Are you considering bringing an investor into your business? Is the prospect of bringing someone else into your business scary? If you are thinking this way, don’t worry, you are not alone.
In this article, I focus on the top three considerations I see as important when bringing in an investor. If you follow this advice, you will be able to avoid the common problems that come up in this type of transaction.
Who is the investor?
The main consideration for both business owner and investor is whether they can work together. You should not look for just any investor; you need to consider the role they will take in the business as well as the legal documentation that will define the role.
What is the role of the investor?
When you bring an investor into your business you need to clearly define the role they will play in your business.
An investor will be investing a sum of money in your business, and naturally will want information relating to your business. However, you need to set the boundaries of their role.
This can include factors such as:
- What is their level of involvement in the day-to-day management of the business?
- Will they do any work in the business? For example: Will they have a say in management decisions? Will they deliver your product or service? Will they have a say in marketing?
- Do they have any right to tell you what to do with their money?
- What are your obligations for reporting to the investor? This is critical: How often does the investor want a report, and exactly what information do they want to make sure they are kept informed about the business?
The right legal documentation
Once you determine the role the investor will take in your business, you must put the right legal documentation in place. People often think they don’t need to do this because everyone is on the same page and lawyers will just complicate matters.
The proper agreement will clearly set out the responsibilities and boundaries of all the parties in relation to the investor’s role. There is no one-size-fits-all way of analysing the investor; a business owner needs to carefully consider all these points and make the decision on whether to bring the investor in.
The process of defining the potential investor’s role and documenting that role will tell you if the relationship is likely to work. If you don’t like how the investor conducts themselves in those discussions, or you feel they will not honour their commitment, then you need to reconsider if this investor is the right one for you.
