If you are a new start-up and have no previous experience, you may find that successfully attracting investors can be extremely challenging. If you find yourself in this situation, your best action plan is to include a team member with start-up experience.
When approaching investors, bear in mind that they are essentially buying a portion of your business. The beauty of this, however, is that most investors are happy to exit the company once they have recovered their capital and made a sizable profit.
Valuation (the price of giving ownership to investors) is important to both you and your investors. If you wish to give only 10 percent of your business stake to investors in return for $150,000, you are claiming your business is worth $1.5 million. The reality is not as simple as the calculation. Be prepared for a challenge during the negotiation stages.
Let’s suppose you have found an investor and the payment has now been made. How is the investor going to make money? The answer is liquidity events. This is the reason that investors will always ask you about your exit and failure strategy. Your business may grow and be cash independent, but your investors will still need to be reimbursed for their initial investment which they draw out from your business. Remember, your business is a start-up, so at this stage you cannot offer your investors any dividends. When you repay your investors, you reclaim your company ownership.
So, before you attract investors, be well aware of what type of investors you need. You should also be clear about the money required to fund growth to finance the investor's exit. When you find investors, give them equity with a buyout clause. This will ensure that you will recover ownership of your company when it is on the road to profitability and you can repay your investors the money you still owe them.
You should not give personal surety, full stop! Instead, go for a guarantee that is tied to business volume and growth. Exit and failure strategies should be in place so that you and your investors can be on the safe side in the case of a buyout or business failure.