Business Sense - Starting a Business, Need money? Be Careful Where You Get It.
By Dr Paul E Adams | July 31, 2002
"The need for capital can cause you to lose control" - Henry Ford
Yes, there are “angels” who have money to invest; but most have stringent requirements your new business may not meet. Some “angels” are willing to be silent and play no part in the running of your business; others insist on a management voice. Some are professional management or venture capital companies who specialize in finding start-up companies with a potential that they can orchestrate to a future public stock offering. These firms are selective and reject most inquires.
You may wish to look at the classified ads of “investors” seeking opportunities. My experience with such individuals is that most do not understand the problems of a start-up business. They become impatient and meddlesome. If you place an ad, expect curiosity seekers, opportunists, and sleight of hand artists. If you decide to ask friends and relatives, (which may be your best source) I caution you against painting an overly optimistic future. If you fail, and lose their money, it may not be pleasant. I have a friend who lent his son a portion of his retirement to finance a small foundry. It went bust. The loss was difficult for both- it strained their relationship for sometime.
Investor expectations can affect your future relationship with your investor(s). They invest with you-leaving the safety of banks and the relative safety of the stock markets-expecting high rates of return and capital gains. You must make them realize that if they become unhappy and demand to cash out, you will not be able to write a check. Their money is, most likely, invested in equipment, inventory, customer credit, or others' assets and is not immediately available. Unlike a publicly traded stock, your corporation is not a liquid investment. If you wish a good relationship, any person investing in your business should understand it is a long-term commitment, not a short-term opportunity.
Control may be another issue. Knowledgeable investors may shy away from a minority position in a small private corporation realizing that if the company's performance is not to their liking they will have little voice and little chance of liquidating their investment.
If you are asked to give up control, you need legal advice to protect yourself. Trading a major portion of your equity for money is tricky. If you are successful, you may feel later on that you sold too cheap. On the other hand, if your business flounders, you may be pushed out. Give up control only when you have no other choice.
You Can Trust Me
Don't fall for the fantasy; "we can trust each other". You may trust the person you are in business with, however, your associate may have a spouse- because of death or illness- who will become your new "partner". And what about your family- will they be protected if something happens to you?
To some, a handshake is a macho and romantic way of doing business. While such deal making agreements are great theater, in real life they are risky and potentially troublesome. Misunderstandings and conflict between partners or amongst investors are common- disagreements and bad feelings can evolve from many circumstances. Success creates as many “collaborate” problems as failure. Do you know how you will react to losing your money or the opportunity to grab a windfall?
It is important to your company's health to stay away from “fuzzy” understandings. Clarity is necessary. Lack of definition and direction make it is easy to misunderstand each other. The right time to develop an understanding that is clear, specific, and addresses the problems that you can anticipate arising is when you start your business-not later. If you think discussing such issues will frighten off an investor, you are not being candid. As anyone who has experienced investor in-fighting will tell you, deal with the possibility of any misunderstanding at the start of the relationship not later- It may put you out of business.
Put it on Paper
Conversations are easy to deny as well as misunderstand. Put your understanding of ownership and investor status in writing. If you can't, maybe your understanding of the proposed relationship is not clear.
To help you formulate your thinking, ask yourself the following questions:
- What do I want my associate(s) or investor(s) to do in my company?
- How much reward ($) do I feel they should be entitled to?
- What do I do if I am not able to work harmoniously with the person(s)?
- How do I deal with a problem of different expectations?
- What do I do if they want their money back?
The answers should be the basis for any agreement that you will have with your fellow owners. If you cannot agree to agree, what do you think will happen when money is involved?