Small business and startup owners often ask how to get connected with an investor. Strangers willing to invest their hard-earned cash into supporting your dream are hard to find and, when you do find one, they will want to own part of your dream in exchange for their “investment.” Quickly they go from “investor” to business partner and that is where the trouble begins.
My advice is to figure a way to get your funding without using an investor. Here is why:
1. Investors want to own a piece of your business. That is how they differ from a lender. They come to ownership with their own ideas that may not align with yours especially in the beginning when you are trying to figure out how to run your dream as a business or later when times get tough.
2. Once the investor becomes an owner, you can’t get rid of them very easily unless they want to go. In that case, the investor will set their exit price and you may have to pay them more money than they invested.
3. In case your investor is not financially sound, their creditors and even soon to be ex-spouses are going to want a part of your business. If they die, that creates another problem for you.
4. If you need a loan, credit from a supplier, or a lease, the investor will be required to provide their personal guarantee for the debt or the lease. That is the real world. They may refuse to sign or cooperate and the opportunity you desperately need slips away.
5. Investors want to be paid first before you are paid and in some cases before other creditors of your business get paid. That can kill your cash flow.
If you can’t find a bank to lend you money for your business you may have to dip into your own personal resources like retirement savings, credit cards or an equity line on your home for funding. All these sources carry their own risk and caution should be used before you crack open your own piggy bank or run up your credit cards.
If there is an angel investor who wants to contribute financial support to help you turn your dream into a business, make them a “lender” and never let them be an investor or owner. If you do decide to take their money hire a lawyer to write up a proper agreement that specifies who is responsible for running the business and a detailed exit plan for the investor. If the money is a loan, have a proper loan agreement with specific re-payment terms set out. No point in losing your dream, and your money as well as ruining important personal or family relationships. This is one of those times when hiring a lawyer makes sense. This is not a do it yourself or legal zoom type of agreement.