Seeking investors in a startup presents various opportunities for an entrepreneur. Most apparently, investors present a source of available funding that is critical to a start-up in its initial stages. In addition, investors may bring with them specialized knowledge or personal connections that can provide an entrepreneur with opportunities to start and grow his business. But seeking and engaging investors should be a decision that is carefully considered. While outside investment has various benefits, there can also be some disadvantages in allowing others to contribute to your vision.
Most entrepreneurs at some point consider seeking investors because investors supply necessary capital for the company. The funds obtained from investors can be used for a variety of purposes in growing the venture. In some cases, the business could not come to fruition without outside investors. In addition, investment funding, unlike debt, does not come with interest and payment terms, thus contributing flexibility to the financial aspects of the plan. However, investment in your business is precisely that – a form of equity, rather than debt. Thus, investors are entitled to some portion of the business from a sale or a public offering. Some financing arrangements may guarantee an investor a percentage of future revenues as well.
In many cases, investors contribute not just capital, but also ideas and experience. An investor can provide additional opportunities to the entrepreneur through his advice and his connections in the industry. Investors have a tangible interest in making the venture profitable so they make considerable efforts to share their knowledge. Having multiple investors provide this type of advice is also beneficial because it allows an entrepreneur to access a wide range of opinions and areas of expertise in order to make the best decisions. At the same time, the guidance offered by an investor may squarely conflict with your vision for the company. When an investor attains voting rights, he may vote on matters relating to the business in a manner that is at odds with your goals and your role in the company. The decisions made by investors may not necessarily be in the best long term interests of the company (such as promoting growth) and may be driven solely by financial returns.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.