Taking someone else’s money for your business is a serious move with serious consequences.
Your growing business may require capital. That may take the form of money blended from several sources, including:
The decision to engage investors is a serious one. After all, it may involve releasing some ownership of your business. Then again, multiple stakeholders might be just what your business needs to ascend to the next level of success.
Should you take investor money? Consider these advantages and disadvantages.
- Additional value. An investor can bring value to your business beyond money. An investor wants to see your business succeed. Investors can contribute money, expertise, connections and resources.
- It’s not your money. Too many entrepreneurs put all of their own money on the line. While it’s important to have ‘some skin in the game’ in terms of personal investment, money from outside investors will help minimize your own financial risk.
- More money. Investors can likely contribute larger amounts of capital than you can personally generate from savings, cash flow and profits.
- Advocacy. Investors obviously want to see your business succeed so they can extract a profit. To help you, many investors are willing to advocate for your business by leveraging their professional network. For example, an investor might introduce you to a major source of new business.
- Obligation. Taking someone else’s money, either as a loan or investment, means you must repay them someday.
An investor wants to enjoy a return on their financial investment in the form of interest, dividends or increased share value. They want to make a profit. Are you comfortable with that obligation?
- Shared ownership. A traditional investment scenario involves giving the investor shares in your corporation in return for funds. While you should ideally enjoy control of your company by retaining a majority of shares, you’ll still have to answer to the other shareholders on business issues regarding profits, sales, expenses, management decisions and overall company performance.
Your shareholders are legally entitled to convene with management regularly (usually in the form of an Annual General Meeting) where they may vote on business matters.
- Less profit. Your investors want to see a return on their investment, so you can expect to earn less money as you must share business profits. Because you’ll own fewer shares you’ll receive a smaller share of profits.
It’s worth a conversation with your team of advisors before you accept any scenario involving investors. Consult with your accountant, lawyer, financial planner and banker to obtain a healthy variety of opinions. And, speak with other business owners about their experience with investors.
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