As a small business operator you value your independence. Yet, there may be times when you wish that other people would back your business, whether they be known as angel investors or someone you know, like friends and family. However, financial backing is not something that should be taken lightly, a topic we’ll explore here.
The moment you give someone a stake in your enterprise is the very moment when they will attempt to exercise some sort of leverage over you. Certainly, that is understandable as they have a financial investment they want to protect. Yet, giving them too much say can tie your hands.
When searching for any investor make it clear what you want and what you will allow. Specifically, never allow investors to have day-to-day say in your business as you will find that interference suffocating. Definitely, you might allow investors to provide input, attend an occasional meeting or have limited say elsewhere. Certainly, those restrictions will limit your pool of investors, but it will also keep you from feeling closed in.
If you have people working for you, including managers, investors may look at management pay as an issue when investing in your enterprise. In particular, angel investors are notorious in this area and may require you to cap compensation in a remuneration quid quo pro.
This is another area where an investor can tie your hands. Indeed, if you have a key manager who is worth his weight in cold to you, then you may lose this individual if such restrictions are in place. Certainly, you understand your business best and should make compensation decisions based on what you know. Such a clause can also restrict who you hire if you plan to expand.
Be Mindful of Provisos
If you do attract an angel investor know that you will be signing some sort of contract as part of the investment. This means you will need to procure an attorney to ensure that your rights are safeguarded. In addition, your attorney will scrutinize every clause judiciously.
Beware of any clause that can cancel the agreement if certain provisions are not met. Indeed, the investor may require that every covenant and user agreement you have ever entered in to be scrutinized. Further, there could be provisions about laws and regulations you must follow or risk defaulting the agreement if you do not comply. That could result in an immediate calling in of the funds invested, a prospect you might imagine would have devastating consequences.
One restriction can lead to another one, including some that may not be easy to digest. Therefore, hire an attorney familiar with small business and angel investors as well as other types of financial arrangements.
The bottom line is that you want to maintain full control over your business without investors dictating your every move. If you do work with angel investors, the demands can grow as you go beyond first round funding. Be prepared to hold your ground when you need to as well as to find places where compromise may be warranted.
See Also — Where to Find Investors For Your Business