Taking on an Investor For Your Business? Here’s What You Need to Know

Legal AdviceOctober 16, 2021

Once your new business starts taking off, the smell of success surely starts disseminating. Best believe that it won’t be long before investors will be rat-tat-tatting at your door, looking to take a bit of that success (read: money) for themselves. As the owner and the person with the highest stake in your company, you need to be prepared before that time comes.

Pexels | Your business is your baby – and you must protect it with all you have

The Big Fat Lunch Story

With her food container business doing fairly well, Tina McGonagill decided to take on a new investor. Her pick was someone she met at a trade show and with $50,000, investor Trent Lowenstein earned a 20% stake in McGonagill’s company, Big Fat Lunch. In McGonagill’s mind, the idea was to make use of Lowenstein’s charismatic personality to get into retail. That’s where all the big bucks come from, right? To sell out more stock, you need partners that have large orders.

Lowenstein, however, was on a different page altogether. He was looking to lower margins by taking out the middle man. That is, using influencers and social media to build a direct connection between the consumer and producer.

With investor and owner on completely different ends, doesn’t it add up to quite a pickle?

CNBC | Tina McGonagill and Trent Lowenstein on Money Court with Kevin O’Leary

Here’s the Lesson

Veale Institute for Entrepreneurship’s executive director Michael Goldberg states that an issue as such highlights the importance of creating a small government structure within your company. You need to have a board. You need to be sure everyone understands the role and rights of investors in the company.

He comments that as an entrepreneur running a small business, it can be quite counterproductive and time-consuming dealing with investors and their input. So, right from the get-go, you need to make clear for your investors how much of a stake they’ll have in your company. In Lowenstein and McGonagill’s case, since the former had only a 20% stake, he had no right to direct how the money would be used.

Pexels | Before you bring an investor on board, be sure to make the terms and conditions very clear

What to do When You’re Ready for an Investor

Goldberg suggests that once you start your business, it’s all about networking. Engaging with people well before you’re ready for investment helps set the stage for later. More often than not, new business owners find early investors in friends and family. If not, it could be people you knew in high school, college, work, etc.

Apart from that, networking will help you build rapport with people with much more experience. The people you can call mentors. Instead of putting large chunks into hiring an investment banker or lawyer, lean on your mentors for advice when your business is still taking its baby steps.