse the portfolio, the less risk is involved in investing. By spreading out commitments over a period of three to five years, companies get time diversity; this is essential since it takes time for new opportunities to come up and mature.

This way, when one opportunity is not performing well, the other will offset the losses. Another benefit of having a diversified portfolio is that it helps in reducing the risk on the share capital.

Final Thoughts

In conclusion, when starting a new business, one should try and minimize risks since this will ensure that their business is successful in the long term.

The methods mentioned above will definitely help to reduce the risks involved and ensure that a business is successful.

Featured Image: Supplied by the author
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