Three Honest Ways to Raise Start-Up Money

By Asheesh Advani of Entrepreneur.com.

Entrepreneurs tend to exaggerate. They exaggerate the success of their business when talking to start-up investors. They exaggerate the market potential of their products to find distribution partners. They exaggerate the soundness of their strategy to recruit employees.

Funding your business without exaggerating isn't easy, but there's a clear line between optimistic exaggeration and outright fabrication. Here are some guidelines to help you get your start-up off the ground without selling your soul or spinning a web of lies.

1. Develop financial projections that are rooted in verifiable assumptions. Venture capital firms and angel investors typically want to see financial projections that shoot up like a hockey stick. Entrepreneurs often feel compelled to exaggerate projections to look like their businesses can reach a billion dollars of market value in a few years.

There's no point in just fabricating a set of projections that aren't based on reality. One way to build a set of realistic projections is to start with business drivers that can be discussed and debated with investors.

For example, if you're selling widgets that depend on the cost of oil, develop a set of financial projections that link market value to the number of widgets you plan to sell and the changing price of oil. This will show billion-dollar market value and allow investors to understand what assumptions you're basing your growth on.

2. Write paychecks that don't bounce, but increase as the business grows. One of the most difficult tasks for entrepreneurs is to convince talented employees to join the team and stay on the team before their company is profitable or stable. As a start-up business owner, you're faced with a choice: Pay your employee a market salary (say $150,000 per year) and take a bet that you can grow the business to justify the salary, or share risk with your employee by paying a below-market salary (say, $75,000 per year) plus equity incentives (worth $75,000 or more).