I’m often asked this question by businesses that are ready to scale. My answer is always it depends. I’ve seen businesses thrive through investments and I’ve seen an equal number lose their edge because the investors did not have the culture, core values or drive that the founder/owner brought to the table. You see, bringing on an investor means that you are going to allow someone else to have a say, (or more than a say) depending on the equity given in how you run your business. Are you prepared for that??
When you receive a business loan, the equity and stakes related to ownership are not affected.
Here’s a list of advantages and disadvantages of going the investor/investment route. I’m not advocating one over the other– just offering some things to consider…
Advantages of going with an investor
- Money and support/expertise. An investor will provide guidance and expertise you need to take your business to the next level. Think Shark Tank and what those investors always say: “you’re getting my money and my contacts and my expertise”.
- Investors may be more flexible than a traditional bank loan officer. Is your company considered high risk? The bank will be more conservative in their decision making than an investor might be. You might be able to more readily convince an investor about the potential of your business. A bank officer needs to see demonstrated success.
- You may not have to give a personal guarantee such as you would have to give for a bank loan. Be intentional about that in the negotiation process!
- Potential for additional funding. Because the investor is involved in the business and has an ownership stake therein, they are more willing to further invest to make sure that their investment will pay off.
- Ownership– are you willing to give up ownership and how much ownership are you willing to give up in exchange for cash and expertise?
- Decision making goes hand in hand with ownership and can be the cause of great friction. Be sure to spell out the decision making process and how decisions will be made (i.e. consensus, vote, veto powers).
- Look beyond the immediate to the future/end game. Are you planning to sell the business? Keep in mind that the equity share extends to the sale as well. Investors expect a return on their investment and your contract should clearly spell that out.
It is also very important to consider your business goals and your business culture. Go into an investment relationship with your eyes wide open and with the expectations clearly spelled out. Taking on investors has been likened to getting married. There should be a courtship where you get to know each other. Then there’s the inevitable period of adjustment (this is where the expectations kick in) and then hopefully mutual support and growth. And yes (!) you need a contract. Yes, you need to take the time to dot all the “i”s and cross all the “t”s, because after all, this will most likely be a long term and intimate relationship.
Have more questions? Please let us know.
“Bank loan or investor worksheet”
Not a certified WBE? Click here for information on how you can gain access and opportunities for business development.
Click here for more information on how you can join the Her Community Membership Program