Many start-up and small businesses consider bringing in an investor or a partner to take them to the “next level”. There are many questions and issues, though, that should be answered and addressed before doing so. Bringing in an investor is not always the right decision. Here are five key questions that should be answered before making the investor leap.
#1 What Resources Does the Business Need To Get To the Next Level?
This is probably the most important question to ask. If you don’t know what you need, then you cannot determine if the interested investor is right for you. Is it cash infusion? Is it industry knowledge or experience? Is it industry connections that you are after? Whatever the case may be, you want to identify that certain need that you believe will take you to the next level of growth and success and ensure that the interested investor has the ability to bring that asset to your business.
#2 Does the Investor’s Vision Align with Your Vision?
The importance of this issue cannot be overstated. Many businesses hear “interested investor” and they begin to see dollar signs. The decision is more complicated than that, though. The issue of “vision” and issues related to the vision of the business are where many business disputes between owners and investors arise and should be carefully considered.
Most often, the business is the owner’s baby and he/she started with a very specific vision in mind for the business. Likewise, an investor who is putting his or her money on the line, has a very specific vision for the company, which he or she believes will offer the business the best chance to turn a profit and provide him or her with a worthwhile return on investment.
However, when those two visions do not align, trouble is sure to brew. Sooner or later a conflict, perhaps an impassable one, will occur and the relationship will be doomed. The parties should have a very thorough and honest conversation before even discussing financial terms or details, about their respective visions and ensure that they are both on the same page with respect to the direction of the company.
#3 What Does the Investor Want In Return?
Determining what the investor wants in return for his or her investment is also a crucial step in this process. Often times what the investor wants is control by way of decision making authority. Perhaps less often, the investor simply wants a reasonable monetary return on his or her investment to justify the risk of making the investment in the first place.
The business owner considering accepting the investment must determine the amount of control he/she is willing to surrender, if any. If it is not control that the investor wants, then what is a reasonable rate of return for the investor? The parties must negotiate these points, but it is imperative that the business owner puts serious thought into answering these questions before those negotiations begin. Professional investors, such as angel investors and venture capitalists, are well versed and experienced in these negotiations. The business owner needs to be well prepared for these discussions.
#4 Are You Ready for A Roomie?
Business owners have to remember that often times bringing in an investor does not simply mean accepting money and promising a return. Most often when a business offers an equity stake to an investor, that investor, whether as a member of a limited liability company or a stockholder of a corporation, will then have rights as a member or stockholder, including the right to review the books and records of the entity and perhaps the right to bring a suit against the other equity holders for what they feel is a wrong that has been committed against the entity.
Business owners must ask whether it is worth bringing someone, with whom they may not have a long-term, trusted relationship, into their “house”. There are ways to accept money without bringing someone on as an equity holder, such as a loan. A business owner may even hedge their bet a bit by offering convertible debt, pursuant to which no equity stake is granted until/unless certain benchmarks are reached by the entity. These other options should be considered as well before allowing an investor on the inside of the house.
#5 Will Bringing In An Investor Actually Take You To the Next Level?
Perhaps the biggest question to answer, which goes back to my first point, is whether bringing in an investor will actually take the business to the next level. Are there other ways to get to where you want to go? Will a consultant, contractor, coach or a mentor help your business in as similar way without giving up control or letting someone into the business?
Answering these five questions before you negotiate and accept an investment is crucial. There are many ways to accomplish the objective of funding your business or getting the help you need to take your business to the next level. Sometimes accepting an investment is worthwhile and truly necessary to get to where you want to go. A business owner simply needs to make sure that bringing in the investor makes sense, on a variety of levels, for the business.