I really should title this blog post 1001 things I didn’t know about investors before I took the money but for brevity sake I’ll tackle the top 3.
Taking an investment is essentially a marriage but more like a shot gun wedding.
In the beginning everyone is excited and happy the woo’ing is heavy on both sides. They come in and look at your process, you go and check out their office, a few rounds of dinner and drinks. I like you, you like me, your numbers add up, term sheet looks good lets bring in the lawyers and get married However this is usually quick and not so quick process all at the same time. Honestly once you get to the paperwork it’s more like a painful prenuptial agreement where everyone is questioning trust and work ethic, trying to get their best interest on paper just incase everything goes wrong but somehow you should not really take it personal. You really need to take your time to ask the right questions about company culture and practices and realize that you will be in weekly if not daily contact with this person or company. If you are able to reach out to other companies they have invested in to get an idea of what it is like to really work with this company on a day to day long term basis. Just like dating everything they do is cute until you have to wake up to them day in and day out and notice their bad habits like cutting their toenails in the bed. In short do your research and don’t get blinded by the money.
There’s no such thing as a silent partner it’s more like loud whispers or yelling.
Ask yourself the honest question…How silent are you when you give someone money? Why would you expect someone that has given you thousands or even millions of dollars to not want to have some sort of say so about how their money is being spent. No matter if they have 1% equity or 51% they have given you their money and they may have a high level of expertise in your field they will want to have an input. Set and manage expectations in the very beginning. Be careful of how much you call your investor asking for advice and resources because you want to make sure that they feel confident about you, your team and your circle. Just like the overbearing helicopter parent that has just let their child extend their curfew don’t give them reason to feel like they need to cross every “T” and dot every “I” for you. Make sure your every move makes your investor feel confident that they have made the right decision and that they can let you run your business the way you want to run your business.
Define your exit plan before you sign, because they have
Just like Hollywood shot gun weddings the majority of investors are not looking to grow old with you. They see huge potential in your industry and of course a high ROI. The view of most investors is that there must be an identifiable exit route and an identifiable exit valuation before investing. Some of the best advice I received a few years ago was to determine if you are going to sell your business or keep it in the family for generations either way you need to treat your business like you are going to sell it because it gets you in a scaleable mindset from day one. When you take on investor money its a little different. Are you going to sell and everyone cash out, sell and stay on to run the business as an employee or make enough money to buy out your investor. Your investor is not a charity, they are looking to eventually cash out one way or another and have made that decision before extending a term sheet to you. You need to make sure you have your own exit plan decision before you get the term sheet.
Felecia Hatcher will be speaking at Ideas are Worthless – Austin on the panel After Funding: Managing the Investor Relationship. Sign up here for Ideas Are Worthless Austin: http://ideasareworthless-austin.eventbrite.com/