When starting a business and looking for much-needed funding, it would be naive to think that any investment in your business may be due to your good looks, your excellent presentation or even the profitability figures on offer.
Seriously, and without mincing words, most investors, if not all in some cases, come into your business for an outright level of scrutiny. So, if as an entrepreneur you seek complete control of your own business, with no one looking over your shoulder, you should learn to work within the limits of your own resources, a process called business start-up. (more on that later).
Starting with the obvious, mostly described in the investor’s prospectus, SAFE documents, articles of incorporation, the fine print of convertible notes, even verbal agreements though never recommended, most investors will come into your business with a string of accompaniment. Everything you need to be adequately prepared for to be successful.
While some investors will partner with you because they have knowledge or access to knowledge, finance or people that you may need to thrive in your given business and thus become active investors helping you reach new heights, perhaps only dreamed of before, other investments in your business may be self-centered in nature while still others depend on greed and may insist on liquidating or selling the business at the first sign of profits, no matter how small and as long as they cover or even exceed their own expenses in the business.
So, let’s look at some of the positives and negatives of investor funding and how to navigate the less palatable landmines you may encounter on your business journey to greatness.
First of all and as previously stated, although some investors will come to your company with a wealth of experience, connections and/or access to the funding pool that you may need, there could be a tendency to define the follow-up this way. of success, more commonly known as your key performance indicators (KPIs), much higher than what you initially proposed. And while setting the bar higher than expected can be an advantage, you should also be wary of growing too fast too fast. Like a child learning only to crawl and then walk, anything worth building takes time to build, like any good business idea. Not to mention the burnout you could experience from blindly rushing to hit set metrics in improbable time frames.
Some of these investors may even snuff out a previous idea that you had hoped to execute at a certain pre-planned timeline in your business growth curve, deeming the idea too shallow or not profitable enough to achieve the goals you have now set yourself. fixed. So while having such knowledgeable investors can be a blessing, it’s always good to have checks and balances in place to make sure they don’t interfere too much with your vision. In addition to possibly having a lawyer or a relationship with a law firm, a properly drafted investor document outlining their role, vis-à-vis yours, as well as that of the rest of the team, is an excellent way to avoid such unsavory incidents. never happen.
Another advantage of investor funding over banks is that whether you are successful or not, the bank expects their money to be returned, in full, and with interest. If your business or idea fails however, some investors are willing to dive in with you, however, make no mistake, accepting funding is also a part of your business and its earnings, present and future, do not belong to you. more. The more money you receive, the more equity you have to give up, and in some cases that can be a lot. So 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 receiving phone calls and inquiries at ungodly times of the day. An easy step to curb this is to grow gradually and accept funding in small chunks. Ensuring you maintain equity control over the business can save you a lot of investor headaches and keep critical decision-making under your control.
But, remember, the money you received is still a loan. Some investors are impatient, others reckless and only see your financing request as a temporary savings account outside the traditional banking system. Don’t be surprised if you get a call a few weeks or even days after an investment asking for a refund citing family or work issues and the need for immediate cash. Clearly indicating an investment lock-up period in the prospectus can be of great help. However, and since some business activities never go as planned and on schedule, having a little extra cash at your disposal never hurts. So, asking for a little more than your business actually needs, maybe even a little more, can be reassuring about business continuity; however caution and frugality must be your watchword because many companies have gone bankrupt due to excess liquidity. And yes, there is such a thing.
Some investors, regardless of their investments, still expect you to pay for every advice you ask them. Others will still offer unsolicited advice, then a few days later send an invoice if it works to your advantage. With these, you should exercise caution as all possible scenarios may not be covered in your investor documentation. Always keep your investors informed of the latest company and industry happenings, but choose your advisors carefully, as some may want to get out of your hands but still retain some form of control.
Always be prepared to do your due diligence. Accepting an investment means that your entity is no longer private, at least in the traditional sense, therefore some investors will require constant updating of your financial records, as well as anything else that documents the value or character. unique to your business, especially assets such as intellectual property. Arming your business with a confidentiality agreement that ensures certain information remains private is well advised. You don’t want that investor walking away with vital information about the business and possibly selling it to the highest bidder without their consent.
Finally, remember, debt is better than equity. Although some investors may require a level of control independent of signing a debt agreement, most such agreements, such as commercial paper, still leave you with a considerable level of control. However, debt, more often than not, is short-term and carries higher repayments and incentives than equity investments. Some companies go years without enticing their stock investors, which is good for liquidity. So, be sure to put your need for external financing through careful consideration before choosing the best one for your business.
Overall, while having a well-drafted investor document stating your investment need and its related use will greatly improve access to finance, externally ensure proper case law in regarding how your investors come in and what capacity they will have within your business.
Essien Brain is a Business Consultant, with expertise in Crowdfunding and business plan/proposal formulation and design, working and living in Lagos State.