When starting a business and sourcing much-needed funding, it will be naïve to think that any investment into your business may have come because of perhaps your good looks, excellent presentation or even proposed business profitability numbers.
Seriously, and without mincing words, most investors, if not all in certain cases, come into your business for a level of control, pure and simple. Thus, if as an entrepreneur you seek total control of your own venture, with no one looking over your shoulder, you should learn to work within the limits of your own resources, a process called business bootstrapping (more on this later).
Starting with the obvious, most times outlined in the investor prospectus, Simple Agreements for Equity (SAFEs) documents, Articles of Association, to Convertible Note fine prints, to even verbal agreements though not ever recommended, most investors will come into your business with an accompaniment of strings. All of which you must be adequately prepared for are you to succeed.
While some investors will partner with you because they have some knowledge or access to the knowledge, finance or people you may need to thrive in your given business and thus become Active Investors helping you reach new heights, perhaps only previously dreamed of, other investments into your business may be egocentric in nature while others still, hinged on greed and may insist on business liquidation or selloff at the first sign of profits no matter how small and as long as it covers or even surpasses their own outlay into the business.
So, let us examine some of the positives and negatives of investor funding and how to traverse of the less palatable landmines you may encounter on your business journey to greatness.
Firstly and as earlier stated, while some investors will come into your business with a wealth of experience, connections and/or access to the pool of financing you may need, there might be a tendency to thus set the success tracker, more commonly known as your Key Performance Indicators (KPIs), much higher than you originally proposed. And as much as setting the bar higher than planned might be a benefit, you must also be wary of growing too fast too quickly. Like an infant only learning to crawl then walk, everything worth its foundation takes time to build as does any good business idea. Not to mention the burnout you could suffer from a mindless scramble to meet set indicators within improbable timelines.
Some of these investors may even stifle a previous idea that you had hoped to execute at a certain preplanned timeline in your business growth curve, deeming the idea too shallow or not profitable enough to reach the goals you have now found yourself being set for you. Thus, and as much as having such knowledgeable investors can be a blessing it is always good to have checks and balances in place to ensure they do not interfere too much with your vision. Along with possibly having a lawyer or connections to a law firm comes highly recommended, a properly prewritten investor document stating their role, vis–a–vis, yours, along with the rest of the team’s, is a great way to prevent such unsavoury incidences from ever happening.
One other pro of investor finance over the banks’ is, whether you succeed or not, the bank expects its money back, all of it, and with interest. If your company or idea falls flat however, some investors are willing to take the dive with you, however, do not be deceived, accepting funding also means a part of your company and its earnings, present and future, no longer becomes yours. The more money you receive, the more equity you have to give up, and in some cases, it can be a lot. Thus, the less equity you have, the less your entity will feel like yours. You may even find yourself, a pseudo employee still taking orders and getting phone calls and inquiries at unholy hours of the day. One easy step to curb this is to grow gradually and accept funding in small lumps. Ensuring you maintain controlling equity over the company can save you a lot of investor headaches and keep critical decision making within your control.
But, remember, the monies you have received is still a loan. Some investors are impatient, others, rash, and just see your request for funding as a temporary savings account outside the traditional banking system. Do not be surprised should you get a call a few short weeks or even days after an investment requesting a refund citing family or business troubles and the need for immediate liquidity. Clearly stating an investment lock–in period within the prospectus can be of great aid. However, and since some business endeavours never go as envisioned and within anticipated timelines, having a little extra liquidity at your disposal never hurts. Thus, asking for a little more than your business actually needs, perhaps even a little bit more still, can be reassuring with regards to business continuity; however prudence and frugality should be your watchword as many a-company have gone under thanks to over–liquidity. And yes, there is such a thing.
Some investors, regardless of their investments will still expect you to pay for every advice you come to them seeking. Others still will offer unsolicited advice then days later, send an invoice if it works to your advantage. With these you must tread carefully as not every possible scenario may be covered in your investor documentation. Always keep your investors undated on latest happenings to the business and within the industry, however warily chose your advisors as some may be in to leech off you while still maintaining some form of control.
Always be prepared for due diligence. Accepting investment means your entity is no longer private, at least in the traditional sense, therefore, some investors will demand constant update of your financial records, as well as anything else that documents the value or uniqueness of your business, more especially such assets as intellectual property. Arming your business with a confidentiality agreement that ensures some information remain private is well advised. You do not want that investor walking away with vital company information and perhaps selling it to the highest bidder without consent.
Finally, remember, debt is better than equity. Though some investors may demand a level of control regardless of signing a debt agreement, most of these agreements, such as commercial papers, still leave your with a considerable level of control. However, debt, more often than not, is short term and commands higher paybacks and incentives than equity investments. Some companies go years without incentivizing their equity investors, which is good for liquidity. Thus, be sure to subject your need for external financing to careful scrutiny before choosing which is best for your business.
On the whole, as much as having a well-prewritten investor document stating your need for investment and its attendant use will greatly enhance access to funding, be sure to extraneously ensure proper jurisprudence with regards how your investors are coming in and what capacity they will play within your business.
Brain Essien is a business consultant, with expertise in crowdfunding and business plan/proposal formulation and design, working and living in Lagos State.
Very informative. I really found the useful. Thanks a bundle
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