Lenders give you money and you repay it with interest. Investors give you money in exchange for ownership of part of your business. Their investments may come with restrictions—that you have to get approval for transactions over a certain dollar amount, for example, or that you have to set up an independent Board of Directors.
And investors have certain rights, too, which you should discuss with your lawyer before jumping in. Investors can be a great thing for your business. An investor can also be a reliable source for business advice and may have a strong business network that you can draw on. If you do decide that you want to seek funding from investors, how do you draw them in?
What is it that makes them decide to put money into a business? More than anything, investors want to see a return on their investment. Investors are in the business of putting money into growing businesses so they can make money. While each investor will want to make money, the hard part becomes knowing how to woo each prospective investor in a way that piques their interest. Remember, at the end of the day, investors are just people — each investor will have different pain points and different intangible sets of criteria for how they arrive at investment decisions.
We break down the top ten criteria many investors will use so that you can develop your best plan and your best possible pitch to earn capital for your small business funding needs.
As we just covered, investors want to make money. That risk of a decrease in the overall ownership percentage triggers an important term called an anti-dilution protection clause. As the small business owner, the goal is just to understand how to negotiate the clause to serve you best. A liquidation preference is just a fancy way of describing in what order, and how the various owners of a business get paid in the event of a sale or bankruptcy.
Covenants, a legal term that just means promises, are things you promise to do known as affirmative covenants or promise not to do known as negative covenants as the manager of the business. Covenants can include all sorts of things, ranging from a high level requirement that you prepare and distribute monthly or quarterly financial forecasts for the business, to detailed requirements that you maintain certain levels of insurance protection.
For example, having to go to the investor for approval before signing any new contract or making a new hire is going to be a big hassle and will probably hurt your ability to jump on new opportunities as a business. By contrast, having to ask their permission before giving yourself a raise or distributing significant amounts of money is probably a reasonable request.
Taking on an outside investor may seem like the sort of five minute negotiation you see on the Shark Tank, but in truth there are dozens of important legal clauses that you need to understand and negotiate before you can sign a deal.
But understanding the implications of the clauses, instead of just glossing over them and signing whatever is put in front of you, can literally be the difference between a business sale that leaves you a multi-millionaire and one that leaves you looking for another job.
Disclaimer: The purpose of this article is to promote awareness of legal and other issues that may affect business owners, and is not intended to provide either legal or professional advice. How should I pay back the investors in my small business? Recent Articles. Read More. Call Now Free Consultation. Most preference shares have a fixed dividend, while common stocks generally do not. This compares with less than half 44 percent of baby boomers who consider themselves. Macro-economic factors such as interest rates, inflation, unemployment and economic growth often move stock.
What are the 3 principles of investing? Investors buy bonds because: They provide a predictable income stream. Investments Shares Stock market.
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