What to consider when securing money from an investor
With investor funding, money for your business can be provided in exchange for a share of ownership and/or future earnings. In this model your ownership is diluted, meaning you no longer own as much of the company as you did to start. For example, if you start a business yourself and no one else is involved, you own 100%. An investor taking a share of your company in exchange for their funding would bring your ownership to less than 100%.
Determine the investor's share of ownership
How much of a share of ownership an investor takes, and of which parts of your business, need to be determined before finalizing their investment in your company. Considerations often include the amount of money to be invested, as well as experience or other value the investor can offer. Keep in mind an investor can be another individual, a pool of individuals or another entity who may bring additional expertise and access to capital to your organization.
Know the value of your business to ensure you don't give away too much equity
When working with an investor, or anyone who might take an equity stake in your business, it's important to know the value of your business. Without knowing the value of your business, you may be giving away too much ownership in your business early, making it harder to offer more equity later for further investments. Be prepared to provide the business valuation, and supporting details of how you arrived at that value, to potential investors. Learn about four ways you can determine the value of your business.
Research your investor and their background
You've worked hard to get your business started, so make sure you gather key information on any investor who will have the ability to influence the next stage of growth for your company. Some qualifying questions you may want to ask a potential investor include:
- Can you provide me with a list and contacts for other companies you have invested in?
- How long do you typically work with companies?
- How many other companies are you working with right now?
- Is your investment just one-time seed funding or could it be ongoing in multiple rounds or a series of investment pitches?
- What is your level of interaction with the companies you invest in?
- Will I work directly with you or is there someone else on your team?
- What kind of support do you provide?
- What key metrics or standards are you using to measure the success of your investment?